CORPORATION LAW

INTRODUCTION
Definition and attributes of a
corporation

A corporation is an artificial being

created by operation of law, having the
right of succession and the powers,
attributes and properties expressly
authorized by law or incident to its
existence.
A corporation, being a creature of
law, "owes its life to the state, its birth

being purely dependent on its will," it is

"a creature without any existence until
it has received the imprimatur of the
state acting according to law." A
corporation will have no rights and
privileges of a higher priority than that
of its creator and cannot legitimately
refuse to yield obedience to acts of its
state organs. (Tanyag v. Benguet
Corporation)
A corporation has four (4) attributes:
(1)
It is an artificial being;
(2)
Created by operation of law;
(3)
With right of succession;
(4)
Has the powers, attributes,
and properties as expressly
authorized by law or incident to its
existence.

CLASSIFICATION OF PRIVATE
CORPORATIONS
Stock v. Non-Stock Corporations

Definition

Stock

Non-Stock

Corporation
s which
have capital
stock
divided into
shares and
are
authorized

All other
private
corporation
s (3)
One where
no part of
its income

Purpose

to distribute
to the
holders of
shares
dividends
or
allotments
of the
surplus
profits on
the basis of
the shares
(3)

is
distributabl
e as
dividends
to its
members,
trustees or
officers.
(87)

Primarily to
make
profits for
its
shareholder

May be
formed or
organized
for
charitable,

religious,
educationa
l,
profession
al, cultural,
fraternal,
literary,
scientific,
social,
civic
service, or
similar
purposes
like trade,
industry,
agricultural
and like
chambers,
or any
combinatio

n thereof.
(88)
Distribution Profit is
of Profits
distributed
to
shareholder
s

Whatever
incidental
profit made
is not
distributed
among its
members
but is used
for
furtheranc
e of its
purpose.
AOI or bylaws may
provide for
the

distribution
of its
assets
among its
members
upon its
dissolution.
Before
then, no
profit may
be made
by
members.
Composition Stockholder Members
s
Scope
of Each
Each
right to vote stockholder member,
votes
regardless

according
to the
proportion
of his
shares in
the
corporation.
No shares
may be
deprived of
voting
rights
except
those
classified
and issued
as
"preferred"
or
"redeemabl

of class, is
entitled to
one (1)
vote
UNLESS
such right
to vote has
been
limited,
broadened
, or denied
in the AOI
or bylaws.
(Sec. 89)

e" shares,
and as
otherwise
provided by
the Code.
(Sec. 6)
Voting
proxy

by May be
Cannot be
denied by denied.
the AOI or (Sec. 58)
the by-laws.
(Sec. 89)

Voting
mail

by May be
Not
authorized possible.
by the bylaws, with
the
approval of
and under

the
conditions
prescribed
by the SEC.
(Sec. 89)
Who
exercises
Corporate
Powers 23

Board of
Members
Directors or of the
Trustees
corporation

Governing
Board

Board of
Directors or
Trustees,
consisting
of 5-15
directors /
trustees.

Board of
Trustees,
which may
consist of
more than
15 trustees
unless
otherwise
provided

by the AOI
or by-laws.
(Sec, 92)
Term
of Directors /
directors or trustees
trustees
shall hold
office for 1
year and
until their
successors
are elected
and
qualified
(Sec. 23).

Board
classified
in such a
way that
the term of
office of
1/3 of their
number
shall
expire
every year.
Subseque
nt
elections
of trustees
comprising

1/3 of the
board shall
be held
annually,
and
trustees so
elected
shall have
a term of 3
years.
(Sec. 92)
Election
officers

of Officers are
elected by
the Board
of Directors
(Sec. 25),
except in
close
corporation

Officers
may
directly
elected by
the
members
UNLESS
the AOI or

s where the
stockholder
s
themselves
may elect
the
officers.
(Sec. 97)
Place
of Any place
meetings
within the
Philippines,
if provided
for by the
by-laws
(Sec. 93)

by-laws
provide
otherwise.
(Sec. 92)

Generally,
the
meetings
must be
held at the
principal
office of
the
corporation
, if
practicable

. If not,
then
anyplace
in the city
or
municipalit
y where
the
principal
office of
the
corporation
is located.
(Sec. 51)
Transferabili Transferabl Generally
ty of interest e.
nonor
transferabl
membership
e since
membershi

p and all
rights
arising
therefrom
are
personal.
However,
the AOI or
by-laws
can
provide
otherwise.
(Sec. 90)
Distribution
of assets in
case
of
dissolution

See Sec.
94.

CIR VS. CLUB FILIPINO (5 SCRA 321;

1962)
FACTS: Club Filipino owns and operates
a club house, a sports complex, and a bar
restaurant, which is incident to the
operation of the club and its gold course.
The club is operated mainly with funds
derived from membership fees and dues.
The BIR seeks to tax the said restaurant as
a business.
HELD: The Club was organized to
develop and cultivate sports of all class
and denomination for the healthful
recreation and entertainment of its
stockholders and members. There was in
fact, no cash dividend distribution to its
stockholders and whatever was derived on
retail from its bar and restaurants used

were to defray its overhead expenses and

to improve its golf course.
For a stock corporation to exist, 2
requisites must be complied with:
(1) a capital stock divided into shares
(2) an authority to distribute to the
holders of such shares, dividends or
allotments
of the surplus profits on the basis of
shares held.
In the case at bar, nowhere in the AOI or
by-laws of Club Filipino could be found an
authority for the distribution of its
dividends or surplus profits.

FORMATION AND ORGANIZATION

OF CORPORATION
Requirements in the formation of a
corporation

Who may form a

corporation (See SEC. 10)
INCORPORA REQUIREM COMMEN
TORS
ENTS
TS
Definition

stockholder
com
s
or pare with
members
Corporat
mentioned ors
in
the which
articles of include

incorporati
on
as
originally
forming
and
composing
the
corporatio
n and who
are
signatories
thereof
stockholde
rs
or
members
mentioned
in
the
articles of
incorporati
on
as

all
stockhol
ders or
members
, whether
incorpora
tors
or
joining
the
corporati
on after
its
incorpora
tion.

originally
forming
and
composing
the
corporatio
n and who
are
signatories
thereof
Characteristi
natura
c
l persons

exclu
des
corpor
ations
and

partnershi
ps

Number

not

may
less than be more
5;
not than 15
more than for non15
stock
corp.
except
educatio
nal corp.

doe
s
not
prevent
the oneman
(person)
corporati
on
wherein
the other

incorpora
tors may
have
only
nominal
ownershi
p of only
one
share of
stock;
not
necessar
ily illegal
Age

of
legal age

Residence

majori
resi
ty should dence a
be
requirem

residents
of
the
Philippines

ent;
citizenshi
p
requirem
ent only
in certain
areas
such as
public
utilities,
retail
trade
banks,
investme
nt
houses,
savings
and loan
associati
ons,

schools

Steps in the formation of a

corporation

Mutual Agreement to perform

certain acts required for
organizing a corporation
1- Organize and establish a
corporation
2- Comply with requirements of
corporation code
3- Contribute capital/resources
4- Mode of use of
capital/resource and

control/management of
capital/resource
5- distribution/disposition of
capital/resource (embodied in
constitutive documents)
STEPS

COMMENTS

a. Promotional Promoter
Stage (See

brings
SEC. 2.
together persons
Definitions)
who become
interested in the
enterprise

aids in
procuring
subscriptions
and sets in
motion the

machinery which
leads to the
formation of the
corporation itself

formulates
the necessary
initial business
and financial
plans and, if
necessary, buys
the rights and
property which
the business
may need, with
the
understanding
that the
corporation
when formed,
shall take over

the same.
b. Drafting
(see chart below)
articles of
incorporation
(See SEC. 14)
c. Filing of
articles;
payment of
fees.

AOI & the

treasurers affidavit
duly signed &
acknowledged

must be filed
w/ the SEC & the
corresponding fees
paid

failure to file
the AOI will prevent
due incorporation of

the proposed
corporation & will
not give rise to its
juridical
personality. It will
not even be a de
facto corp.

Under present
SEC rules, the AOI
once filed , will be
published in the
SEC Weekly
Bulletin at the
expense of the
corp. (SEC Circular
# 4, 1982).
d. Examination Process:
of articles;
a) SEC shall

approval or
rejection by
SEC.

examine them in
order to determine
whether they are in
conformity w/ law.
b) If not, the
SEC must give the
incorporators a
reasonable time w/in
w/c to correct or
modify the
objectionable
portions.
Grounds for
rejection or
disapproval of AOI:
a) AOI
/amendment not
substantially in

accordance w/ the
form prescribed
b) purpose/s
are patently
unconstitutional,
illegal, immoral, or
contrary to
government rules &
regulations;
c) Treasurers
Affidavit is false;
d) required
percentage of
ownership has not
been complied with
(Sec. 17)

e) corp.s
establishment,
organization or
operation will not be
consistent w/ the
declared national
economic policies (to
be determined by the
SEC, after
consultation w/ BOI,
NEDA or any
appropriate
government agency
-- PD 902-A as
amended by PD
1758, Sec. 6 (k))

Decisions of
the SEC
disapproving or

rejecting AOI may

be appealed to the
CA by petition for
review in
accordance w/ the
ROC.
e. Issuance of Certificate of
certificate of
Incorporation will
incorporation. be issued if:
a) SEC is
satisfied that all legal
requirements have
been complied with;
and
b) there are
no reasons for

rejecting or
disapproving the AOI.

It is only upon
such issuance that
the corporation
acquires juridical
personality.
(See Sec. 19.
Commencement of
corporate existence)

Should it be
subsequently found
that the
incorporators were
guilty of fraud in
procuring the
certificate of
incorporation, the

same may be
revoked by the
SEC, after proper
notice & hearing.

b. Drafting articles of incorporation

(See SEC. 14)
CONTENTS
OF AOI
Corporate
Name

COMMENTS

Essential to its
existence since it is
through it that the
corporation can sue
and be sued and

perform all legal acts

A
corporate
name
shall
be
disallowed by the
SEC if the proposed
name is either:
(1)
identical or
deceptively
or
confusingly similar
to that of any
existing
corporation or to
any other name
already protected
by law; or
(2)
patently
deceptive,

confusing
contrary
existing
(Sec. 18)

or
to
laws.

LYCEUM OF THE
PHILS. VS. CA (219
SCRA 610)
The policy underlying
the prohibition against
the registration of a
corporate name which
is
identical
or
deceptively
or
confusingly similar to
that of any existing
corporation or which is
patently deceptive or
patently confusing or

contrary
laws is:

to

existing

1.
the avoidance
of fraud upon the
public which would
have occasion to
deal with the entity
concerned;
2.
the prevention
of evasion of legal
obligations
and
duties, and
3.
the reduction
of difficulties of
administration and
supervision over
corporations.

Purpose
Clause

A
corporation
can only have one (1)
primary
purpose.
However, it can have
several
secondary
purposes.

A
corporation
has only such powers
as
are
expressly
granted to it by law &
by its articles of
incorporation, those
which
may
be
incidental to such
conferred powers ,
those
reasonably
necessary
to
accomplish
its
purposes & those

which
may
incident
to
existence.

Principal
Office

be
its

Corporation may
not be formed for the
purpose of practicing
a profession like law,
medicine
or
accountancy

must be within
the Philippines

specify city or
province

street/number
not necessary

important
in
determining venue in

an action by or
against the corp., or
on determining the
province where a
chattel mortgage of
shares should be
registered
Term of
Existence

cannot
specify
term which is longer
than 50 years at a
time

may be renewed
for another 50 years,
but not earlier than 5
years prior to the
original
or
subsequent
expiry
date UNLESS there
are justifiable reasons

for
an
extension.

earlier

Incorporator
names,
s and
nationalities &
Directors
residences of the
incorporators;

names,
nationalities &
residences of the
directors or trustees
who will act as such
until the first regular
directors or trustees
are elected;

treasurer
who
has been chosen by
the pre-incorporation
subscribers/members
to receive on behalf

of the corporation, all

subscriptions
/contributions paid by
them.
Capital Stock

amount of its
authorized
capital
stock in lawful money
of the Philippines

number
of
shares into which it is
divided

in
case
the
shares are par value
shares, the par value
of each,

names,
nationalities
and
residences of the
original subscribers,

and
the
amount
subscribed and paid
by each on his
subscription, and if
some or all of the
shares are without
par value, such fact
must be stated

for a non-stock
corporation,
the
amount of its capital,
the
names,
nationalities
and
residences of the
contributors and the
amount contributed
by each

25% of 25% rule

to be certified by
Treasurer

Other
matters

paid up capital
should not be less
than P5,000

Classes of
shares into w/c the
shares of stock
have been
divided;
preferences of &
restrictions on any
such class;
and any denial or
restriction of the preemptive right of
stockholders
should also be
expressly stated in said
articles.

If the corporation
is engaged in a
wholly or partially
nationalized
business or activity, the
AOI must contain a
prohibition against
a transfer of stock
which would reduce
the Filipino
ownership of its stock
to less than the
required
minimum.
Any corporation may be
incorporated as a close corporation,
except:

a) mining or oil
companies;
b) stock exchanges;
c) banks;
d) insurance companies;
e) public utilities;
f) educational institutions;
&
g) corporations declared
to be vested w/ public interest

De Facto Corporations: Requisites

User of Corporate Powers

What
is
a
corporation?

de

facto

A de facto corporation is a
defectively
organized
corporation, which has all the
powers and liabilities of a de
jure corporation and, except as
to the State, has a juridical
personality distinct and separate
from its shareholders, provided
that the following requisites are
concurrently present:
(1) That
there
is
an
apparently valid statute under
which the corporation with its
purposes may be formed;

(2) That there has been

colorable compliance with the
legal requirements in good
faith; and,
(3) That there has been use
of corporate powers, i.e., the
transaction of business in
some way as if it were a
corporation.
Can a corporation transact
business as a de facto
corporation while application
is still pending with SEC?
No. In the case of Hall v.
Piccio (86 Phil. 603; 1950),
where the supposed corporation

transacted business as a
corporation pending action by
the SEC on its articles of
incorporation, the Court held that
there was no de facto
corporation on the ground that
the corporation cannot claim to
be in good faith to be a
corporation when it has not yet
obtained
its
certificate
of
incorporation.
Formation under apparently valid
statute.
MUNICIPALITY OF MALABANG V.
BENITO (29 SCRA 533; 1969)

WON a corporation organized under a

statute subsequently declared void acquires
status as de facto corporation.
No. A corporation organized under a
statute subsequently declared invalid
cannot acquire the status of a de facto
corporation unless there is some other
statute under which the supposed
corporation may be validly organized.
Hence, in the case at bar, the mere fact that
the municipality was organized before the
statute had been invalidated cannot
conceivably make it a de facto
corporation since there is no other valid
statute to give color of authority to its
creation.

Colorable compliance with the legal

requirements in good faith.
BERGERON V. HOBBS (71 N.W. 1056,
65 Am. St. Rep. 85)
The constitutive documents of the
proposed corporation were deposited with
the Register of Deeds but not on file in
said office. One of the requirements for
valid incorporation is the filing of
constitutive documents in the Register of
Deeds.
Was there colorable compliance
enough to give the supposed corporation at
least the status of a de facto corporation?

No. The filing of the constitutive

documents in the Register of Deeds is a
condition precedent to the right to act as a
corporate body. As long as an act, required
as a condition precedent, remains undone,
no immunity from individual liability is
secured.
HARRIL V. DAVIS (168 F. 187; 1909)
The constitutive documents were filed
with the clerk of the Court of Appeals but
not with the clerk of court in the judicial
district where the business was located.
Arkansas law requires filing in both
offices.

Was there colorable compliance

enough to give the supposed corporation at
least the status of a de facto corporation?
No. Neither the hope, the belief, nor the
statement by parties that they are
incorporated, nor the signing of the articles
of incorporation which are not filed, where
filing is requisite to create the corporation,
nor the use of the pretended franchise of
the nonexistent corporation, will constitute
such a corporation de facto as will exempt
those who actively and knowingly use s
name to incur legal obligations from their
individual liability to pay them. There
could be no incorporation or color of it
under the law until the articles were filed
(requisites for valid incorporation).

HALL v. PICCIO (29 SCRA 533; 1969)

In the case of Hall v. Piccio, where the
supposed corporation transacted business
as a corporation pending action by the
SEC on its articles of incorporation, the
Court held that there was no de facto
corporation on the ground that the
corporation cannot claim to be in good
faith to be a corporation when it has not
yet obtained its certificate of incorporation.
NOTE: The
validity
of
incorporation cannot be inquired
into collaterally in any private
suit
to which such corporation
may be a party. Such inquiry
must be through a quo
warranto proceeding made by

the Solicitor General. (Sec.

20)
CORPORATION BY ESTOPPEL
(Sec. 21)
Distinguish
a
de
facto
corporation from a corporation by
estoppel.
The de facto doctrine differs
from the estoppel doctrine in that
where all the requisites of a de
facto corporation are present,
then the defectively organized
corporation will have the status
of a de jure corporation in all
cases brought by and against it,

except only as to the State in a

direct proceeding. On the other
hand, if any of the requisites are
absent, then the estoppel
doctrine can apply only if under
the
circumstances
of
the
particular case then before the
court, either the defendant
association is estopped from
defending on the ground of lack
of capacity to be sued, or the
defendant third party had dealt
with the plaintiff as a corporation
and is deemed to have admitted
its existence.
(De facto has status of de jure
corpo, except separate personality

against State, provided all requisites

are present)
What are the effects of a
Corporation by Estoppel in suits
brought:
(1) against the Corporation?
Considered a corporation in suits
brought against it if
it held itself out as such
and denies capacity to be
sued;
(2) against
third
party?
Third party cannot
deny existence of corporation if it
dealt with it as such.

EMPIRE vs. STUART (46 Mich. 482, 9

N.W. 527; 1881)
Company was sued on a promissory
note. Its defense was that at the time of its
issuance, it was defectively organized and
therefore could not be sued as such.
The Corporation cannot repudiate the
transaction or evade responsibility when
sued thereon by setting up its own mistake
affecting the original organization.
LOWELL-WOODWARD
WOODS (104 Kan. 729; 1919)

vs.

Corporation sued a partnership on a

promissory note. The latter as defense

alleged that the plaintiff was not a

corporation.
One who enters into a contract with a
party described therein as a corporation is
precluded, in an action brought thereon by
such party under the same designation,
from denying its corporate existence.

ASIA BANKING VS STANDARD

PRODUCTS (46 Phil. 145; 1924)
The
corporation
sued
another
corporation a promissory note. The
defense was that the plaintiff was not able
to prove the corporate existence of both
parties.

The defendant is estopped from

denying its own corporate existence. It is
also estopped from denying the others
corporate existence. The general rule is
that in the absence of fraud, a person who
has contracted or otherwise dealt with an
association is such a way as to recognize
and in effect admit its legal existence as a
corporate body is thereby estopped from
denying its corporate existence.
CRANSON VS IBM (234 MD. 477, 200
A. 2D 33 ; 1964)
IBM sued Cranson in his personal
capacity regarding a typewriter bought by
him as President of a defectively organized
company whose Articles were not yet filed
when the obligation was contracted.

IBM, having dealt with the defectively

organized company as if it were properly
organized and having relied on its credit
instead of Cransons, is estopped from
asserting that it was not incorporated. It
cannot sue Cranson personally.
SALVATIERRA VS GARLITOS (103
Phil. 757; 1958)
Salvatierra leased his land to the
corporation. He filed a suit for accounting,
rescission and damages against the
corporation and its president for his share
of the produce. Judgment against both was
obtained. President complains for being
held personally liable.

He is liable. An agent who acts for a

non-existent principal is himself the
principal. In acting on behalf of a
corporation which he knew to be
unregistered, he assumed the risk arising
from the transaction.
ALBERT
VS
UNIVERSITY
PUBLISHING CO., INC. (Jan. 30, 1965)
Mariano Albert entered into a
contract with University Publishing Co.,
Inc. through Jose M. Aruego, its President,
whereby University would pay plaintiff for
the exclusive right to publish his revised
Commentaries on the Revised Penal
Code. The contract stipulated that failure
to pay one installment would render the
rest of the payments due. When
University failed to pay the second

installment, Albert sued for collection and

won. However, upon execution, it was
found that University was not registered
with the SEC. Albert petitioned for a writ
of execution against Jose M. Aruego as the
real defendant. University opposed, on the
ground that Aruego was not a party to the
case.
The Supreme Court found that
Aruego represented a non-existent entity
and induced not only Albert but the court
to believe in such representation. Aruego,
acting as representative of such nonexistent principal, was the real party to the
contract sued upon, and thus assumed such
privileges and obligations and became
personally liable for the contract entered
into or for other acts performed as such
agent.

The Supreme Court likewise held

that the doctrine of corporation by estoppel
cannot be set up against Albert since it was
Aruego who had induced him to act upon
his (Aruego's) willful representation that
University had been duly organized and
was existing under the law.
BY-LAWS (Sec. 46 & 47)

When adopted:
(a) No later than one (1)
month after receipt from SEC of
official

notice of issuance of Cert. of

incorporation.
Requirement:
of stockholders

Affirmative vote
representing at least
majority of outstanding
capital stock (Stock
Corp.) or members
(Non-Stock)
Must be
signed by stockholders or members
voting for them
(b) Prior to incorporation
Requirement:
Approval of all incorporators; must be
signed by all of them

Where kept:
(1) In the
principal office of the corporation ; and
(2) Securities
and Exchange Commission
When effective:
Only upon
the SECs issuance of a certification
that the by-laws
are not inconsistent with
the Corporation Code.
Special
corporations: Bylaws and/or amendments thereto must
be accompanied by
a
certificate
of
the
appropriate
government agency to the

effect
that such by-laws / amendments are in
accordance with
law.

banks
or
banking
institutions

building
and
loan
associations

trust companies

insurance companies

public utilities

educational institutions

other special corporations

governed by special laws

Contents of By-laws - Subject to

the provisions of the Constitution, this
Code, other
special laws, and the
articles of incorporation, a
private corporation may
provide in its by-laws for:
1)
the time, place and manner
of calling and conducting regular
or special meetings of the
directors or trustees;
2)
the time and manner of
calling and conducting regular
and special meetings of the
stockholders or members;
3)
the required quorum
meetings of stockholders

in
or

members and the manner of

voting herein;
4)
the form for proxies of
stockholders and members and
the manner of voting them;
5)
the qualifications, duties and
compensation of directors or
trustees,
officers
and
employees;
6)
the time for holding the
annual election of directors or
trustees and the mode or
manner of giving notice thereof;
7)
the manner of election or
appointment and the term of

office of all officers other than

directors or trustees;
8)
the penalties for violation of
the by-laws;
9)
in the case of stock
corporations, the manner of
issuing certificates; and
10) such other matters as may
be necessary for the proper or
convenient transaction of its
corporate business and affairs.
FLEISCHER V. BOTICA NOLASCO
CO. (47 Phil. 583; 1925)
As a general rule, the by-laws of a
corporation are valid if they are reasonable

and calculated to carry into effect the

objective of the corporation and are not
contradictory to the general policy of the
laws of the land. Under a statute
authorizing by-laws for the transfer of
stock, a corp. can do no more than
prescribe a general mode of transfer on the
corp. books and cannot justify an
restriction upon the right of sale.
GOVT. OF P.I. V. EL HOGAR
Is a provision in the by-laws allowing the
BOD, by vote of absolute majority, to
cancel shares valid?
No. It is a patent nullity, being in direct
conflict with Sec. 187 of the Corp. Law
which prohibits forced surrender of

unmatured stocks except in case of

dissolution.
Is a provision in the by-laws fixing the
salary of directors valid?
Yes. Since the Corporation Law does
not prescribe the rate of compensation, the
power to fix compensation lies with the
corporation.
Is a provision requiring persons elected to
the Board of Directors to own at least P
5,000 shares valid?
Yes. The Corporation Law gives the
corporation the power to provide
qualifications of its directors.
CITIBANK, N.A. v. CHUA (220 SCRA
75)

Where the SEC grants a license to

a foreign corporation, it is deemed
to have approved its
foreign-enacted by-laws. Sec. 46 of the
Corporation Code which states that bylaws are not valid without SEC
approval applies only to domestic
corporations.

A board resolution appointing an

attorney-in-fact to represent the
corporation during pre-trial is not
necessary where the by-laws authorize
an officer of the corporation to make
such appointment.

LOYOLA GRAND VILLAS v. CA (276

SCRA 681)

ISSUE:
Whether the failure of a
corporation to file its by-laws within one
(1) month from the date
of its incorporation, as mandated by
Art. 46 of the Corporation Code, results
in
the
corporation's
automatic
dissolution.
RULING:
No. Failure to file by-laws
does not result in the automatic
dissolution of the corporation. It only
constitutes a ground for such
dissolution. (Cf. Chung Ka Bio v. IAC,
163 SCRA 534) Incorporators must be
given the chance to explain their
neglect or omission and remedy the
same.

THE CORPORATE ENTITY

The Theory of Corporate Entity

When does
existence
as
commence?

the corporations
a
legal
entity

Upon issuance by the SEC of

the certificate of incorporation
(Sec. 19)
What rights does the corporation
acquire?
The right to:

1)
sue and be sued;
2)
hold property in its own
name;
3)
enter into contracts with
third persons; &
4)
perform all other legal
acts.
Since corporate property is
owned by the corporation as a
juridical person, the stockholders
have no claim on it as owners,
but have merely an expectancy
or inchoate right to the same
should any of it remain upon the
dissolution of the corporation
after all corporate creditors have
been paid.
Conversely, a
corporation has no interest in the

individual
property
of
its
stockholders, unless transferred
to the corporation. Remember
that
the
liability
of
the
stockholders is limited to the
amount of shares.
SAN JUAN STRUCTURAL & STEEL
FABRICATORS v. CA (296 SCRA 631)
A corporation is a juridical person
separate and distinct from its stockholders
or members. Accordingly, the property of
the corporation is not the property of its
stockholders or members and may not be
sold by the stockholders or members
without express authorization from the
corporation's Board of Directors.
In this case, the sale of a piece of land
belonging to Motorich Corporation by the

corporation treasurer (Gruenberg) was held

to be invalid in the absence of evidence
that said corporate treasurer was
authorized to enter into the contract of
sale, or that the said contract was ratified
by Motorich. Even though Gruenberg and
her husband owned 99.866% of Motorich,
her act could not bind the corporation
since she was not the sole controlling
stockholder.
STOCKHOLDERS OF F. GUANZON
V. REGISTER OF DEEDS (6 SCRA 373)
Properties registered in the name of the
corporation are owned by it as an entity
separate and distinct from its members.
While shares of stock constitute personal
property, they do not represent property of
the corporation. A share of stock only

typifies an aliquot part of the corporation's

property or the right to share in its
proceeds to that extent when distributed
according to law and equity, but its holder
is not the owner of any part of the capital
of the corporation. Nor is he entitled to the
possession of any definite portion of its
property or assets.
The act of liquidation made by the
stockholders of the corp of the latters
assets is not and cannot be considered a
partition of community property, but rather
a transfer or conveyance of the title of its
assets to the individual stockholders.
Since the purpose of the liquidation, as
well as the distribution of the assets, is to
transfer their title from the corporation to
the stockholders in proportion to their
shareholdings, that transfer cannot be

effected without the corresponding deed of

conveyance from the corporation to the
stockholders. It is, therefore, fair and
logical to consider the certificate of
liquidation as one in the nature of a
transfer or conveyance.
CARAM V. CA (151 SCRA 373; 1987)
The case of the unpaid compensation for
the preparation of the project study.
The petitioners were not involved in the
initial stages of the organization of the
airline. They were merely among the
financiers whose interest was to be invited
and who were in fact persuaded, on the
strength of the project study, to invest in
the proposed airline.

There was no showing that the Airline

was a fictitious corp and did not have a
separate juridical personality to justify
making the petitioners, as principal
stockholders thereof, responsible for its
obligations. As a bona fide corp, the
Airline should alone be liable for its
corporate acts as duly authorized by its
officers and directors. Granting that the
petitioners benefited from the services
rendered, such is no justification to hold
them
personally
liable
therefor.
Otherwise, all the other stockholders of the
corporation, including those who came in
late, and regardless of the amount of their
shareholdings, would be equally and
personally liable also with the petitioner
for the claims of the private respondent.

PALAY V. CLAVE (124 SCRA 640;

1983)
The case of the reliance on a default
provision of the contract granting
automatic extra-judicial rescission.
The court found no badges of fraud on
the part of the president of the
corporation. The BOD had literally and
mistakenly relied on the default provision
of the contract. As president and
controlling stockholder of the corp, no
sufficient proof exists on record that he
used the corp to defraud private
respondent. He cannot, therefore, be made
personally liable because he appears to be
the
controlling
stockholder.
Mere
ownership by a single stockholder or by
another corporation of all or nearly all of

the capital stock of a corporation is not of

itself sufficient ground for disregarding the
separate corporate personality.
MAGSAYSAY
SCRA 266)

V.

LABRADOR (180

The case of the assignment by Senator

Magsaysay of a certain portion of his
shareholdings in SUBIC granting his
sisters the right to intervene in a case filed
by the widow against SUBIC.
The words "an interest in the subject,"
to allow petitioners to intervene, mean a
direct interest in the cause of action as
pleaded, and which would put the
intervenor in a legal position to litigate a
fact alleged in the complaint, without the

establishment of which plaintiff could not

recover.
Here, the interest, of petitioners, if it
exists at all, is indirect, contingent, remote,
conjectural, consequential and collateral.
At the very least, their interest is purely
inchoate, or in sheer expectancy of a right
in the management of the corporation and
to share in the profits thereof and in the
properties and assets thereof on
dissolution, after payment of the corporate
debts and obligations.
While a share of stock represents a
proportionate or aliquot interest in the
property of the corp, it does not vest the
owner thereof with any legal right or title
to any of the property, his interest in the
corporate property being equitable and

beneficial in nature. Shareholders are in

no legal sense the owners of corporate
property, which is owned by the corp as a
distinct legal person.
PIERCING THE CORPORATE VEIL

Q: What is
corporate entity?

the

theory

A: That a corporation has a

personality distinct from its
stockholders, and is not affected
by
the
personal
rights,
obligations and transactions of
the latter.

of

Q: When Can the Veil

Corporate Entity be Pierced?
A:
The veil of corporate
fiction may be pierced when it is
used as a shield to further an
end subversive of justice, or for
purposes that could not have
been intended by law that
created it or to defeat public
convenience,
justify
wrong,
protect fraud or defend crime or
to perpetuate fraud or confuse
legitimate
issues
or
to
circumvent the law or perpetuate
deception or as an alter ego,
adjunct or business conduit for
the
sole
benefit
of
the
stockholders.

of

Q: What are the effects of

disregarding the corporate veil?
(1) Stockholders would be
personally liable for the acts and
contracts of the corporation
whose existence at least for the
purpose
of
the
particular
situation involved is ignored.
(2) Court is not denying
corporate existence for all
purposes but merely refuses to
allow the corporation to use the
corporate privilege for the
particular purpose involved.
Contrary to law / public policy;
evasion of liability to government

STATE V. STANDARD OIL (49 Ohio,

St., 137, N.E. 279, 15; 1892)
Where all or a majority of stockholders
comprising a corporation do an act which
is designed to affect the property and
business of the company, as if it had been a
formal resolution of its Board of Directors
and the acts done is ultra vires, the act
should be regarded as the act of the
corporation, and may be challenged by the
state in a quo warrranto proceeding.
LAGUNA TRANS V. SSS (107 Phil. 833;
1960)
Where the corporation was formed by
and consisted of the members of a

partnership whose business and property

was conveyed to the corporation for the
purpose of continuing its business, such
corporation is presumed to have assumed
partnership debts.
MARVEL BLDG. CORP. V. DAVID (94
Phil. 376; 1954)
The fact that:

certificates in possession of Castro

were endorsed in blank;

Castro had enormous profits and

had motive to hide them;

other subscribers had no incomes

of sufficient magnitude; and

directors never met;

shows that other shareholders may be

considered dummies of Castro. Hence,
corporate veil may be pierced.

Evasion of liability to creditors

TAN
BOON
BEE
CO.
JARENCIO (163 SCRA 205; 1988)

V.

Tan BBC (T) supplies paper to

Graphics Publishing Inc (G) but the latter
fails to pay. G's printing machine levied
upon to satisfy claim but PADCO, another
corpo intercedes, saying it is the owner of
the machine, having leased such to G.

Printing machine was allowed by the

Court to satisfy G's liability. Both G and
PADCO's corporate entities pierced
because they have: the same board of
directors, PADCO owns 50% of G,
PADCO never engaged in the business of
printing. Obviously, the board is using
PADCO to shield G from fulfilling liability
to T.
NAMARCO v. AFCorp (19 SCRA 962;
1967)
Associated Financing Corp. (AFC),
through its pres. F. Sycip (who together
with wife, own 76% of AFC) contracts
with NAMARCO for an exchange of sugar
(raw v. refined). N delivers, AFC doesn't
since it did not have sugar to supply in the

first place. N sues to recover sum of

money plus damages.
Sycip held jointly and severally liable
with AFC. AFC's corporate veil was
pierced because it was used as Sycip's alter
ego, corpo used merely as an
instrumentality, agency or conduit of
another to evade liability.
JACINTO V. CA (198 SCRA 211)
Jacinto, president/GM and owner of
52% of corpo, owes MetroBank sum of
money, signs trust receipts therefor. Jacinto
absconds. Jacinto ordered to jointly and
severally pay MetroBank. Corpo veil
pierced because it was used as a shield to
perpetuate fraud and/or confuse legitimate
issues. There was no clear cut delimitation

between the personality of Jacinto and the

corporation.
Evasion of liability / obligation to
employees
CLAPAROLS V. CIR (65 SCRA 613;
1975)
Both predecessor and successor were
owned and controlled by petitioner and
there was no break in the succession and
continuity of the same business. All the
assets of the dissolved Plant were turned
over to the emerging corporation. The veil
of corporate fiction must be pierced as it
was deliberately and maliciously designed
to evade its financial obligation to its
employees.

INDOPHIL
TEXTILE
MILL
WORKERS UNION V. CALICA (205
SCRA 698)
Rule: The doctrine of piercing the veil
of corporate entity applies when corporate
fiction is used to defeat public
convenience, justify wrong, protect fraud
or defend crime, or when it is made as a
shield to confuse the legitimate issues or
where a corporation is the mere alter ego
or business conduit of a person, or where
the corporation is so organized and
controlled and its affairs are so conducted
as to make it merely an instrumentality,
agency, conduit or adjunct of another
corporation.

Case at bar: Union sought to pierce

corporate veil alleging that the creation of
Acrylic is a devise to evade the application
of the CBA Indophil had with them (or it
sought to include the other union in its
bargaining leverage).
SC: Legal corporate entity is disregarded
only if it is sought to hold the officers and
stockholders directly liable for a corporate
debt or obligation. Union does not seek to
impose such claim against Acrylic. Mere
fact that businesses were related, that some
of the employees of Indophil are the same
persons manning and providing for
auxiliary services to the other company,
and that physical plants, officers and
facilities are situated in the same
compound - not sufficient to apply
doctrine.

NAFLU V. OPLE (143 SCRA 125; 1986)

Libra/Dolphin Garments was but an
alter ego of Lawman Industrial, therefore,
the former must bear the consequences of
the latter's unfair acts. It cannot deny
reinstatement of petitioners simply because
of cessation of Lawman's operations, since
it was in fact an illegal lock-out, the
company having maintained a run-away
shop and transferred its machines and
assets there.
Here, the veil of corporate fiction was
pierced in order to safeguard the right to
self-organization and certain vested rights
which had accrued in favor of the union.
Second corporation sought the protective

shield of corporate fiction to achieve an

illegal purpose.
ASIONICS PHILS. v. NLRC (290 SCRA
164)
A corporation is invested by law with a
personality separate and distinct from
those of the persons composing it as well
as from that of any other legal entity to
which it may be related. Mere ownership
by a single stockholder or by another
corporation of all or nearly all of the
capital stock of a corporation is not of
itself sufficient ground for disregarding the
separate corporate personality.
Where there is nothing on record to
indicate the President and majority

stockholder of a corporation had acted in

bad faith or with malice in carrying out the
retrenchment program of the company,
he cannot be held solidarily and personally
liable with the corporation.
Evasion of liability on contract
VILLA-REY
TRANSIT
FERRER (25 SCRA 849; 1968)

V.

Jose M. Villarama, operator of a

bus company, Villa Rey Transit, which was
authorized to operate 32 units from
Pangasinan to Manila and vice-versa, sold
2 CPCs to Pantranco. One of the
conditions included in the contract of sale
was that the seller (Villarama) "shall not,
for a period of 10 years from the date of

the sale, apply for any TPU service

identical or competing with the buyer
(Pantranco)."
Barely 3 months after the sale, a
corporation called Villa Rey Transit, Inc.
was organized, with the wife of Jose M.
Villarama as one of the incorporators and
who was subsequently elected as treasurer
of the Corporation. Barely a month after
its registration with the SEC, the
corporation bought 5 CPCs and 49 buses
from one Valentin Fernando, and applied
with the Public Service Commission (PSC)
for approval of the sale. Before the PSC
could take final action on the said
application, however, 2 of the 5 CPCs
were levied upon pursuant to a writ of
execution issued by the CFI in favor of
Eusebio Ferrer, judgment creditor, against

Valentin Fernando, judgment debtor.

During the public sale conducted, Ferrer
was the highest bidder, and a certificate of
sale was issued in his name. Shortly
thereafter, he sold the said CPCs to
Pantranco, and they jointly submitted their
contract of sale to the PSC for approval.
The PSC issued an order that
pending resolution of the applications,
Pantranco shall have the authority to
provisionally operate the service under the
2 CPCS that were the subject of the
contract between Ferrer and Pantranco.
Villa Rey Transit took issue with this, and
filed a complaint for annulment of the
sheriff's sale of the CPCs and prayed that
all the orders of the PSC relative to the
dispute over the CPCs in question be
annulled. Pantranco filed a third-party

complaint against Jose M. Villarama,

alleging that Villarama and Villa Rey
Transit are one and the same, and that
Villarama and/or the Corporation is
qualified from operating the CPCs by
virtue of the agreement entered into
between Villarama and Pantranco.
Given the evidence, the Court
found that the finances of Villa-Rey, Inc.
were managed as if they were the private
funds of Villarama and in such a way and
extent that Villarama appeared to be the
actual owner of the business without
regard to the rights of the stockholders.
Villarama even admitted that he mingled
the corporate funds with his own money.
These circumstances negate Villarama's
claim that he was only a part-time General
Manager, and show beyond doubt that the

corporation is his alter ego. Thus, the

restrictive clause with Pantranco applies. A
seller may not make use of a corporate
entity as a means of evading the
obligation of his covenant. Where the
Corporation is substantially the alter
ego of one of the parties to the covenant
or the restrictive agreement, it can be
enjoined from competing with the
covenantee.
Close Corporations
CEASE V. CA (93 SCRA 483; 1979)
The Cease plantation was solely
composed of the assets and properties of
the defunct Tiaong plantation whose
license to operate already expired. The

legal fiction of separate corporate

personality was attempted to be used to
delay and deprive the respondents of their
succession rights to the estate of their
deceased father.
While originally, there were other
incorporators of Tiaong, it has developed
into a closed family corporation (Cease).
The head of the corporation, Cease, used
the
Tiaong
plantation
as
his
instrumentality. It was his business conduit
and an extension of his personality. There
is not even a showing that his children
were subscribers or purchasers of the
stocks they own.
DELPHER TRADES V. CA (157 SCRA
349; 1988)

The Delpher Trades Corp. is a business

conduit of the Pachecos. What they really
did was to invest their properties and
change the nature of their ownership from
unincorporated to incorporated form by
organizing Delpher and placing the control
of their properties under the corporation.
This saved them inheritance taxes.
This is the reverse of Cease; however,
it does not modify the other cases. It stands
on its own because of the facts.
Parent-Subsidiary Relationship

Q: What is the general rule

governing
parent-subsidiary
relationship?
A: The mere fact that a
corporation
owns
all
or
substantially all of the stocks of
another corporation is not alone
sufficient to justify their being
treated as one entity.
Q: When may it be disregarded
by the courts?
(1) if the subsidiary was
formed for the payment of
evading the payment of
higher taxes

(2) where it was controlled by

the parent that its separate
identity was hardly discernible
(3) parent corporations may
be held responsible for the
contracts as well as the torts
of the subsidiary
Q: What are the criteria by which
the subsidiary can be considered
a mere
instrumentality of the parent
company?
1.
the parent corp. owns all
or most of the capital stock of
the subsidiary.

2.
the
parent
and
subsidiary have common
directors and officers
3.
the parent finances the
subsidiary
4.
the parent subscribes to
all the capital stock of the
subsidiary
or
otherwise
causes its incorporation
5.
the
subsidiary
has
grossly inadequate capital
6.
the parent pays the
salaries and other expenses
or losses of the subsidiary
7.
the
subsidiary
has
substantially no business
except with the parent corp.
or no assets except those
conveyed to or by the parent
corp.

8.
in the papers of the
parent corp. or in the
statements of its officers, the
subsidiary is described as a
department or division of the
parent corp. or its business or
financial
responsibility
is
referred as the parents own
9.
the parent uses the
property of the subsidiary as
its own
10. the directors or the
executives of the subsidiary
do not act independently in
the interest of the subsidiary
but take their orders from the
parent corp. in the latters
interest

11. the
formal
legal
requirements
of
the
subsidiary are not observed
(Garrett vs.
Southern
Railway)
(Note: Sir Jack said that we
must not stop after weve gone
through the 11 points in order to
determine whether or not there
is
a
subsidiary
or
instrumentality. We must go
further and consider other
circumstances which may help
determine clearly the true nature
of the relationship. --- Em)

GARRETT
VS.
SOUTHERN
RAILWAY (173 F. Supp. 915, E.D. Tenn.
1959)
This case involved a Workers
Compensation claim by a wheel moulder
employed by Lenoir Car Works. The
plaintiff sought to claim from Southern
Railway Company, which acquired the
entire capital stock of Lenoir Car Works.
Plaintiff contended that Southern so
completely dominated Lenoir that the
latter was a
mere adjunct or
instrumentality of Southern.
The general rule is that stock
ownership alone by one corporation of the
stock of another does not thereby render
the dominant corporation liable for the
torts of the subsidiary, unless the separate

corporate existence of the subsidiary is a

mere sham, or unless the control of the
subsidiary is such that it is but an
instrumentality or adjunct of the dominant
corporation.
In the case, it was found that there were
two distinct operations. There was no
evidence that Southern dictated the
management of Lenoir. In fact, evidence
shows that Marius, the manager of the
subsidiary, was in full control of the
operation. He established prices, handled
negotiations in CBAs, etc. Lenoir paid
local taxes, had local counsel and maintain
a Workmens Compensation Fund. There
was also no evidence that Lenoir was run
solely for the benefit of Southern. In fact,
a substantial part of its requirements in the
field of operation of Lenoir was bought

elsewhere.
Lenoir sold substantial
quantities to other companies. Policy
decisions remained in the hands of
Marius. Hence, the complaint against
Southern Railway was dismissed.
KOPPEL VS. YATCO (77 Phil. 496;
1946)
This case involved a complaint for
the recovery of merchant sales tax paid by
Koppel (Philippines), Inc. under protest to
the Collector of Internal Revenue.
Although the Court of First Instance did
not deny legal personality to Koppel
(Philippines), Inc. for any and all purposes,
it dismissed the complaint saying that in
the transactions involved in the case, the
public interest and convenience would be

defeated and would amount to a

perpetration of tax evasion unless resort
was had to the doctrine of "disregard of the
corporate fiction."
The facts show that 99.5% of the shares
of stocks of K-Phil were owned by KUSA. K-Phil. acted as a representative of
K-USA and not as an agent. K-Phil. also
bore alone its own incidental expenses
(e.g. Cable expenses) and also those of its
principal. Moreover, K-Phils share in
the profits was left in the hands of KUSA. Clearly, K-Phil was a mere branch
or dummy of K-USA, and was therefore
liable for merchant sales tax. To allow
otherwise would be to sanction a
circumvention of our tax laws and permit a
tax evasion of no mean proportion and the
consequent commission of a grave

injustice to the Government. Moreover, it

would allow the taxpayer to do by
indirection what the tax laws prohibit to be
done directly.
LIDDELL & CO. VS. CIR (2 SCRA 632;
1961)
Liddel Motors Inc. was an alter ego of
Liddel & Co. At the time of its
incorporation, 98% of the Liddel Inc.s
stock belonged to Frank Liddel. As to
Liddel Motors, Frank supplied the original
capital funds. The bulk of the business of
Liddel Inc. was channeled through Liddel
Motors. Also, Liddel Motors pursued no
other activities except to secure cars,
trucks and spare parts from Liddel Inc. and
then sell them to the general public.

To allow the taxpayer to deny tax

liability on the ground that the sales were
made through another and distinct
corporation when it is proved that the latter
is virtually owned by the former or that
they were practically one and the same is
to sanction the circumvention of tax laws.
YUTIVO VS. CTA (1 SCRA 160; 1961)
Southern Motors was actually owned
and controlled by Yutivo as to make it a
mere subsidiary or branch of the latter
created for the purpose of selling vehicles
at retail. Yutivo financed principally, if not
wholly, the business of Southern Motors
and actually exceeded the credit of the
latter . At all times, Yutivo, through the
officers and directors common to it and the
Southern Motors exercised full control

over the cash funds, policies, expenditures

and obligations of the latter. Hence,
Southern Motors, being a mere
instrumentality or adjunct of Yutivo, the
CTA correctly disregarded the technical
defense of separate corporate identity in
order to arrive at the true tax liability of
Yutivo.
LA CAMPANA VS. KAISAHAN (93
Phil. 160; 1953)
The La Campana Gaugau Packing and
La Campana Coffee Factory were
operating under one single business
although with 2 trade names. It is a settled
doctrine that the fiction of law of having
the corporate identity separate and distinct
from the identity of the persons running it
cannot be invoked to further the end

subversive of the purpose for which it was

created. In the case at bar, the attempt to
make the two businesses appear as one is
but a device to defeat the ends of the law
governing capital and labor relations and
should not be permitted to prevail.
PROMOTERS CONTRACTS PRIOR
TO INCORPORATION
Liability of Corporation for
Promoters Contracts

While a corporation could

not have been a party to a
promoter's contract since it
did yet exist at the time the

contract was entered into and

thus could not possibly have
had an agent who could
legally bind it, the corporation
may make the contracts its
own and become bound
thereon if, after incorporation,
it:
(1)
Adopts or ratifies the
contract; or
(2)
Accepts its benefits
with knowledge of the
terms thereof.
It must be noted, however,
that the contract must be
adopted in its entirety; the
corporation cannot adopt only
the part that is beneficial to it

and discard that which is

burdensome. Moreover, the
contract must be one which is
within the powers of the
corporation to enter, and one
which the usual agents of the
company have express or
implied authority to enter.
McARTHUR V. TIMES PRINTING
CO. (48 Minn. 319, 51 N.W. 216; 1892)
It is not a requisite that a corporation's
adoption or acceptance of a promoter's
contract be expressed, but it may be
inferred from acts or acquiescence on the
part of the corporation, or its authorized
agents, as any similar original contract
might be shown.

The right of agents to adopt an

agreement originally made by promoters
depends upon the purposes of the
corporation and the nature of the
agreement. The agreement must be one
which the corporation itself could make
and one which the usual agents of the
company have express or implied authority
to enter into.
CLIFTON v. TOMB (21 F. 2d 893; 1921)
Whatever may be the proper legal
theory by which a corporation may be
bound by the contract (ratification,
adoption, novation, a continuing offer to
be accepted or rejected by the
corporation), it is necessary in all cases
that the corporation should have full

knowledge of the facts, or at least should

be put upon such notice as would lead,
upon reasonable inquiry, to the knowledge
of the facts.
CAGAYAN FISHING DEV. CO. v.
SANDIKO (65 Phil. 223; 1937)
A promoter could not have acted as
agent for a corporation that had no legal
existence. A corporation, until organized,
has no life therefore no faculties. The
corporation had no juridical personality to
enter into a contract.
Also see Caram v. CA
Corporate Rights under Promoters
Contracts

Should
the
other
contracting party fail to
perform its part of the
bargain,
the
corporation
which has adopted or ratified
the contract may either sue
for:
(1)
Specific
performance; or
(2)
Damages resulting
from breach of contract.
The fact of bringing an action
on the contract has been held
to
constitute
sufficient

adoption or ratification to give

the corporation a cause of
action.
BUILDERS
DUNTILE
CO.
v.
DUNN (229 Ky. 569, 17 S.W. 2d 715;
1929)
When the corporation was formed, the
incorporators took upon themselves the
whole thing, and ratified all that had been
done on its behalf. Though there was no
formal assignment of the contract to the
corporation, the acts of the incorporators
were an adoption of the contract.
Therefore the corporation has the right to
sue for damages for the breach of contract.

RIZAL LIGHT V. PSC (25 SCRA 285;

1968)
The incorporation of (Morong) and its
acceptance of the franchise as shown by
this action in prosecuting the application
filed with the Commission for approval of
said franchise, not only perfected a
contract between the municipality and
Morong but also cured the deficiency
pointed out by the petition. The fact that
Morong did not have a corporate existence
on the day the franchise was granted does
not render the franchise invalid, as Morong
later
obtained
its
certificate
of
incorporation and accepted the franchise.
Personal Liability of Promoter on
Pre-Incorporation Contracts

GENERAL
RULE:
Promoters are personally
liable on their contracts made on
behalf
of a corporation to be
formed.
EXCEPTION: If there is an
express
or
implied
agreement to the contrary.
It must be noted that the
fact that the corporation
when formed has adopted
or ratified the contract
does not release
the
promoter
from

responsibility unless a
novation was intended.
WELLS VS. FAY & EGAN CO. (143
Ga. 732, 85 S.E. 873; 1915)
Individual promoters cannot escape
liability where they buy machinery, receive
them in their possession and authorize one
member to issue a note, in contemplation
of organizing a corporation which was not
formed. (see Campos' notes p. 258-259).
The agent is personally liable for contracts
if there is no principal. The making of
partial payments by the corporation, when
later formed, does not release the
promoters here from liability because the
corporation acted as a mere stranger
paying the debt of another, the acceptance

of which by the creditor does not release

the debtors from liability over the balance.
Hence, there is no adoption or ratification.
HOW & ASSOCIATES INC.
BOSS (222 F. Supp. 936; 1963)

VS.

The rule is that if the contract is partly

to be performed before incorporation, the
promoters solely are liable. Even if the
promoter signed "on behalf of corporation
to be formed, who will be obligor," there
was here an intention of the parties to have
a present obligor, because three-fourths of
the payment are to be made at the time the
drawings or plans in the architectural
contract are completed, with or without
incorporation. A purported adoption by the
corporation of the contract must be

expressed in a novation or agreement to

that effect. The promoter is liable unless
the contract is to be construed to mean: 1)
that the creditor agreed to look solely to
the new corporation for payment; or 2) that
the promoter did not have any duty toward
the creditor to form the corporation and
give the corporation the opportunity to
assume and pay the liability.
QUAKER HILL VS. PARR (148 Colo.
45, 364 P. 2d 1056; 1961)
The promoters here are not liable
because the contract imposed no obligation
on them to form a corporation and they
were
not
named
there
as
obligors/promissors. The creditor-plaintiff
was aware of the inexistence of the

corporation but insisted on naming it as

obligor because the planting season was
fast approaching and he needed to dispose
of the seedlings. There was no intent here
by plaintiff-creditor to look to the
promoters for the performance of the
obligation. This is an exception to the
general rule that promoters are personally
liable on their contracts, though made on
behalf of a corporation to be formed.
Fiduciary relationship between
corporation and promoter

OLD DOMINION VS. BIGELOW (203

Mass. 159, 89 N.E. 193; 1909)

A promoter, notwithstanding his

fiduciary duties to the corporation, may
still sell properties to it, but he must pursue
one of four courses to make the contract
binding. These are: 1) provide an
independent board of officers in no respect
directly or indirectly under his control, and
make full disclosure to the corporation
through them; 2) make full disclosure of
all material facts to each original
subscriber of shares in the corporation; 3)
procure a ratification of the contract after
disclosing its circumstances by vote of the
stockholders of the completely established
corporation; or 4) be himself the real
subscriber of all the shares of the capital
stock contemplated as a part of the
promotion scheme. The promoter is liable,
even if owning all the stock of the
corporation at the time of the transaction,

if further original subscription to capital

stock contemplated as an essential part of
the scheme of promotion came in after
such transaction.
CORPORATE POWERS
General Powers of Corporation
(Sec. 36)

To sue and be sued in its

corporate name;

Of succession by its
corporate name for the period
of time stated in the articles of

incorporation and the certificate

of incorporation;

To adopt
corporate seal;

To amend its articles of

incorporation in accordance
with the provisions of this
Code;

To adopt by-laws not

contrary to law, morals, or
public policy, and to amend or
repeal the same in accordance
with this Code;

In
case
of
stock
corporations, to issue of sell
stocks to subscribers and to

and

use

sell
treasury
stocks
in
accordance with the provisions
of this Code; and to admit
members to the corporation if it
be a non-stock corporation;

To purchase, receive, take,

grant, hold, convey, sell, lease,
pledge,
mortgage
and
otherwise deal with such real
and
personal
property,
including securities and bonds
of other corporations, as the
transaction of the lawful
business of the corporation
may
reasonably
and
necessarily require, subject to
the limitations prescribed by
law and the Constitution;

(NOTE: There are two (2)

general restrictions on the
power of the corp. to acquire
and hold properties:
(1) that the property must
be
reasonable
and
necessarily
required by the
transaction of its lawful
business, and
(2) that the power shall be
subject to the limitations
prescribed
by other special laws
and the Constitution.)

To adopt any plan of

merger or consolidation as
provided in this Code;

To
make
reasonable
donations, including those for
the public welfare of for
hospital, charitable, cultural,
scientific, civic, or similar
purposes:

Provided
that:
no
corporation, domestic or foreign,
shall give donations in
aid of any political party
or candidate or for
purposes of partisan
political activity;

To
establish
pension,
retirement and other plans for
the benefit of its directors,
trustees,
officers
and
employees; and

To exercise such other

powers as may be essential or
necessary to carry out its
purpose or purposes as stated
in its articles of incorporation.

Specific Powers of Corporation

Extension or shortening
of the corporate term (Sec.
37)

Increase or decrease of
the capital stock (Sec. 38)

Incur, create or increase

bonded indebtedness (Sec.
38)

Denial of the pre-emptive

right (Sec. 39)

Sale or other disposition

of substantially all its assets.
(Sec. 40)

A sale is deemed to
substantially cover all the
corporate
property
and
assets if such sale renders
the corporation incapable of

continuing the business or

accomplishing the purpose
for
which
it
was
incorporated.

Acquisition of its own

shares. (Sec. 41)

Investment in another
corporation or business. (Sec.
42)

Declaration of dividends.
(Sec. 43)

Entering
into
management contracts. (Sec.
44)
Implied Powers

Under Sec. 36, a corporation is

given such powers as are essential or
necessary to carry out its purpose or
purposes as stated in the articles of
incorporation. This phrase gives rise to
such a wide range of implied powers,
that it would not be at all difficult to
defend a corporate act versus an
allegation that it is ultra vires.
A corporation is presumed to act
within its powers and when a contract
is not its face necessarily beyond its
authority; it will, in the absence of proof
to the contrary, be presumed valid.

The Ultra Vires Doctrine

Blacks Law Dictionary Definition:

Ultra vires acts are those acts
beyond the scope of the powers of the
corporation, as defined by its charter
or laws of state of incorporation. The
term has a broad application and
includes not only acts prohibited by the
charter, but acts which are in excess of
powers granted and not prohibited,
and generally applied either when a
corporation has no power whatever to
do an act, or when the corporation has
the power but exercises it irregularly.

Q: What are the consequences

of ultra vires acts?

The corporation may be

dissolved
under
a
quo
warrranto proceeding.

The
Certificate
of
Registration
may
be
suspended or revoked by the
SEC.

Parties to the ultra vires

contract will be left as they are,
if the contract has been fully
executed on both sides.
Neither party can ask for
specific performance, if the
contract is executory on both
sides. The contract, provided

that it is not illegal, will be

enforced, where one party has
performed his part, and the
other has not with the latter
having benefited from the
formers performance.

Any stockholder may bring

an individual or derivative suit
to enjoin a threatened ultra
vires act or contract. If the act
or contract has already been
performed, a derivative suit for
damages against the directors
maybe filed, but their liability
will depend on whether they
acted in good faith and with
reasonable
diligence
in
entering into the contracts.
When the suit against the

injured party who had no

knowledge that the corporation
was engaging in an act not
included expressly or impliedly
in its purposes clause.

Ultra vires acts may

become
binding
by
the
ratification
of
all
the
stockholders,
unless
third
parties are prejudiced thereby,
or unless the acts are illegal.

REPUBLIC OF THE PHILS. v. ACOJE

MINING (7 SCRA 361; 1963)
Resolution adopted by the company to
open a post office branch at the mining
camp and to assume sole and direct

responsibility for any dishonest, careless or

negligent act of its appointed postmaster is
NOT ULTRA VIRES because the act
covers a subject which concerns the
benefit, convenience, and welfare of the
companys employees and their families.
While as a rule an ultra vires act is one
committed outside the object for which a
corporation is created as defined by the
law of its organization and therefore
beyond the powers conferred upon it by
law, there are however certain corporate
acts that may be performed outside of the
scope of the powers expressly conferred if
they are necessary to promote the interest
or welfare of the corporation.
CARLOS v. MINDORO
CO. (57 SCRA 343, 1932)

SUGAR

The BOD of the Phil Trust Co. adopted

a resolution which authorized its president
to purchase at par and in the name of the
corp. bonds of MSC. These bonds were
later resold and guaranteed by PTC to third
persons.
PTC paid plaintiff the
corresponding interest payments until July
1, 1928 when it alleged that it is not bound
to pay such interest or to redeem the
obligation because the guarantee given for
the bonds was illegal and void.
Held: The act of guaranty by PTC was
well within its corporate powers.
Furthermore, having received money or
property by virtue of the contract which is
not illegal, it is estopped from denying
liability. Even if the then prevailing law
(Corp. Law) prohibited PTC from

guaranteeing bonds with a total value in

excess of its capital, with all the MSC
properties transferred to PTC based on the
deed of trust, sufficient assets were made
available to secure the payment of the
corresponding liabilities brought about by
the bonds.
GOVT v. EL HOGAR (50 Phil 399;
1932)
(This case is an example of how the
implied powers concept may be used to
justify certain acts of a corporation.)
A quo warranto proceeding instituted by
the Gov't against El Hogar, a building and
loan ass'n to deprive it of its corp.
franchise.

1. El Hogar held title to real property for a

period in excess of 5 years in good faith,
hence this cause will not prosper.
2. El Hogar owned a lot and bldg. at a
business district in Manila allegedly in
excess of its reasonable requirements, held
valid bec, it was found to be necessary and
legally acquired and developed.
3. El Hogar leased some office space in its
bldg.; it administered and managed
properties belonging to delinquent SHs;
and managed properties of its SHs even if
such were not mortgaged to them.
Held: first two valid, but the third is ultra
vires bec. the administration of property
in that manner is more befitting of the
business of a real estate agent or trust

company and not of a building and loan

ass'n.
4. Compensation to the promoter and
organizer allegedly excessive and
unconscionable.
Held: Court cannot dwell on the issue
since the promoter is not a party in the
proceeding and it is the corp. or its SHs
who may bring a complaint on such.
5. Issuance of special shares did not affect
El Hogar's character as a building and loan
ass'n nor make its loans usurious.
6. Corporate policy of using a depreciation
rate of 10 % per annum is not excessive,
bec. accdg. to the SC, the by-laws
expressly authorizes the BOD to determine

each year the amount to be written down

upon the expenses of installation and the
property of the corp.
7. The Corp. Law does not expressly grant
the power of maintaining reserve funds but
such power is implied. All business
enterprises encounter periods of gains and
losses, and its officers would usually
provide for the creation of a reserve to act
as a buffer for such circumstances.
8. That loans issued to member borrowers
are being used for purposes other than the
bldg. of homes not invalid bec. there is no
statute which expressly declares that loans
may be made by these ass'ns solely for the
purpose of bldg. homes.

9. Sec. 173 of the Corp. Law provides that

"any person" may become a SH on a bldg.
and loan ass'n. The word "person" is used
on a broad sense including not only natural
persons but also artificial persons.
BISSEL
v.
MICHIGAN
SOUTHERN ( 22 NY 258; 1860)
Two railroad corporations contend that
they transcended their own powers and
violated their own organic laws. Hence,
they should not be held liable for the injury
of the plaintiff who was a passenger in one
of their trains.
Held: The contract between the two
corporations was an ultra vires act.
However, it is not one tainted with

illegality, therefore, the accompanying

rights and obligations based on the
contract of carriage between them and the
plaintiff cannot be avoided by raising such
a defense.
PIROVANO
v.
DELA
RAMA
STEAMSHIP (96 Phil 335 , 1954)
This case involved the issue of whether
or not the defendant corporation performed
an ultra vires act by donating the life
insurance proceeds to the minor children
of Pirovano, the deceased president of the
defendant
company
under
whose
management the company grew and
progressed to become a multi-million peso
corporation.
Held:

NO.

The AOI of the corporation provided

two relevant items:
(1) to invest and deal with moneys
of the company not immediately
required, in such manner as from
time to time may be determined;
and
(2) to aid in any other manner any
person, association or corporation of
which any obligation or in which
any interest is held by this
corporation or in the affairs of
prosperity of which this corporation
has a lawful interest.
From this, it is obvious that the
corporation properly exercised within its

chartered powers the act of availing of

insurance proceeds to the heirs of the
insured and deceased officer.
HARDEN
v.
BENGUET
CONSOLIDATED (58 Phil 141)
A contract between Benguet and
Balatoc provided that Benguet will bring
in capital, eqpt. and technical expertise in
exchange for capital shares in Balatoc.
Harden was a SH of Balatoc and he
contends that this contract violated the
Corp.Law which restricts the acquisition of
interest by a
mining corp. in another mining corp.
Held: Harden has no standing bec. if any
violation has been committed, the same
can be enforced only in a criminal

prosecution by an action of quo warranto

which may be maintained only by the
Attorney-General.
CONTROL AND MANAGEMENT
Allocation of Power and Control

Q: What are the three levels of

corporate control/power?
Board
of
directors
trustees- responsible
corporate policies and
general management of
business and affairs of
corporation.

or
for
the
the
the

Officers- execute the policies

laid down by the board.
Stockholders or members- have
residual power over fundamental
corporate
changes
like
amendments of articles of
incorporation.
Who Exercises Corporate Powers
Board of directors or trustees
Q: What are the powers of the
BOD?

The BOD is responsible

corporate policies and
general management of
business
affairs
of
corporation. (See Citibank
Chua)
(a)

Authority (Sec. 24)

(b)

Requirements
(i)

for
the
the
the
v

Qualifying share (Sec.

24)

(ii)

Residence (Sec. 24)

(iii)

Nationality

(iv)
27)

Disqualifications (Sec.

conviction
by
final
judgment
of
offense
punishable > 6 yrs. prison
violation of Corporation
code within 5 years prior to
date
of
election
or
appointment
-

(c)

How elected (Sec. 24)

The formula for determining the

number of shares needed to elect a
given number of directors is as
follows:
X = Y x N1
N+1

+1

X = being the number of shares

needed to elect a given number of
directors
Y = being the total number of
shares present or represented at the
meeting
N1 = being the number of
directors desired to be elected
N = being the total number of
directors to be elected
(d)

How removed (Sec. 28)

By a vote of the SHs holding or
representing at least 2/3 of the
outstanding capital stock, or by a
vote of at least 2/3 of the members
entitled to vote, provided that such
removal takes place at either a
regular meeting of the corporation

or at a special meeting called for

the purpose. In both cases, there
must be previous notice to the
SHs / members of the intention to
propose such removal at the
meeting.
Removal may be with or without
cause. However, removal without
cause may not be used to deprive
minority SHs or members of the
right of representation to which they
may be entitled under Sec. 24 of
the Code.
(e)

How vacancy filled (Sec. 29)

If
vacancy
due
to
removal
Must be filled by

the SHs in a regular or special

meeting
or expiration of term:
called
for
that
purpose.
If "vacancy" due to increase
Only by means of an election at a
regular or special SHs
in number of directors
meeting duly called for the purpose,
or in the same
or
trustees:
meeting authorizing the increase of
directors or trustees
if
so stated in the notice of the
meeting.

All other vacancies:

May be filled by the
vote of at least a majority of the
remaining directors or trustees, if
still constituting a
quorum.
Note: Directors or trustees so
elected to fill vacancies shall be
elected only for the unexpired
term of their predecessors in
office.
(f)

How compensated (Sec. 30)

If

provided
in
bylaws:
That
compensation
stated in the by-laws.

If
not
provided
in
bylaws:
Directors shall not receive
any compensation other than
reasonable per diems,
as
directors. However, co
mpensation other than
per diems may be
granted to directors by
a majority vote of the
SHs at a regular or
special
stockholders'
meeting.
Note: In no case shall the total
yearly compensation of directors, as
such directors, exceed 10%

of the net income before income

tax of the corporation during the
preceding year.
(g)
Matters requiring
Directors' action
(h) Liability
(See
discussion
under
Directors
and
Stockholders.)

Board

of

subsequent
Duties
of
Controlling

(i) In general (Sec. 31)

(ii) Business judgment rule
(iii) Dealings with the corporation
(Sec. 32)

(iv) Contracts between corporations

with interlocking directors (Sec. 33)

(i)

(v)

Disloyalty (Sec. 34)

(vi)
65)

Watered stocks (Sec.

Executive Committee (Sec. 35)

See subsequent discussion
under Board Committees.

RAMIREZ VS. ORIENTALIST CO

AND FERNANDEZ (38 Phil. 634; 1918)
In this case, the board of directors,
before the financial inability of the
corporation to proceed with the project

was revealed, had already recognized the

contracts as being in existence and had
proceed with the necessary steps to utilize
the films. The subsequent action by the
stockholders in not ratifying the contract
must be ignored. The functions of the
stockholders are limited of nature. The
theory of a corporation is that the
stockholders may have all the profits but
shall return over the complete management
of the enterprise to their representatives
and agents, called directors. Accordingly,
there is little for the stockholders to do
beyond electing directors, making by-laws,
and exercising certain other special powers
defined by law. In conformity with this
idea, it is settled that contracts between a
corporation and a third person must be
made by directors and not stockholders.

LOPEZ VS. ERICTA (45 SCRA 539;

1972)
In this case, the Board of Regents of
the University of
the Philippines
terminated the ad interim appointment of
Dr. Blanco as Dean of the College of
Education by not acting on the matter. In
the transcript of the meeting which was
latter agreed to be deleted, it was found out
that the BOR, consisting of 12 members,
voted 5 in favor of Dr. Blanco's
appointment 3 voted against, and 4
abstained.
The core of the issue is WON the 4
abstentions will be counted in favor of Dr.
Blanco's appointment or against it. The SC
held that such abstentions be counted as
negative vote considering that those who

abstained, 3 of which members of the

Screening Committee, intended to reject
Dr. Blanco's appointment.
ZACHARY VS. MILLIN (294 Mic. 622;
1940)
The issue in this case is regarding the
validity of the director's meeting at the
company's laboratory on December 8,
1937 wherein Zachary was removed as
president of the company. Zachary that he
was not notified of the meeting thus, the
action was void. On the other hand, the
defendants contend that the notice
requirement was waived by Zachary's
presence at the meeting.
The SC held that the validity of the
meeting was not affected by the failure to

give notice as required by the by-laws,

provided that the parties were personally
present. Since all the parties were present
at the meeting of December 8, and
understood that the meeting was to be a
directors' meeting, then the action taken is
final and may not be voided by any
informality in connection with its being
called.
PNB VS. CA (83 SCRA 238; 1978)
The action was brought by the
mortgagor (Tapnio) against PNB for
damages in connection with the failure of
the latter's board of directors to act
expeditiously on the proposed lease of the
former's sugar quota to one Tuazon.

The Supreme Court held that while the

PNB has the ultimate authority to approve
or disapprove the proposed lease since the
quota was mortgaged to PNB, the latter
certainly cannot escape liability for
observing, for the protection of the interest
of the private respondents, that degree of
care, precaution and vigilance which the
circumstances justly demand in approving
or disapproving the lease of the said sugar
quota.
Corporate officers and agents
(a) Minimum set of officers and
their qualifications (Sec. 25)
The minimum set of officers are:

(1) president (who shall be

a director);
(2) secretary (who shall be
a resident and Filipino
citizen); and
(3) treasurer (who may or
may not be a director)
The by-laws, however,
provide for other officers.

may

Any 2 or more positions may be

held concurrently by the same
person, except that no one shall
act as (a) president and secretary,
or (b) president and treasurer at
the same time.
(b)

Disqualifications (Sec. 27)

- Conviction by final judgment

of an offense punishable by
imprisonment > 6 yrs.
- Violation of Corporation Code
committed within 6 yrs. prior to
the date of election or
appointment
(c)

Liability in general (Sec. 31)

See discussion under Duties of
Directors
and
Controlling
Stockholders. .

(d) Dealings
with
corporation (Sec. 32)

the

Generally voidable (See

discussion under Duties of
Directors and Controlling
Stockholders)
What is the doctrine of apparent
authority?
The doctrine of apparent
authority provides that a
corporation will be liable to
innocent third persons for the
acts of its agent where the
representation was made by
the agent in the course of
business and acting within
his/her general scope of
authority even though, in the
particular case, the agent is
secretly abusing his authority

and attempting to perpetrate

a fraud upon his/her principal
or some other person for
his/her own ultimate benefit.
FIRST
PHILIPPINE
INTERNATIONAL BANK & RIVERA
v. CA (January 24, 1996)
The authority of a corporate officer in
dealing with third persons may be actual or
apparent. The doctrine of "apparent
authority," with special reference to banks,
was laid out in Prudential Bank v. CA (223
SCRA 350) where it was held that:
A bank is liable for the
wrongful acts of its officers
done in the interest of the

bank or in the course of

dealings of the officers in
their representative capacity
but not for acts outside the
scope of their authority. A
bank holding out its officers
and agents as worthy of
confidence will not be
permitted to profit by the
frauds they may thus be
enabled to perpetrate in the
apparent scope of their
employment; nor will it be
permitted to shrink from its
responsibility for such frauds,
even though no benefit may
accrue to the bank therefrom.
Accordingly, a bank is liable to
innocent third persons where the

representation is made in the course of its

business by its agent acting within the
general scope of his authority even though,
in the particular case, the agent is secretly
abusing his authority and attempting to
perpetrate a fraud upon his principal or
some other person for his own ultimate
benefit. Application of these principles is
especially necessary because banks have a
fiduciary relationship with the public and
their stability depends on the confidence of
the people in their honesty and efficiency.
Such faith will be eroded where banks do
not exercise strict care in the selection and
supervision of its employees, resulting in
prejudice to their depositors.
YU CHUCK V. KONG LI PO (46 Phil.
608; 1924)

The power to bind a corporation by

contract lies with its board of directors or
trustees. Such power may be expressly or
impliedly be delegated to other officers
and agents of the corporation. It is also
well settled that except where the authority
of employing servants or agents is
expressly vested in the board, officers or
agents who have general control and
management of the corporation's business,
or at least a specific part thereof, may bind
the corporation by the employment of such
agents and employees as are usual and
necessary in the conduct of such business.
Those contracts of employment should be
reasonable. Case at bar: contract of
employment in the printing business was
too long and onerous to the business (3-

year employment; shall receive salary even

if corp. is insolvent).
THE BOARD OF LIQUIDATORS V.
HEIRS OF MAXIMO KALAW (20
SCRA 987; 1967)
Kalaw was a corporate officer entrusted
with general management and control of
NACOCO. He had implied authority to
make any contract or do any act which is
necessary for the conduct of the business.
He may, without authority from the board,
perform acts of ordinary nature for as long
as these redound to the interest of the
corporation. Particularly, he contracted
forward sales with business entities. Long
before some of these contracts were
disputed, he contracted by himself alone,

without board approval. All of the

members of the board knew about this
practice and have entrusted fully such
decisions with Kalaw. He was never
questioned nor reprimanded nor prevented
from this practice. In fact, the board itself,
through its acts and by acquiescence, have
laid aside the by-law requirement of prior
board approval. Thus, it cannot now
declare that these contracts (failures) are
not binding on NACOCO.
ZAMBOANGA
TRANSPO
V.
BACHRACH MOTORS (52 Phil. 244;
1928)
A chattel mortgage, although not
approved by the board of directors as
stipulated in the by-laws, shall still be
valid and binding when the corporation,

through the board, tacitly approved and

ratified it. The following acts of the board
constitute implied ratification:
1.
Erquiaga is one of the largest
stockholder, and was the all-in-one
officer (he was the President, GM,
Attorney, Auditor, etc.)
2.
Two other directors approved his
actions and expressed satisfaction with
the advantages obtained by him in
securing the chattel mortgage.
3.
The corporation took advantage of
the benefits of the chattel mortgage.
There were even partial payments made
with the knowledge of the three
directors.

ACUNA V. BATAC PRODUCERS

COOPERATIVE
MARKETING
ASSOCIATION (20 SCRA 526; 1967)
Acuna entered into an agreement with
Verano, manager of PROCOMA, in which
the former would be constituted as the
latter's agent in Manila. Acuna diligently
went about his business and even used
personal funds for the benefit of the
corporation. During the face-to-face
meeting with the board, Acuna was
assured that there need not be any board
approval for his constitution as agent for it
would only be a mere formality. Later on,
the board disapproved the agency and did
not pay him. The SC ruled that the
agreement was valid due to the ratification
of the corp. proven by these acts:

1.
He was assured by the board that
no board approval was necessary.
2.
He delivered P 20,000, performed
his work with the knowledge of the
board.
3.
Due to acquiescence, the board
cannot disown or disapprove the
contract.
Board Committees
The
By-laws
of
the
corporation may create an
executive committee, composed
of not less than 3 members of
the Board, to be appointed by
the Board.
The executive
committee may act, by majority
vote of all its members, on such

specific matters within the

competence of the board, as
may be delegated to it in either
(1) the By-laws, or (2) on a
majority vote of the board.
However,
the
following
acts
may never be delegated to an
executive committee:
(1) approval of any action for
which shareholders' approval is
also required;
(2) the filling of vacancies in
the board (refer to Sec. 29);
(3) the amendment or repeal
of by-laws or the adoption of
new by-laws;

(4) the amendment or repeal

of any resolution of the board
which by its
express terms is not so
amendable or repealable; and
(5) a distribution of cash
dividends to the shareholders.
HAYES V. CANADA, ATLANTIC AND
PLANT S.S CO., LTD. (181 F. 289;
1910)
In this case, the Executive Committee:
a)
removed the Treasurer and
appointed a new one
b)
fixed the annual salary of the
members of the Executive Committee
c)
amended the by-laws by giving the
President the sole authority to call a

stockholder's meeting and a board of

directors meeting
d)
amended the composition of the
ExeCom by limiting it to just 2 persons.
Was these actions valid?
No,
because
the
Executive
Commmittee usurped the powers vested in
the board and the stockholders. If their
actions was valid, it would put the corp. in
a situation wherein only two men, acting in
their own pecuniary interests, would have
absorbed the powers of the entire
corporation. "Full powers" should be
interpreted only in the ordinary conduct of
business and not total abdication of board
and stockholders' powers to the ExeCom.
"FULL POWERS" does not mean

unlimited
power.

or

absolute

Stockholders or Members
In the following basic changes
in the corporation, although action is
usually initiated by the board of
directors or trustees, their decision is
not final, and approval of the
stockholders or members would be
necessary:
(1) Amendment of articles of
incorporation;
(2) Increase and decrease of
capital stock;

(3) Incurring,
creating
or
increasing
bonded
indebtedness;
(4) Sale, lease, mortgage or
other
disposition
of
substantially
all
corporate
assets;
(5) Investment of funds in
another
business
or
corporation or for a purpose
other than the primary purpose
for which the corporation was
organized;
(6) Adoption, amendment and
repeal of by-laws;
(7) Merger and consolidation;
(8) Dissolution of corporation
In all of these cases, even nonvoting stocks, or non-voting members,

as the case may be, will be entitled to

vote. (Sec. 6)
BOARD OF DIRECTORS AND
ELECTION COMMITTEE OF SMB
VS. TAN (105 Phil. 426; 1959)
Meeting was invalid for lack of notice.
By-laws provide for a 5-day notice before
meeting. March 26 posting not enough for
March 28 election.

JOHNSTON VS. JOHNSTON (61 O.G.

No. 39, 6160; 1965)

As a general rule, a quorum at a

stockholders' meeting, once reached,
cannot be nullified by a subsequent
walkout.
However, the proceedings can be
nullified if the walkout was for a
reasonable and justifiable cause. In this
case, F. Logan Johnston, who owned
and/or represented more than 50% of the
corporation's outstanding shares, was
prohibited from voting the shares of the
Silos family (which he had validly
purchased) and of the minor children of
Albert S. Johnston (of whom he was
guardian) on the ground that such shares
must first be registered in the names of the
wards, thereby prompting the walkout.
The Court of Appeals held that the walkout
was
neither
unreasonable
nor

unjustifiable. It noted however that there

was no formal declaration of a quorum
before the withdrawal from the meeting by
F. Logan Johnston.
PONCE VS. ENCARNACION (94 Phil.
81; 1953)
Upon good cause, such as a Chairman
of the Board failing to call a meeting,
either by his absence or neglect, the Court
may grant a stockholder the authority to
call such a meeting.
DETECTIVE AND PROTECTIVE
BUREAU VS. CLORIBEL (26 SCRA
225; 1968)

The Corporation Law says that every

director must own at least one (1) share of
the capital stock of the corporation.
GOKONGWEI VS. SEC (89 SCRA 336;
1979)

Section 21 of the Corporation

provides that a corporation
prescribe
in
its
by-laws
qualifications,
duties,
compensation of its directors.

A stockholder has no vested right

to be elected director for he impliedly
contracts that the will of the majority
shall govern.

Law
may
the
and

Amended by-laws are valid for the

corporation has its inherent right to
protect itself.

ROXAS V. DELA ROSA (49 Phil. 609;

1926)
Under the Law, directors can only be
removed from office by a vote of the
stockholders
representing
2/3
of
subscribed capital stock, while vacancies
can be filled by a mere majority.
A director cannot be removed by a
mere majority by disguising it as filling a
vacancy.
ANGELES V. SANTOS (64 Phil. 697;
1937)

Court may appoint a receiver when

corporate remedy is unavailable when
board of directors perform acts harmful to
the corporation.
Generally, stockholders cannot sue on
behalf of the corporation. The exception is
when the defendants are in complete
control of the corporation.
CAMPBELL V. LEOWS INC. (134 A.
2d 852; 1957)
The stockholders have an implied
power to remove a director for cause. Even
when there is cumulative voting,
stockholders can still remove directors for
cause.

DELA RAMA V. MA-AO SUGAR

CENTRAL CO, INC. (27 SCRA 247;
1969)
A corporation may use its funds to
invest in another corporation without the
approval of the stockholders if done in
pursuance of a corporate purpose.
However, if it is purely for investment, the
vote of the stockholders is necessary.
VOTING

Pledgors,
mortgagors,
executors,
receivers,
and
administrators (Sec. 55)

Pledgors
or
mortgagors have the right to attend
and vote at stockholders' meetings.
Exception: If
the
pledgee or mortgagee is expressly
given by the pledgor or
mortgagor such right in
writing
which
is
recorded
on
the
appropriate corporate
books.
- Executors, administrators,
receivers and other legal
representatives duly appointed
by the court may attend and
vote
in
behalf
of
the
stockholders
or
members

without need of any written

proxy.
Joint
stock (Sec. 56)

owners

of

- Generally, consent of
all co-owners shall be necessary.
Treasury shares (Sec. 57)
- Treasury shares have no
voting right for as long as such
shares remain in the Treasury.
Proxies (Sec. 58)
- Proxies must be in writing,
signed
by
the

stockholder/member,
filed
before the scheduled meeting
with the corporate secretary.
- Unless otherwise provided in
the proxy, it shall be valid only
for the meeting for which it is
intended. No proxy shall be
valid and effective for a period
longer than five (5) years at any
one time.
- Voting trusts may be voted
by proxy unless the agreement
provides otherwise. (Sec. 59)
- It must be noted however
that directors or trustees cannot
vote by proxy at board
meetings. (Sec. 25)

- Note that in Sec. 89, nonstock

corporations
are
permitted to waive the right to
use proxies via their AOI or bylaws.
Voting trust (Sec. 59)
- Voting trusts must be in
writing, notarized, specifying
the terms and conditions
thereof, certified copy filed with
SEC. Failure to comply with
this requirement renders the
agreement
ineffective
and
unenforceable.
- As a general rule, voting
trusts are valid for a period not

exceeding 5 years at any one

time, and automatically expire
at the end of the agreed period
unless expressly renewed.
However, in the case of a
voting
trust
specifically
required as a condition in a
loan agreement, said voting
trust may exceed 5 years but
shall automatically expire
upon payment of the loan.
- Voting trusts may be voted
by proxy unless the agreement
provides otherwise. (Sec. 59)
Pooling agreement
- Pooling agreements refer to
agreements between 2 or more

SHs to vote their shares the

same way. They are different
from voting trust agreements in
that they do not involve a
transfer of stocks but are
merely private agreements
between 2 or more SHs to vote
in the same way.
- Sec. 100, par. 2 of the
Corporation Code provides for
pooling and voting agreements
in close corporations. Although
there is no equivalent provision
for widely-held corporations,
Justice and Prof. Campos are
of the opinion that SHs of
widely-held
corporations
should not be precluded from
entering
into
voting

agreements if these are

otherwise valid and are not
intended to commit any wrong
or fraud on the other SHs that
are not parties to the
agreement.
Non-voting shares (Sec. 6)
- Preferred
redeemable shares.

or

ITF shares
And/or shares (Sec. 56)
- Any one of the joint
owners can vote said shares or
appoint a proxy thereof.

Devices Affecting Control

Proxy Device
Sec 58. Proxies. Stockholders and
members may vote in person or by proxy
in all meetings of stockholders or
members. Proxies shall be in writing,
signed by the stockholder or member and
filed before the scheduled meeting with the
corporate secretary. Unless otherwise
provided in the proxy, it shall be valid only
for the meeting for which it is intended.
No proxy shall be valid and effective for a

period longer than five (5) years at any one

time.
Character: agency relationship; revocable
at will (by express revocation, by attending
the meeting) and by death, except when
coupled with interest or is a security.
IN RE GIANT PORTLAND CEMENT
CO. (21 A.2d 697; 1941)
Even if stocks are sold, the stockholder
of record remains the owner of the stocks
and has the voting right until the by-law
requiring recording of transfer in the
transfer book is complied with. Thus, a
proxy given by the stockholder of record
even if he has already sold the share/s of
stock remains effective.

STATE EX REL EVERETT TRUST V

PACIFIC WAXED PAPER, (159 A.L.R.
297; 1945)
The general rule is that a proxy is
revocable even though by its express terms
it is irrevocable. The exceptions are: (a)
when authority is coupled with interest; (b)
where authority is given as part of a
security and is necessary to effectuate such
a security. It is coupled with interest when
there is interest in the share themselves
(such as a right of first refusal in case of
sale) and the rights inherent in the shares
(such as voting rights; capacity to obtain
majority).
DUFFY V LOFT (17 Del. Ch. 376, 152
A. 849; 1930)

Where a stockholders meeting was

validly convened, the proxies must be
deemed present even if the proxies were
not presented, provided: (a) their existence
is established; (b) the agents were so
designated to attend and act in SHs
behalf; (c) the agents were present in the
meeting.
Q: Is it valid for the corporation
to pay the expenses for proxy
solicitation?
A: In the case of Rosenfeld v.
Fairchild Engine and Airplane
Corp. (128 N.E. 2d 291; 1955), it
was held that in a contest over
policy (as opposed to a purely
personal
power
contest),

corporate directors have the

right to make reasonable and
proper expenditures, subject to
the scrutiny of the courts when
duly challenged, from the
corporate treasury for the
purpose of persuading the SHs
of the correctness of their
position and soliciting their
support for policies which the
directors believe, in all good
faith, are in the best interests of
the corporation.
The SHs,
moreover, have the right to
reimburse
successful
contestants for the reasonable
and bona fide expenses incurred
by them in any such policy
contest, subject to like court
scrutiny.

However, where it is
established that such monies
have been spent for personal
power, individual gain or private
advantage, and not in the belief
that such expenditures are in the
best interest of the stockholders
and the corporation, or where
the fairness and reasonableness
of
the
amounts
allegedly
expended
are
duly
and
successfully challenged, the
courts will not hesitate to
disallow them.
ROSENFELD V. FAIRCHILD (128 N.E.
2d 291; 1955)
In a contest over policy, as compared to
a purely personal power contest, corporate

directors have the right to make reasonable

and proper expenditures. Reason: in these
days of giant corporations with vast
numbers of SHs, if directors are not
allowed to authorize reasonable expenses
in soliciting proxies, corporate business
may be hampered by difficulty in
procuring quorum; or corporations may be
at the mercy of persons seeking to wrest
control for their purposes if the directors
may not freely answer their challenge. But
corp expense may be disallowed by courts
where money was shown to have been
spent for personal power, individual gain
or private advantage, or where fairness and
reasonableness of amount spent has been
successfully challenged.
Voting Trust

A Voting Trust Agreement (VTA) is

an agreement whereby the real
ownership of the shares is separated
from the voting rights, the usual aim
being to insure the retention of
incumbent directors and remove from
the stockholders the power to change
the management for the duration of the
trust.
Advantages

Accumulates power. Small

shareholders are given the chance
to have a representation in the BOD
or at least a spokesperson during
stockholders meetings.

Continuity of management.

More effective than

because it is irrevocable.

Ensures that the

number of stockholders
thereby
facilitating
corporate operations.

proxies
required
is met
smooth

Disadvantages

Stockholders give up rights

(voting and naked title)

Susceptible to abuse

Not used in widely held

corporations
Rights given up by the shareholder
in a VTA in exchange for the
fiduciary obligation of the trustee:

Voting rights

Proprietary
rights/naked
title/legal ownership

Incidental rights such as to

attend meetings, to be elected, to
receive dividends)

Rights retained by the shareholder

Beneficial
or
equitable
ownership

Right to revoke VTA in case of

breach by trustee

Regain full ownership after the

lapse of the period

Right to an accounting by the

trustee after the period of the VTA
How is a voting trust created?

(1) A VTA is prepared in writing,

notarized, and filed with the
corporation and SEC.
(2) The certificates of stock
covered by the VTA are cancelled
and new ones (voting trust
certificates) are issued in the
name of the trustee/s stating that
they are issued pursuant to the
VTA.
(3) The transfer is noted in the
books of the corporation.
(4) The trustee/s execute and
deliver to transferors the voting
trust certificates. (Note that these
certificates shall be transferable in

the same manner and with the

same effect as certificates of
stock.)
(5) At the end of the period of the
VTA (or the full payment of the
loan to which the VTA is made a
condition, as the case may be), in
the absence of any express
renewal,
the
voting
trust
certificates as well as the
certificates of stock in the name of
the trustee/s shall be deemed
cancelled and new certificates of
stock shall be reissued in the
name of the transferors.
EVERETT V. ASIA BANKING (49 Phil.
512; 1926)

This case illustrates how VTA can give

rise to effective control and how it can be
abused. Original stockholders can set aside
the VTA when their rights are trampled
upon by the trustee.
MACKIN, ET AL. V. NICOLLET
HOTEL (25 F. 2d 783; 1928)
Invalidating circumstances of a VTA
are:

Want of consideration
Voting power not coupled with
interest

Fraud

Illegal or improper purpose

NIDC V. AQUINO (163 SCRA 153;

1988)
A VTA transfers only voting or other
rights pertaining to the shares subject of
the agreement, or control over the stock.
Stockholders of a corp. that lost all its
assets through foreclosures cannot go after
those properties. PNB-NIDC acquired
those properties not as trustees but as
creditors.
Pooling and voting agreements
What
are
the
advantages/disadvantages of a
pooling agreement?
Advantages:

1. there is a commitment to
agree to a certain manner of
voting
2. minority stockholders are
able to control the corpo
Disadvantages:
1. possibility of disagreement
thus the need for an
arbitration clause
2. there is no compelling
reason for stockholders to act
together
What rights does a shareholder
give up/ retain with a pooling
agreement?

Shareholders retain their right to

vote because the parties are not
constituted as agents. However,
the will of the parties may not be
carried out due to noncompliance with the pooling
agreement.
RINGLING v. RINGLING (29 Del. Ch.
318, 49 A. 2d 603; 1946)
Generally,
agreements
and
combinations to vote stock or control
corporate fiction & policy are valid if they
seek without fraud to accomplish only
what parties might do as stockholders and
do not attempt it by illegal proxies, trusts

or other means in contravention of statutes

or law.
BUCK RETAIL STORE v.
HARKERT (62 N.W. 2d 288; 1954)
Stockholders control agreements are
valid where it is for the benefit of
corporation where it works no fraud upon
creditors or other stockholders and where
it violates no statute or recognized public
policy.
MCQUADE v. STONEHAM (189 N.E.
234; 1934)
An agreement among stockholders to
divest directors of their power to discharge
an unfaithful employee is illegal as against
public policy. Stockholders may not by

agreement among themselves control the

directors in the exercise of the judgment
vested in them by virtue of their office to
elect officers and fix salaries.
CLARK v. DODGE (199 N.E. 641;
1936)
If the enforcement of a particular
contract damages nobody-not even the
public, there is no reason for holding it
illegal. Test is WON it causes damage to
the corporation and stockholders.

Cumulative voting (see sec. 24)

Methods of Voting

1.
Straight voting:
If A has
100 shares and there are 5
directors to be elected, he shall
multiply 100 by five
(equals 500) and distribute
equally among the five
candidates
without
preference
2.
Cumulative voting:
If A has
100 shares and there are 5
directors to be elected, he shall
(one candidate)
multiply 100
by five (equals 500) and he can vote
the 500 for only one
candidate.
3.
Cumulative voting:
If A has
100 shares, there are 5 directors to
be elected, and he only

(multiple candidates) wants to

vote for two nominees, he can divide
500 votes between the
two, giving each one 250
votes.
How to compute votes needed to
get a director elected by cumulative
voting:
1.
Freys formula (minimum no. of
votes to elect one director)
X= # of shares required
Y= # of outstanding votes
Z= # of directors to be elected
X = _ Y__ + 1
Z+1

2.
Baker
&
Carys
formula (minimum no. of votes
needed to elect multiple directors)
X= # of shares required
Y= # of shares represented at
meeting
D= # of directors the minority
wants to elect
D= total # of directors to be elected
X= Y x D + 1
D' + 1
NOTES

Levels playing field or at least

ensures that the minority can elect
at least one representative to the
board of directors (BOD)

Cannot of itself give the

minority control of corporate
affairs, but may affect and limit the
extent of the majoritys control

By-laws
cannot
provide
against cumulative voting since
this right is mandated by law in
Section 24.

Classification of shares (see sec. 6)

Type of shares

1.
Common:
to vote

share with right

2.
Preferred:
share has
preference over dividends and
distribution
of
assets
upon
liquidation;
right to vote may be
restricted (Sec. 6)
3.
Redeemable:
share is
purchased or taken up by the
corporation upon the expiration of a
fixed
period (Sec. 8); right to vote
may be restricted (Sec. 6)
NOTES

Stock can also be

preferred and redeemable.

Even though the right to vote

of preferred and redeemable
shares may be restricted, owners
of these shares can still vote on
certain matter provided for in Sec.
6.

SEC requires that where no

dividends are declared for three
consecutive years, in spite of
available profits, preferred stocks
will be given the right to vote until
dividends are declared.

GOTTSCHALK V. AVALON
REALTY (23 N.W. 2d 606; 1946)

both

Provision granting right to vote to

preferred stock previously prohibited
from voting, constitutes diminution of
the voting power of common stock.

Provision in the articles of

incorporation granting holders of
preferred stock right to vote in case of
default in payment of dividends after
July 1, 1951 was construed as denial by
necessary implication of the right to vote
even prior to July 1, 1951.
Restriction on transfer of shares

Peculiar
corporations.

to

close

Most common restriction:

granting first option to the other
stockholders
and/or
the
corporation to acquire the shares
of a stockholder who wishes to
sell them.

Restrictions on shares of
stock must conform to the
requirements in Sec. 98

This gives to the corporation

and/or to its current management
the power to prevent the transfer
of shares to persons who they
may see as having interests
adverse to theirs.

Prescribing
qualifications
directors; founders shares

for

Directors (See Sec. 23, 27, 47)

As long as the qualifications

imposed are reasonable and not
meant to unjustly or unfairly deprive
the minority of their rightful
representation in the BOD, such
provisions are within the power of
the majority to provide in the bylaws.

According to Gokongwei vs.

SEC, aside from prescribing
qualifications, by-laws can also

provide for the disqualification of

anyone in direct competition with
the corporation.
Founders shares
See Sec. 7 for definition

Exception to the rule in sec. 6

that non-voting shares shall be
limited to preferred and redeemable
shares

If founders shares enjoy the

right to vote, this privilege is limited
to 5 years upon SECs approval, so
as to prevent the perpetual
disqualification
of
other
stockholders.

Management contracts (sec. 44)

Contract to manage the day-today affairs of the corporation in

accordance with the policies laid
down by the board of the managed
corporation.

BOD can and usually delegate

many of its functions but it cant
abdicate its responsibility to act as
a governing body by giving absolute
power to officers or others, by way
of a management contract or
otherwise. It must retain its control
over such officers so that it may
recall the delegation of power
whenever the interests of the
corporation are seriously prejudiced
thereby.

SHERMAN & ELLIS VS. INDIANA

MUTUAL CASUALTY (41 F. 2d 588;
1930)
Although corporations may, for a
limited period, delegate to a stranger
certain duties usually performed by the
officers, there are duties, the performance
of which may not be indefinitely delegated
to outsiders.
UNUSUAL VOTING AND QUORUM
REQUIREMENTS (Sec. 25, 97 [for
close corporations])

Increases veto power of the

minority in some cases.

In exchange for the numerical

majority in the BOD, minority can
ask for a stronger veto power in
major corporate decisions.

BENITENDI VS. KENTON

HOTEL (60 N.E. 2d 829; 1945)

A requirement that there shall be no

election of directors at all unless every
single vote be cast for the same
nominees, is in direct opposition to the
statutory rule that the receipt of plurality
of the votes entitles a nominee to
election. (See Sec. 24)

Requiring unanimity before the

BOD can take action on any corporate
matter makes it impossible for the
directors to act on any matter at all. In all
acts done by the corporation, the major
number must bind the lesser, or else
differences could never be determined
nor settled.

The State has decreed that every

stock corporation must have a
representative government, with voting
conducted conformably to the statutes,
and the power of decision lodged in
certain fractions, always more than half,
of the stock. This whole concept is
destroyed when the stockholders, by
agreement, by-law or certificates of
corporation provides for unanimous
action, giving the minority an absolute,

permanent and all-inclusive power of

veto.

The requirement of unanimous vote

to amend by-laws is valid. Once proper
by-laws have been adopted, the matter of
amending them is no concern of the
State.
Device

Favorable Limitations
To:

Cumulative MINORITY: Cant give

voting
assures
minority
them of
control of
representati corp. affairs
on on the
board

Classificati MINORITY: Preferred

on of
so long as and
shares
they hold
redeemable
more
stock can
common
still vote on
stock as
certain
opposed to matters as
the majority provided in
who holds Sec. 6 or as
more
may be
preferred
provided by
stock
the corp.
Restriction
on transfer
of shares
*applicable
only to
close
corporation

MAJORITY: See Sec.

they can
98
choose
whether to
keep or
release
shares and

they can
prevent
opposition
from
acquiring
shares

Prescribing
qualificatio
ns for
directors;
founders
shares

MAJORITY:
theyre the
ones who
can
prescribe
the
qualification
s in the bylaws

Qualificatio
ns must be
reasonable
and do not
deprive
minority of
representati
on on the
board

Manageme MAJORITY:
Cann
nt
allows them ot exceed
contracts to delegate
five years

certain

BOD
functions
must
and duties
retain
without
control
losing
over corp.
control over policies
the

BOD
corporation
must have
power to
recall
contract
Unusual
voting and
quorum
requiremen
ts

MINORITY:
gives them
stronger
veto power
in certain
corp. affairs
MEETINGS

Subject to
the
limitations
in Sec. 103.

Meetings of Directors / Trustees

KINDS:
Meetings of the
Board of Directors or Trustees
may be either regular or
special. (Sec. 49)
REGULAR:
Held
monthly, unless otherwise
provided in the by-laws.
(Sec. 53)
SPECIAL:
At
any
time upon call of the president or
as provided in the bylaws.

NOTICE:
Must be sent at
least 1 day prior to the
scheduled meeting, unless
otherwise provided by the
by-laws.
Note: Notice may be
waived expressly or
impliedly. (Sec. 53)
WHERE:
Anywhere in or
outside the Philippines,
unless the by-laws provide
otherwise.
QUORUM:
Generally,
a
majority of the number of
directors or trustees as
fixed in the articles of
incorporation
shall

constitute a quorum for the

transaction of corporate
business. (Sec. 25)
Exceptions:
(1) If the AOI or bylaws provide for a
greater majority;
(2) If the meeting is
for the election of
officers,
which
requires the vote of a
majority of all the
members
of
the
Board
WHO PRESIDES:
The
president, unless the by-laws provide
otherwise. (Sec. 54)

Meetings of Stockholders /
Members

KINDS:
Meetings of
stockholders or members may be
either regular or special.
(Sec. 49)
REGULAR:
Held
annually on a date fixed
in the by-laws. If no
date is fixed, on any
date in April of every
year as determined by
the Board of Directors
or trustees.

Notice: Written, and sent

to all stockholders or
members of record at
least 2 weeks prior to
the meeting, unless a
different
period
is
required by the by-laws.
SPECIAL:
At
any
time deemed necessary or as
provided in the by-laws.
Notice: Written, and sent
to all stockholders or
members of record at
least 1 week prior to
the meeting, unless
otherwise provided in
the by-laws.

Note:
Notice of any
meeting may be waived
expressly or
impliedly by any SH
or member. (Sec. 50)
WHERE:
In the city of
municipality where the
principal office of the
corporation is located, and
if practicable in the
principal office of the
corporation. Metro Manila
is considered a city or
municipality. (Sec. 51)
QUORUM:
Generally,
a
quorum shall consist of the
stockholders representing

a
majority
of
the
outstanding capital stock,
or a majority of the
members.
Exception: If otherwise
provided for in the
Code or in the
by-laws.
WHO PRESIDES:
The
president, unless the by-laws provide
otherwise. (Sec. 54)
WHAT IS THE EFFECT IF A
STOCKHOLDER'S
MEETING IS IMPROPERLY
HELD OR CALLED?

Generally, the proceedings

had and/or any business
transacted shall be void.
However, the proceedings
and/or transacted business
may still be deemed valid if:
(1) Such proceedings or
business are within the
powers or authority of the
corporation; and
(2) All the stockholders
or members of the
corporation were present
or duly represented at
the meeting. (Sec. 51)

DUTIES OF DIRECTORS
AND CONTROLLING STOCKHOLDE
RS
Duties and Liabilities of Directors

WHAT IS THE 3-FOLD DUTY

THAT DIRECTORS OWE TO
THE CORPORATION?
(1) Diligence
(2) Loyalty
(3) Obedience
Obedience - directors must act
only within corporate powers
and are liable for damages if

they acted beyond their powers

unless in good faith. Assuming
that they acted within their
powers, liability may still arise if
they have not observed due
diligence or have been disloyal
to the corporation.
WHEN DOES LIABILITY ON
THE PART OF DIRECTORS,
TRUSTEES OR OFFICERS
ARISE?
In
general,
liability
of
directors, trustees or officers
arises when they either:

(1) willfully and

knowingly vote for or assent to
patently unlawful acts of the
corporation; or
(2) are guilty of gross
negligence of bad faith in
directing the affairs of the
corporation; or
(3) acquire any personal or
pecuniary interest in conflict
with their duty as such
directors or trustees.
In such cases, the directors or
trustees shall be liable jointly
and severally for all damages
resulting therefrom suffered by
the corporation, its stockholders
or members and other persons.

When a director, trustee

or officer attempts to acquire or
acquires, in violation of his duty,
any interest adverse to the
corporation in respect of any
matter which has been reposed
in him in confidence, as to which
equity imposes a disability upon
him to deal in his own behalf, he
shall be liable as a trustee for
the
corporation
and must
account for the profits which
would otherwise have accrued to
the corporation. (Sec. 31)
In addition to this general
liability, the Corporation Code
provides for specific rules to
govern the following situations:

(1) Self-dealing directors

(Sec. 32)
(2) Contracts between
interlocking
directors
(Sec. 33)
(3) Disloyalty
to
the
corporation (Sec. 34)
(4) Watered
stocks
(Sec. 65)
Duty of Diligence: Business
Judgment Rule.
WHAT IS THE BUSINESS
JUDGMENT RULE?
As a general rule, directors
and trustees of the corporation

cannot be held liable for

mistakes or errors in the
exercise of their business
judgment, provided they have
acted in good faith and with due
care
and
prudence.
Contracts intra vires entered into
by the board of directors are
binding upon the corporation,
and the courts will not interfere
unless such contracts are so
unconscionable and oppressive
as to amount to a wanton
destruction of the rights of the
minority.
However, if due to the
fault or negligence of the
directors the assets of the
corporation are wasted or lost,

each of them may be held

responsible for any amount of
loss which may have been
proximately caused by his
wrongful acts or omissions.
Where there exists gross
negligence or fraud in the
management of the corporation,
the directors, besides being
liable for damages, may be
removed by the stockholders in
accordance with Sec. 28 of the
Code. (Campos & Campos)
GENERAL
RULE: Contracts intra
vires entered into by BoD are
binding
upon
the

corporation and courts will not

interfere.
EXCEPTION:
When
such
contracts
are
so
unconscionable
and
oppressive as
to amount to a wanton
destruction of the rights of the
minority.
WHAT KIND OF DILIGENCE
IS
EXPECTED
OF
DIRECTORS?
Directors are expected to
manage the corporation with
reasonable diligence, care and
prudence, i.e. the degree of care
and
diligence
which
men

prompted
by
self-interest
generally exercise in their own
affairs. Thus, they can be held
liable
not
only
for willful dishonesty but also for
negligence.
Although they are not
expected to interfere with the
day-to-day administrative details
of
the
business
of
the
corporation, they should keep
themselves sufficiently informed
about the general condition of
the business.
WHAT FACTORS SHOULD BE
CONSIDERED
IN
DETERMINING
WHETHER
REASONABLE
DILIGENCE
HAS BEEN EXERCISED?

The nature of the business,

as well as the particular
circumstances of each case.
The court should look at the
facts as they exist at the time of
their occurrence, not aided or
enlightened by those which
subsequently took place. (Litwin
v. Allen)
OTIS AND CO. VS PENNSYLVANIA
RAILROAD CO. (155 F. 2d 522; 1946)
If in the course of management, the
directors arrive at a decision for which
there is a reasonable basis and they acted
in good faith, as a result of their
independent judgment, and uninfluenced

by any consideration other than what they

honestly believe to be for the best interest
of the railroad, it is not the function of the
court to say that it would have acted
differently and to charge the directors for
any loss or expenditures incurred.
In the present case, the bond issue
was adequately deliberated and planned,
properly negotiated and executed; there
was no lack of good faith; no motivation of
personal gain or profit; there was no lack
of diligence, skill or care in selling the
issue at the price approved by the
Commission and which resulted in a
saving of approximately $9M to the
corporation.

MONTELIBANO VS. BACOLODMURCIA MILLING CO. (5 SCRA 36;

1962)
The Bacolod-Murcia Milling Co.
adopted a resolution which granted to its
sugar planters an increase in their share in
the net profits in the event that the sugar
centrals of Negros Occidental should have
a total annual production exceeding onethird of the production of all sugar central
mills in the province. Later, the company
amended its existing milling contract with
its sugar planters, incorporating such
resolution. The company, upon demand,
refused to comply with the contract,
stating that the stipulations in the
resolution
were
made
without
consideration and that such resolution was,
therefore, null and void ab initio, being in

effect a donation that was ultra vires and

beyond the powers of the corporate
directors to adopt. This is an action by the
sugar planters to enforce the contract.
The terms embodied in the resolution
were supported by the same cause and
consideration underlying the main
amended milling contract; i.e., the
premises and obligations undertaken
thereunder by the planters, and
particularly, the extension of its operative
period for an additional 15 years over and
beyond the thirty years stipulated in the
contract.
As the resolution in question was
passed in good faith by the board of
directors, it is valid and binding, and
whether or not it will cause losses or

decrease the profits of the central, the court

has no authority to review them. They
hold such office charged with the duty to
act for the corporation according to their
best judgment, and in so doing, they
cannot be controlled in the reasonable
exercise and performance of such duty. It
is a well-known rule of law that questions
of policy or of management are left solely
to the honest decision of officers and
directors of a corporation, and the court is
without authority to substitute its judgment
of the board of directors; the board is the
business manager of the corporation, and
so long as it acts in good faith, its orders
are not reviewable by the courts.
LITWIN (ROSEMARIN ET. AL.,
INTERVENORS) VS. ALLEN ET. AL.
(25 N.Y.S. 2d 667; 1940)

FACTS:
Alleghany Corp. bought
terminals in Kansas City and St. Joseph. It
needed to raise money to pay the balance
of the purchase price but could not directly
borrow money due to a borrowing
limitation in its charter. Thus, it sold
Missouri Pacific bonds to J.P. Morgan and
Co. worth $IOM. J.P. Morgan, in turn,
sold $3M worth of the bonds to Guaranty
Trust Company. Under the contract, the
seller was given an option to repurchase at
same price within six months.
HELD:
Option given to seller is
invalid. It is against public policy for a
bank to sell securities and buy them back
at the same price; similarly, it is against
public policy for the bank to buy securities
and give the seller the option to buy them

back at the same price because the bank

incurs the entire risk of loss with no
possibility of gain other than the interest
derived from the securities during the
period that the bank holds them. Here, if
the market price of the securities rise, the
holder of the repurchase option would
exercise it to recover the securities at a
lower price at which he sold them. If the
market price falls, the seller holding the
option would not exercise it and the bank
would sustain the loss.
Directors are not in a position of
trustees of an express trust who, regardless
of good faith, are personally liable. In this
case, the directors are liable for the
transaction because the entire arrangement
was improvident, risky, unusual and
unnecessary so as to be contrary to

fundamental conceptions of prudent

banking practice. Yet, the advice of
counsel was not sought. Absent a showing
of exercise of good faith, the directors are
thus liable.
WALKER VS. MAN, ET. AL. (253
N.Y.S. 458; 1931)
FACTS:
Frederick Southack and
Alwyn Ball loaned Avram $20T evidenced
by a promissory note executed by Avram
and endorsed by Lacey. The loan was not
authorized by any meeting of the board of
directors and was not for the benefit of the
corporation. The note was dishonored but
defendant-directors did not protest the note
for non-payment; thus, Lacey, the indorser
who was financially capable of meeting

the
obligation,
discharged.

was

subsequently

HELD:
Directors are charged not
with misfeasance, but with non-feasance,
not only with doing wrongful acts and
committing waste, but with acquiescing
and confirming the wrong doing of others,
and with doing nothing to retrieve the
waste. Directors have the duty to attempt
to prevent wrongdoing by their codirectors, and if wrong is committed, to
rectify it. If the defendant knew that an
unauthorized loan was made and did not
take steps to salvage the loan, he is
chargeable with negligence and is
accountable for his conduct.
STEINBERG VS. VELASCO (52 Phil.
953; 1929)

FACTS:
The board of directors of
Sibuguey Trading Company authorized the
purchase of 330 shares of stock of the
corporation and declared payment of P3T
as dividends to stockholders. The
directors from whom 300 of the stocks
were bought resigned before the board
approved the purchase and declared the
dividends. At the time of purchase of
stocks and declaration of dividends, the
corporation
had
accounts
payable
amounting to P9,241 and accounts
receivable amounting to P12,512, but the
receiver who made diligent efforts to
collect the amounts receivable was unable
to do so.
It has been alleged that the
payment of cash dividends to the

stockholders was wrongfully done and in

bad faith, and to the injury and fraud of the
creditors of the corporation. The directors
are sought to be made personally liable in
their capacity as directors.
HELD:
Creditors of a corporation
have the right to assume that so long as
there are outstanding debts and liabilities,
the BOD will not use the assets of the
corporation to buy its own stock, and will
not declare dividends to stockholders when
the corporation is insolvent.
In this case, it was found that the
corporation did not have an actual bona
fide surplus from which dividends could be
paid. Moreover, the Court noted that the
Board of Directors purchased the stock
from the corporation and declared the

dividends on the stock at the same Board

meeting, and that the directors were
permitted to resign so that they could sell
their stock to the corporation. Given all of
this, it was apparent that the directors did
not act in good faith or were grossly
ignorant of their duties. Either way, they
are liable for their actions which affected
the financial condition of the corporation
and prejudiced creditors.
BARNES V. ANDREWS (298 F. 614;
1924)
A complaint was filed against a
corporate director for failing to give
adequate attention (he relied solely on the
Presidents updates on the status of the
corp) to the affairs of a corporation which
suffered depletion of funds.

The director was not liable. The court

said that despite being guilty of misprision
in his office, still the plaintiff must clearly
show that the performance of the directors
duties would have avoided the losses.
When a business fails from general
mismanagement, business incapacity, or
bad judgment, it is difficult to conjecture
that a single director could turn the
company around, or how much dollars he
could have saved had he acted properly.
FOSTER V. BOWEN (41 N.E. 2d 181;
1942)
Cushing, a director and in charge of
leasing a roller skating rink of the corp,
leased the same to himself. Minority
stockholders filed suit against Bowen, the

corporation's President, to recover for

company losses arising out of an alleged
breach of fiduciary duty.
Bowen was held to be not liable
because: (1) Cushing's acts were not
actually dishonest or fraudulent; (2)
Cushing performed personal work such as
keeping the facility in repair which
redounded to the benefit of the company
and even increased its income; (3) Bowen
did not profit personally through Cushing's
lease; and (4) the issue of the possible
illegality of the lease was put before the
Board of Directors, but the Board did not
act on it but instead moved on to the next
item on the agenda. Absent any bad faith
on Bowen's part, and a showing that it was
a reasonable exercise of judgment to take
no action on the lease agreement at the

time it was entered into, Bowen was not

liable.
LOWELL HOIT & CO. V. DETIG (50
N.E. 2d 602; 1943)
Lowell Hoit filed action against
directors of a cooperative grain company
for an alleged willful conversion by the
manager of grain stored in the company
facility. The court said that the directors
were not personally liable. There was no
evidence that the directors had knowledge
of the transaction between the manager
and Lowell Hoit.
The court will treat directors with
leniency with respect to a single act of
fraud on the part of a subordinate
officer/agent. But directors could be held

liable if the act of fraud was habitual and

openly committed as to have been easily
detected upon proper supervision. To hold
directors liable, he must have participated
in the fraudulent act; or have been guilty of
lack of ordinary and reasonable
supervision; or guilty of lack of ordinary
care in the selection of the officer/agent.
BATES V. DRESSER (40 S.Ct.247;
1920)
Coleman, an employee of the bank, was
able to divert bank finances for his benefit,
resulting in huge losses to the bank. The
receiver sued the president and the other
directors for the loss.
The court said that the directors were
not answerable as they relied in good faith

on the cashiers statement of assets and

liabilities found correct by the government
examiner, and were also encouraged by the
attitude of the president that all was well
(the president had a sizable deposit in the
bank). But the president is liable. He was
at the bank daily; had direct control of
records; and had knowledge of incidents
that ordinarily would have induced
scrutiny.
The self-dealing director
WHAT IS A SELF-DEALING
DIRECTOR? (Sec. 32)
A self-dealing director is
one who enters into a contract

with the corporation of which

he is a director.
WHAT IS THE NATURE OF
CONTRACTS ENTERED INTO
BY
SELF-DEALING
DIRECTORS?
Voidable at the option of
the corporation, whether or not
it suffered damages. It is
possible that the self-dealing
director may have the greatest
interest in its welfare and may
be willing to deal with it upon
reasonable terms.
However, such contract may
be upheld by the corporation if all of
the following

conditions are present:

(1) The presence of the
self-dealing
director
or
trustee in the board meeting
for which the contract was
approved
was
not
necessary to constitute a
quorum for such meeting;
(2) The vote of such selfdealing director or trustee
was not necessary for the
approval of the contract;
(3) The contract is fair and
reasonable
under
the
circumstances;

(4) In the case of an officer,

the
contract
has
been
previously authorized by the
Board of Directors.
In the event that either of or
both conditions (1) and (2) are
absent (i.e., the presence of the
director/trustee was necessary
for a quorum and/or his vote was
necessary for the approval of the
contract), the contract may be
ratified by a 2/3 vote of the OCS
or all of the members, in a
meeting called for the purpose.
Full disclosure of the adverse
interest of the directors or
trustees involved must be made
at such meeting.

DOCTRINE:
A director of a
corporation holds a position of
trust and as such, he owes a
duty of loyalty to his corporation.
In case his interests conflict with
those of the corporation, he
cannot sacrifice the latter to his
own advantage and benefit. As
corporate managers, directors
are committed to seek the
maximum amount of profits for
the corporation.
This trust
relationship "is not a matter of
statutory or technical law. It
springs from the fact that
directors have the control and
guidance of corporate affairs and
property and hence of the
property
interests
of
the
stockholders." (Prime
White

Cement Corp. v. IAC, 220 SCRA

103; 1993)
PALTING V. SAN JOSE
PETROLEUM (Dec. 17, 1966)
The articles of inc. of respondent
included a provision that relieves any
director of all responsibility for which he
may otherwise be liable by reason of any
contract entered into with the corp.,
whether it be for his benefit or for the
benefit of any other person, firm,
association or partnership in which he may
be interested, except in case of fraud.
SC: This is in direct contravention of the
Corp Law, of the traditional fiduciary
relationship between directors and the SH.
The implication is that they can do

anything short of fraud, even to their

benefit, and with immunity.
Note: This case was decided in
1966 under the Corporation Law,
which had no
provisions
on
self-dealing
directors.
MEAD V. MCCULLOUGH (21 Phil. 95;
1911)
Issue: validity of sale of corp. property
and assets to the directors who approved
the same.
Gen Rule: When purely private
corporations remain solvent, its directors
are agents or trustees for the SH.

Exception: when the corp. becomes

insolvent, its directors are trustees of all
the creditors, whether they are members of
the corp. or not, and must manage its
property and assets with strict regard to
their interest; and if they are themselves
creditors while the insolvent corp is under
their management, they will not be
permitted to secure to themselves by
purchasing the corp property or otherwise
any personal advantage over the other
creditors.
Exception to Exception: A director or
officer may in good faith and or an
adequate consideration purchase from a
majority of the directors or SH the
property even of an insolvent corp, and
a sale thus made to him is valid and
binding upon the minority.

In the case at bar, the sale was held to

be valid and binding. Company was losing.
4 directors present during meeting all
voted for the sale. They likewise constitute
majority of SH. Contract was found to be
fair and reasonable.
PRIME WHITE CEMENT CORP. V.
IAC (220 SCRA 103; 1993)
Prime White Cement Corp. (through
the President and Chairman of the Board)
and Alejandro Te, a director and auditor of
the corporation, entered into a dealership
agreement whereby Te was obligated to act
as the corporation's exclusive dealer and/or
distributor of its cement products in the
entire Mindanao area for 5 years. Among
the conditions in the dealership agreement

were that the corporation would sell to and

supply Te with 20,000 bags of white
cement per month, and that Te would
purchase the cement from the corporation
at a price of P 9.70 per bag.
Relying on the conditions contained in
the dealership agreement, Te entered into
written agreements with several hardware
stores which would enable him to sell his
allocation of 20,000 bags per month.
However, the Board of Directors
subsequently imposed new conditions,
including the condition that only 8,000
bags of cement would be delivered per
month. Te made several demands on the
corporation to comply with the dealership
agreement.
However,
when
the
corporation refused to comply with the
same, Te was constrained to cancel his

agreements with the hardware stores.

Notwithstanding the dealership agreement
with Te, the corporation entered into an
exclusive dealership agreement with a
certain Napoleon Co for marketing of
corporation's products in Mindanao. The
lower court held that Prime White was
liable to Te for actual and moral damages
for having been in breach of the agreement
which had been validly entered into.
On appeal, the Supreme Court held that
the dealership agreement is not valid and
enforceable, for not having been fair and
reasonable: the agreement protected Te
from any market increases in the price of
cement, to the prejudice of the
corporation. The dealership agreement
was an attempt on the part of Te to enrich
himself at the expense of the corporation.

Absent any showing that the stockholders

had ratified the dealership agreement or
that they were fully aware of its
provisions, the contract was not valid and
Te could not be allowed to reap the fruits
of his disloyalty.

Using inside information

USE
OF
INSIDE
INFORMATION: Do directors
and officers of a company owe
any duty at all to stockholders
in relation to transactions
whereby the officers and
directors buy for themselves
shares of stock from the
stockholders?

MINORITY RULE:
YES. Directors and officers
have an obligation to
the
stockholders individually as
well as collectively.
MAJORITY
RULE:
NO.
Directors
and officers owe no fiduciary
duty at
all to stockholders, but
may deal with them at arms
length.
No duty of
disclosure of facts known to
the
director or officer
exists. Nondisclosure cannot

constitute constructive
fraud.
SPECIAL
FACTS
DOCTRINE: IT DEPENDS.
Where special circumstances
or
facts are present which make
in
inequitable
to
withhold information from the
stockholder,
the
duty
to disclose arises, and
concealment is fraud.
In the case of Gokongwei
v. SEC (89 SCRA 336; 1979),
the Supreme Court, quoting

from the US case of Pepper v.

Litton (308 U.S. 295-313;
1939) stated that a director
cannot, "by the intervention of
a corporate entity violate the
ancient precept against serving
two masters He cannot
utilize his inside information
and his strategic position for
his own preferment. He cannot
violate rules of fair play by
doing indirectly through the
corporation what he could not
do directly. He cannot use his
power
for
his
personal
advantage and to the detriment
of the stockholders and
creditors no matter how
absolute in terms that power
may be and no matter how

meticulous he is to satisfy
technical requirements. For
that power is at all times
subject
to
the
equitable
limitation that it may not be
exercised
for
the
aggrandizement, preference, or
advantage of the fiduciary to
the exclusion or detriment of
the cestuis."
Seizing Corporate Opportunity (Sec.
34)
If a director acquires for
himself, by virtue of his office, a
business
opportunity
which
should
belong
to
the
corporation, thereby
obtaining

profits to the prejudice of the

corporation, he must account to
the corporation for all such
profits
by
refunding
the
same. However, if
his
act
was ratified by 2/3 stockholders'
vote, he need not refund said
profits. This provision applies
even though the director may
have risked his own funds in the
venture.
Note: This provision is to be
distinguished from Sec. 32 on
contracts of self-dealing
directors: contracts of selfdealing directors are voidable
at
the
option
of
the
corporation even if it has not
suffered any injury; on the

other hand, Sec. 34 applies

only if the corporation has
been prejudiced by the
contract.

SINGER VS. CARLISLE (27 N.Y.S. 2d

190; 1941)
In this case, it was held that the general
allegations in the complaint of conspiracy
of the directors to obtain corporate
opportunity were deficient. The complaint
should state specific transactions.
Directorship
in
2
competing
corporations does not in and of itself
constitute a wrong. It is only when a

business opportunity arises which places

the director in a position of serving two
masters, and when, dominated by one, he
neglects his duty to the other, that a wrong
has been done.
IRVING TRUST CO. VS.
DEUTSCH (79 L. Ed. 1243; 1935)
Fiduciary duty applies even if the
corporation is unable to enter into
transactions itself.
LITWIN V ALLEN (25 N.Y.S. 2d 667;
1940)
In this case, it was held that the
common stock purchased by the
defendants wasnt a business opportunity
for the corporation. Having fulfilled their

duty to the corporation in accordance with

their best judgment, the defendant
directors were not precluded from a
transaction for their own account and risk.
Interlocking directors
WHAT IS AN INTERLOCKING
DIRECTOR?
An interlocking director is
one who occupies a position in 2
companies dealing with each
other.
WHAT IS THE RULE ON
CONTRACTS
INVOLVING
INTERLOCKING DIRECTORS?

Except in cases of fraud,

and provided the contract is fair
and reasonable under the
circumstances,
a
contract
between 2 or more corporations
having interlocking directors
shall not be invalidated on that
ground alone. This practice is
tolerated by the Courts because
such an arrangement oftentimes
presents definite advantages to
the corporations involved.
However, if the interest of the
interlocking director in one
corporation is substantial (i.e.,
stockholdings exceed20% of the
OCS) and his interest in the
other corporation or corporations
is merely nominal, he shall be
subject to the conditions stated

in Sec. 32, i.e., for the contract

not to be voidable, the following
conditions must be present:
(1) The presence of the
self-dealing director or
trustee in the board
meeting for which the
contract was approved
was not necessary to
constitute a quorum for
such meeting;
(2) The vote of such
self-dealing director or
trustee
was
not
necessary
for
the
approval of the contract;
(3) The contract is fair
and reasonable under
the circumstances;

(4) In the case of an

officer, the contract has
been
previously
authorized by the Board
of Directors.
In the event that either of or
both conditions (1) and (2) are
absent (i.e., the presence of the
director/trustee was necessary
for a quorum and/or his vote was
necessary for the approval of the
contract), the contract may be
ratified by a 2/3 vote of the OCS
or all of the members, in a
meeting called for the purpose.
Full disclosure of the adverse
interest of the directors or
trustees involved must be made
at such meeting.

Note: The Investment House

Law prohibits a director or
officer of an investment house
to be concurrently a director
or officer of a bank, except as
otherwise authorized by the
Monetary Board. In no event
can a person be authorized to
be concurrently an officer of
an investment house and of a
bank except where the
majority or all of the equity of
the former is owned by the
bank. (P.D. 129, Sec. 6, as
amended)
The Insurance Code
likewise prohibits a person
from being a director and/or
officer of an insurance

company and an adjustment

company. (Sec. 187)
GLOBE WOOLEN CO. V. UTICA GAS
& ELECTRIC (121 N.E. 378; 1918)
Maynard,
president
and
chief
stockholder of Globe but nominal SH in
Utica Gas, obtained a cheap, 10-year
contract for Utica to supply power.
Maynard did not vote during the meeting
for the approval of the contract.
Can Globe seek to enforce contract?
The Supreme Court held that Globe could
not enforce the contract and that said
contract was voidable at the election of
Utica. It was found that based on the facts
of the case, the contract was clearly onesided. Maynard, although he did not vote,

exerted a dominating influence to obtain

the contract from beginning to end.
The director-trustee has a constant duty
not to seek harsh advantage in violation of
his trust.
Watered stocks (Sec. 65)
Any director or officer of the
corporation:
(1) consenting
to
the
issuance of stocks for a
consideration less than its
par or issued value or for a
consideration in any form
other than cash, valued in
excess of its fair value, or

(2) who,
having
knowledge thereof, does
not forthwith express his
objection in writing and file
the
same
with
the
corporation secretary
shall be solidarily liable with the
stockholders concerned to the
corporation and its creditors for
the difference between the fair
value received at the time of the
issuance of the stock and the
par or issued value of the same.
Fixing compensation of directors
and officers

GENERAL
RULE:
Directors as such are
not
entitled
to
compensation
for
performing services
ordinarily attached to
their office.
EXCEPTIONS:
(1) If
the articles of incorporation or
the
by-laws
expressly
so provide;
(2) If a
contract is expressly made in
advance.
WHO
FIXES
COMPENSATION?

THE
The

stockholders only (majority of

the OCS)
EXCEPTION:
Per
diems, which can be fixed by
the directors themselves
APPLICABILITY
OF
COMPENSATION:
Only
to
future and NOT past services.
MAXIMUM
AMOUNT
ALLOWED
BY
LAW:
Total yearly
income of the directors
shall not exceed 10% of
the net income before
income
tax
of
the
corporation during the
preceding year (Sec. 30)

GOV'T OF THE PHILIPPINES VS. EL

HOGAR FILIPINO (50 Phil. 399; 1927)
The compensation provided in sec. 92
of the by-laws of El Hogar Filipino which
stipulated that 5% of the net profit shown
by the annual balance sheet shall be
distributed to the directors in proportion to
the attendance at board meetings is valid.
The Corporation Law does not prescribe
the rate of compensation for the directors
of a corporation. The power to fix it , if
any is left to the corporation to be
determined in its by-laws. In the case at
bar, the provision in question even resulted
in extraordinarily good attendance.

BARRETO VS. LA PREVISORA

FILIPINA
This action was brought by the
directors of defendant corporation to
recover 1% from each of the plaintiffs of
the profits of the corporation for 1929
pursuant to a by-law provision which
grants the directors the right to receive a
life gratuity or pension in such amount for
the corporation.
The SC held that the by-law provision
is not valid. Such provision is ultra vires
for a mutual loan and building association
to make. It is not merely a provision for
the compensation of directors. The
authority conferred upon corporations
refers only to providing compensation for
the future services of directors, officers,

and employees after the adoption of the

by-law in relation thereto. The by-law can't
be held to authorize the giving of
continuous compensation to particular
directors after their employment has
terminated for past services rendered
gratuitously by them to the corporation.
CENTRAL COOPERATIVE
EXCHANGE INC VS. TIBE (33 SCRA
596; 1970)
The questioned resolutions which
appropriated the funds of the corporation
for different expenses of the directors are
contrary to the by-laws of the corporation;
thus they are not within the board's power
to enact. Sec. 8 of the by-laws explicitly
reserved to the stockholders the power to
determine the compensation of members

of the board and they did restrict such

compensation to actual transportation
expenses plus an additional P30 per diems
and actual expenses while waiting. Hence,
all other expenses are excluded. Even
without the express reservation, directors
presumptively serve without pay and in the
absence of any agreement in relation
thereto, no claim can be asserted therefore.
FOGELSON VS. AMERICAN
WOOLEN CO. (170 F. 2d. 660; 1948)
A retirement plan which provides a
very large pension to an officer who has
served to within one year of the retirement
age without any expectation of receiving a
pension would seem analogous to a gift or
bonus. The size of such bonus may raise a
justifiable inquiry as to whether it amounts

to wasting of the corporate property. The

disparity also between the president's
pension plan and that of even the nearest
of the other officers and employees may
also be inquired upon by the courts.
KERBS VS. CALIFORNIA EASTERN
AIRWAYS (90 A. 2d 652; 1952)
This is an appeal filed to enjoin the
California Eastern Airways from putting
into effect a stock option plan and a profitsharing plan. The SC held that the stock
option plan was deficient as it was not
reasonably created to insure that the
corporation would receive contemplated
benefits. A validity of a stock option plan
depends
upon
the
existence
of
consideration and the inclusion of
circumstances which may insure that the

consideration would pass to the

corporation. The options provided may be
exercised in toto immediately upon their
issuance within a 6 month period after the
termination of employment. In short, such
plan did not insure that any optionee
would remain with the corporation.
With regard to the profit-sharing plan,
it was held valid because it was reasonable
and was ratified by the stockholders
pending the action.

Close Corporations

Sec. 97 provides that the AOI of a

close corp. may specify that it shall be
managed by the stockholders rather
than the BoD. So long as this
provision continues in effect:

No stockholders meeting
need be called to elect directors;

Generally,
stockholders
deemed to be directors for
purposes of this Code, unless the
context clearly requires otherwise;

Stockholders shall be subject

to all liabilities of directors. The
AOI may likewise provide that all
officers or employees or that
specified officers or employees
shall be elected or appointed by

the stockholders instead of by the

BoD.
Further, Sec. 100 provides that for
stockholders managing corp. affairs:

They shall be personally

liable for corporate torts (unlike
ordinary directors liable only upon
finding of negligence)

If
however
there
is
reasonable
adequate
liability
insurance, injured party has no
right of action v. stockholdersmanagers

Duty of Controlling Interest

A SH/director is still entitled to vote

in a stockholders meeting even if his
interest is adverse to a corporation.
But a stockholder able to control a
corp. is still subject to the duty of good
faith to the corp. and the minority.
Persons with management control
of corporation hold it in behalf of SHs
and can not regard such as their own
personal property to dispose at their
whim.
The ff. acts are legal:

Transfer
of
managerial
control through BoD resignation &
seriatim election of successors if

concomitant with the sale and

actual transfer of majority interest
or that which constitutes voting
control;

Disposal by controlling SH of
his stock at any time & at such
price he chooses

The ff. are illegal:

Selling
corp.
office
or
management control by itself, that
is NOT accompanied by stocks or
stocks are insufficient to carry
voting control;

Transferring office to persons

who are known or should be
known as intending to raid the

corporate treasury or otherwise

improperly benefit themselves at
the expense of the corp.
(Insuranshares Corp. V. Northern
Fiscal);

Receiving
a
bonus
or
premium
specifically
in
consideration of their agreement
to resign & install the nominees of
the purchaser of their stock,
above and beyond the price
premium normally attributable to
the control stock being sold;

INSURANSHARES CORP. V.
NORTHERN FISCAL CORP. (35 F.
Supp. 22; 1940)

The corp. is suing its former directors

to recover damages as a result of the sale
of its control to a group (corporate raiders)
who proceeded to rob it of most of its
assets mainly marketable securities.
Are previous directors who sold corp.
control liable? Yes, they are under duty not
to sell to raiders.
Owners of corp. control are liable if
under the circumstances, the proposed
transfer are such as to awaken a suspicion
or put a prudent man on his guard. As in
this case, control was bought for so much
aside from being warned of selling to
parties they knew little about, and also
from fair notice that such outsiders indeed
intended to raid the corp.

Duty to Creditors

General rule: Corporate creditors can

run after the corp. itself only, and not
the directors for mismanagement of a
solvent corp.
If
corp.
becomes
insolvent,
directors are deemed trustees of the
creditors and should therefore manage
its assets with due consideration to the
creditors interest.
If directors are also creditors
themselves, they are prohibited from

gaining undue advantage over other

creditors.

Personal Liability of Directors

In
what
instances
does
personal
liability
of
a
corporate director, trustee or
officer validly attach together
with corporate liability?
When the director / trustee /
officer:

I.

(1) assents to a
patently unlawful act of the
corporation;
(2) is in bad faith or gross
negligence in directing the
affairs of the corporation;
(3) creates a conflict of
interest, resulting in damages
to
the
corporation,
its
stockholders or other persons

II.

Consents to the
issuance of watered stocks,
or who, having knowledge
thereof, does not forthwith file
with the corporate secretary
his written objection thereto;

III.
himself

Agrees
to
personally

hold
and

solidarily liable
corporation;
IV.

with

the

Is made, by a
specific provision of law, to
personally answer for his
corporate action.
(Tramat
Mercantile v. CA,
238 SCRA 14)

UICHICO v. NLRC (G.R. No. 121434,

June 2, 1997)
In labor cases, particularly, corporate
directors and officers are solidarily liable
with the corporation for the termination of

employment of corporate employees done

with malice or in bad faith.
In the instant case, there was a showing
of bad faith: the Board Resolution
retrenching the respondents on the feigned
ground of serious business losses had no
basis apart from an unsigned and
unaudited Profit and Loss Statement which
had no evidentiary value whatsoever.

CORPORATE BOOKS AND

RECORDS
AND
THE RIGHT OF INSPECTION

Corporate Books and Records

WHAT
BOOKS
AND
RECORDS MUST A CORPORATION
KEEP? (Sec. 74)
(1) Record of all business
transactions;
(2) Minutes of all meetings of
stockholders or members;
(3) Minutes of all meetings of
Board of Directors or Trustees;
(4) Stock and Transfer book
WHAT IS A STOCK AND
TRANSFER BOOK? (Sec. 75)
A stock and transfer book
is a record of all stocks in the

names of the stockholders

alphabetically
arranged.
It
likewise contains the following
information:

Installments paid and

unpaid on all stock for which
subscription
has
been
made, and the date of any
installment;

A statement of every
alienation, sale or transfer of
stock made, the date
thereof, and by whom and
to whom made;

Such other entries as

the by-laws may prescribe

The stock and transfer book

shall be kept in the principal
office of the corporation or in the
office of its stock transfer agent,
and shall be open for inspection
by any director or stockholder of
the corporation at reasonable
hours on business days.
WHAT IS A STOCK TRANSFER
AGENT? (Sec. 75)
A stock transfer agent is
one who is engaged principally
in the business of registering
transfers of stocks in behalf of a
stock corporation. He or she
must be licensed by the SEC;
however, 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, except
the payment of a license fee,
shall be applicable.
WHO IS THE CUSTODIAN OF
CORPORATE RECORDS?
In the absence of any
provision to the contrary, the
corporate secretary is the
custodian of corporate records.
Corollarily, he keeps the stock
and transfer book and makes the
proper and necessary entries.
(Torres, et al. vs. CA, 278 SCRA
793; 1997)

Basis of the Right of Inspection

Ordinary stockholders, the

beneficial owners of the corporation,
usually have no say on how business
affairs of the corp. are run by the
directors. The law therefore gives them
the right to know not only the financial
health of the corp. but also how its
affairs are managed so that if they find
it unsatisfactory, they can seek the
proper remedy to protect their
investment.
WHAT IS THE NATURE OF
THE RIGHT TO INSPECT?

PREVENTIVE :
deterrent
to
an
ill-intentioned
management knowing its acts
are
subject to scrutiny; and
REMEDIAL:
A
dissatisfied SH may
avail of this right as
a preliminary step
towards
seeking
more direct and
appropriate
remedies
against
mismanagement.
What Records Covered

1.
Records
transactions

of

ALL

business

This
includes
book
of
inventories
and
balances,
journal, ledger, book for copies
of
letters
and
telegrams,
financial statements, income tax
returns,
vouchers,
receipts,
contracts, papers pertaining to
such contracts, voting trust
agreements (sec. 59)
2.

By-laws
These are expressly required to
be open to inspection by
SH/members during office hours
(Sec. 46). Note: There is no

similar provision as to AOI, but

these are filed with the SEC
anyway.
3.
Minutes
meetings

of

directors

This is to inform stockholders of

Board policies. Such right arises
only upon approval of the
minutes, however.
4.
Minutes
meetings
5.

of

stockholders'

Stock and transfer books

These are records of all stocks
in the names of the stockholders
alphabetically arranged. contain

all names of the stockholders of

record.
Useful
for
proxy
solicitation for elections. SEC
has however ruled that a SH
cannot demand that he be
furnished such a list but he is
free to examine corp. books.
6.
Most
statement

recent

financial

Sec. 75 of the Code provides

that within 10 days from the
corporation's
receipt
of
a written request
from
any
stockholder or member, the
corporation must furnish the
requesting party with a copy of
its
most
recent
financial
statement, which shall include a

balance sheet as of the end of

the last taxable year and a profit
or loss statement for said
taxable year.
Note: Under the Secrecy of
Bank Deposits Act, records of
bank
deposits
of
the
corporation are NOT open to
inspection, EXCEPT under the
following circumstances:
(1) Upon written consent
of concerned depositor
(presumably the
corporation);
(2) In cases
of impeachment;

(3) Upon
court order in cases of bribery or
dereliction of duty of a public
official; and
(4) In cases where the
money
deposited
/
invested is the subject
matter
of litigation
(5) Upon order of a
competent court in cases
of unexplained wealth
under RA 3019 or the
Anti-Graft and Corrupt
Practices Act
(6) Upon
order of the Ombudsman

Extent and Limitations on Right

1.
The exercise of this right is
subject to reasonable limitations
similar to a citizens exercise of the
right to information. Otherwise, the
corp. might be impaired, its
efficiency in operations hindered, to
the prejudice of SHs.
2.
Such limitations to be valid
must be reasonable and not
inconsistent with law ( Sec. 36[5]
and 46).
3.
A corp. may regulate time and
manner of inspection but provisions
in its by-law which gives directors

absolute discretion to allow or

disallow inspection are prohibited.
Limitations as to time and
place:

Exercise of right only at

REASONABLE HOURS on
BUSINESS DAYS.

Such
business
days
should be THROUGHOUT
THE YEAR. BoD cannot limit
such to merely a few days
within the year. (Pardo v.
Hercules Lumber)
4.
By-laws cannot prescribe that
authority of president must first be
obtained.

5.
Inspection should be made in
such a manner as not to impede the
efficient operations
6.
Place of inspection: Principal
office of the corp. SH cannot
demand that such records be taken
out of the principal office.
7.

As to purpose:

PRESUMPTION: that SHs

purpose is proper. Corp. cannot
refuse on the mere belief that his
motive is improper (sec 74).

BURDEN OF PROOF: lies

with corp. which should show
that purpose was illegal.

To be
legitimate,
the
purpose for inspection must be
GERMANE to the INTEREST of
the stockholder as such, and it is
not contrary to the interests of
the corporation.
Legitimate:
inquiry
about
failure
to
declare
dividends
Not legitimate:
for mere
satisfaction or speculation.

Belief in good faith that a

corp. is being mismanaged may
be given due course even if
later, this is proven unfounded.

If motive can be clearly

shown as inimical to corp., right
may be denied.

Who May Exercise Right

Every
director,
trustee,
stockholder, member may exercise
right personally or through an agent
who can better understand and
interpret records (impartial source,
expert accountant, lawyer).
As to VTA: both voting trustee and
transferor

SH
of
subsidiary:

parent

corp.

over

If the two are operated

as SEPARATE entities
: NO right of
inspection
If they are ONE AND THE
SAME with respect
to management and control,
and inspection is
demanded
due
to
mismanagement of subsidiary
by the parents directors
who are also
directors of the subsidiary
: With right of
inspection

If the subsidiary is whollyowned by the parent,

and its books & records are
in the possession
and control of the parent
corporation
: With right of
inspection
(Gokongwei
v. SEC)
Remedies available if Inspection
Refused

WHAT
REMEDIES
ARE
AVAILABLE IF INSPECTION IS
REFUSED
BY
THE
CORPORATION?

(1) Writ of mandamus.

NOTE:
Writ shall not
issue where it is shown that the
petitioners
purpose
is
improper and
inimical to the interests of the
corporation.
Writ should be
directed
against
the
corporation. The secretary and
the president
may be joined as party
defendants.
(2) Injunction

(3) Action for damages against

the officer or agent refusing
inspection. Also, penal
sanctions such as fines and /
or imprisonment (Sec. 74; Sec.
144)
What
defenses
are
available to the officer or
agent?
(1)
The
person
demanding has improperly
used
any
information
secured through any prior
examination; or
(2)
Was not acting in
good faith; or
(3)
The demand was not
for a legitimate purpose.

PARDO V. HERCULES LUMBER (47

Phil. 965; 1924)
BOD/Officers may deny inspection
when sought at unusual hours or under
improper conditions. But they cannot
deprive the stockholders of the right
altogether. In CAB, by-law provided that
the inspection be made available only for a
few days in a year, chosen by the
directors. This is void.
GONZALES V. PNB (122 SCRA 490;
1983)
G acquired 1 share of stock purposely
to be able to exercise right to inspection

with respect to transactions before he

became a SH. G not in good faith. His
obvious purpose was to arm himself with
materials which he can use against the
bank for acts done by the latter when G
was a total stranger to the same. Right not
available here.
VERAGUTH V. ISABELA SUGAR
CO. (57 Phil. 266; 1932)
There was nothing improper in the
secretarys refusal since the minutes of
these prior meetings have to be verified,
confirmed and signed by the directors then
present. Hence, Veraguth has to wait until
after the next meeting.

GOKONGWEI V. SEC (April 11, 1979)

The law takes from the SH the burden
of showing impropriety of purpose and
places upon the corporation the burden of
showing impropriety of purpose and
motive.
Considering that the foreign subsidiary
is wholly owned by SMC and therefore
under its control, it would be more in
accord with equity, good faith and fair
dealing to construe the statutory right of
Gokongwei as petitioner as SH to inspect
the books and records of such wholly
subsidiary which are in SMCs possession
and control.
DERIVATIVE SUITS

Nature and Basis of derivative suit

Suits of stockholders/ members
based on wrongful or fraudulent
acts of directors or other persons:
a.
Individual suits - wrong done
to stockholder personally and not
to other stockholders
(ex. When right of inspection
is denied to a stockholder)
b.
Class suit - wrong done to a
group of stockholders
(ex. Preferred stockholders'
rights are violated)

c.
Derivative suit - wrong done
to the corporation itself

Cause
of
action
belongs to the corp. and not
the stockholder

But since the directors

who are charged with
mismanagement are also
the ones who will decide
WON the corp. will sue, the
corp. may be left without
redress;
thus,
the
stockholder is given the
right to sue on behalf of the
corporation.

An effective remedy of
the minority against the
abuses of management

An
individual
stockholder is permitted to
bring a derivative suit to
protect
or
vindicate
corporate rights, whenever
the officials of the corp.
refuse to sue or are the
ones to be sued or hold the
control of the corp.

Suing stockholder is
merely the nominal party
and the corp. is actually the
party in interest.

A SH can only bring suit

for an act that took place
when he was a stockholder;
not before. (Bitong v. CA,
292 SCRA 503)

Requirements Relating to
Derivative Suits
WHAT ARE THE LEGAL
PRINCIPLES
CONCERNING
DERIVATIVE SUITS?
1)
Stockholder/
member
must have exhausted all
remedies within the corp.

2)
Stockholder/
member
must be a stockholder/
member at the time of acts or
transactions complained of or
in case of a stockholder, the
shares must have devolved
upon him since by operation
of
law,
unless
such
transaction or act continues
and is injurious to the
stockholder.
3)
Any benefit recovered by
the stockholder as a result of
bringing derivative suit must
be accounted for to the corp.
who is the real party in
interest.

4)
If suit is successful,
plaintiff
entitled
to
reimbursement from corp. for
reasonable
expenses
including attorneys' fees.
EVANGELISTA VS. SANTOS (86 Phil.
387; 1950)
The injury complained of is against the
corporation and thus the action properly
belongs to the corporation rather than the
stockholders. It is a derivative suit brought
by the stockholder as a nominal party
plaintiff for the benefit of the corporation,
which is the real party in interest. In this
case, plaintiffs brought the suit not for the
benefit of the corporation's interest, but for
their own. Plaintiffs here asked that the

defendant make good the losses

occasioned by his mismanagement and to
pay them the value of their respective
participation in the corporate assets on the
basis of their respective holdings. Petition
dismissed for venue improperly laid.
REPUBLIC BANK VS.
CUADERNO (19 SCRA 671; 1967)
In a derivative suit, the corporation is
the real party in interest, and the
stockholder merely a nominal party.
Normally, it is the corp. through the board
of directors which should bring the suit.
But as in this case, the members of the
board of directors of the bank were the
nominees and creatures of respondent
Roman and thus, any demand for an intra-

corporate remedy would be futile, the

stockholder is permitted to bring a
derivative suit.
Should the corporation be made a
party? The English practice is to make the
corp. a party plaintiff while the US
practice is to make it a party defendant.
What is important though is that the
corporation should be made a party in
order to make the court's ruling binding
upon it and thus bar any future re-litigation
of the issues. Misjoinder of parties is not a
ground to dismiss the action.
REYES VS. TAN (3 SCRA 198; 1961)
The importation of textiles instead of
raw materials, as well as the failure of the

board of directors to take actions against

those directly responsible for the misuse of
the dollar allocations constitute fraud, or
consent thereto on the part of the
directors. Therefore, a breach of trust was
committed which justified the suit by a
minority stockholder of the corporation.
The claim that plaintiff Justiniani did
not take steps to remedy the illegal
importation for a period of two years is
also without merit. During that period of
time plaintiff had the right to assume and
expect that the directors would remedy the
anomalous situation of the corporation
brought about by their wrong-doing. Only
after such period of time had elapsed could
plaintiff conclude that the directors were
remiss in their duty to protect the
corporation property and business.

BITONG v. CA (292 SCRA 503)

The power to sue and be sued in

any court by a corporation even as a
stockholder is lodged in the Board of
Directors that exercises its corporate
powers and not in the president or
officer thereof.
It was JAKA's Board of
Directors, not Senator Enrile,
which had the power to grant
Bitong authority to institute a
derivative suit for and in its
behalf.

The basis of a stockholder's suit

is always one in equity. However, it

cannot
prosper
without
first
complying with the legal requisites
for its institution. The most important
of these is the bona fide ownership by
a stockholder of a stock in his own
right at the time of the transaction
complained of which invests him with
standing to institute a derivative
action for the benefit of the
corporation.

FINANCING THE CORPORATION

Sources of Financing

WHERE CAN CAPITAL TO

FINANCE THE CORPORATION
BE SOURCED?
1)
Contributions
(stockholders); also known
as stockholder equity/equity
investment
2)
Loans
or
advances
(creditors)
3)
Profits (corporation itself)
Capital Structure
WHAT IS MEANT BY CAPITAL
STRUCTURE?

This refers to the aggregate of

the securities -- instruments
which represent relatively longterm investment -- issued by
the corporation. There are
basically
2
kinds
of
securities: shares
of
stock and debt securities.
Capital and Capital Stock
Distinguished

CAPITAL
STOCK
DEFINITI
ON

CAPITAL

the amount actual property

fixed,
of the

usually by
the
corporate
charter, to
be
subscribed
and paid in
or secured
to be paid
in by the
SHS of a
corporation,
and upon
which the
corporation
is to
conduct its
operation
CONSTAN

corporation,
including cash,
real, and
personal
property.
Includes all
corporate
assets, less any
loss which may
have been
incurred in the
business.

CONSTAN FLUCTUATIN

CY

T, unless
G
amended by
the AOI

Shares of Stock: Kinds

COM PREFE PAR NO TRE

MON RRED
PAR* SUR
DEFINI Stock Stock
TION
which which
entitle entitles
s the the
owner holder
of
to some
such prefere
stocks nce
to an either in
equal the
pro
dividen
rata
ds or

Shar
that
have
been
issue
and
fully
paid
but
subs
uentl
reacq

divisio distribut
n of
ion of
profits assets
upon
liquidati
on, or in
both

VALUE Depe Stated

nds if par
its
value
par or
no par

red b
the
issui
corpo
ation
by
lawfu
mean

Fixed
in the
AOI,
and
indica
ted in
the
stock

Value
not
fixed
in the
AOI,
and
theref
ore

certifi
cate.
May
be
sold
at a
value
highe
r, but
not
lower,
than
that
fixed
in the
AOI.

not
indica
ted in
the
stock
certifi
cate.
Price
may
be set
by
BOD,
SHs
or
fixed
in the
AOI
event
ually.

VOTIN
G
RIGHT
S

Usuall
y
veste
d with
the
exclus
ive
right
to
vote

Can
vote
only
under
certain
circums
tances

PREFE
RENCE
UPON
LIQUID
ATION

No
advan
tage,
priorit
y, or
prefer
ence

First
crack at
dividen
ds /
profits /
distribut
ion of

Depe
nds if
its
com
mon
or
prefer
red.

Depe
nds if
its
comm
on or
prefer
red.

No
votin
rights
for a
long
such
stock
rema
s in t
treas
y (Se
57)

over assets
any
other
SH in
the
same
class
NOTE: Only preferred and
redeemable shares may be deprived
of the right to vote. (Sec. 6,
Corporation Code)
EXCEPTION: As otherwise
provided in the Corporation Code.
* No-par value shares may not be
issued by the following entities:
banks, trust companies, insurance
companies, public utilities, building &
loan association (Sec. 6)

Nature of Subscription Contract

WHAT IS A SUBSCRIPTION
CONTRACT?
It is any contract for the
acquisition of unissued stock in
an existing corporation or a
corporation still to be formed.
This is notwithstanding the fact
that the parties refer to it as a
purchase
or
some
other
contract. (Sec. 60)

WHAT IS THE NATURE OF A

SUBSCRIPTION CONTRACT?

Subscriptions constitute
a fund to which the creditors
have a right to look for
satisfaction of their claims.

The
assignee
in
insolvency can maintain an
action upon any unpaid stock
subscription in order to
realize
assets
for
the
payment of its debts.

A subscription contract is
INDIVISIBLE (Sec. 64).

A subscription contract
subsists as a liability from the

time that the subscription is

made until such time that the
subscription is fully paid.
GARCIA V. LIM CHU SING (59 Phil.
562; 1934)
A share of stock or the certificate
thereof is not an indebtedness to the owner
nor evidence of indebtedness and
therefore, it is not a credit. Stockholders as
such are not creditors of the corporation.
The capital stock of a corporation is a
trust fund to be used more particularly for
the security of the creditors of the
corporation who presumably deal with it
on the credit of its capital.

Pre-incorporation subscription
RULE: When a group of persons sign
a subscription contract, they are
deemed not only to make a continuing
offer to the corporation, but also to
have contracted with each other as
well. Thus, no one may revoke the
contract even prior to incorporation
without the consent of all
the
others.
WHEN
IS
A
INCORPORATION
SUBSCRIPTION
IRREVOCABLE?

PRE-

1)
For a period of at least 6
months from the date of
subscription;
EXCEPTIONS:
(1)
unless all of the other
subscribers consent to the
revocation; or
(2)
unless the incorporation of said
corporation
fails
to
materialize within the said
period or within a longer period
as
may
be stipulated in the contract of
subscription

2) After the AOI have been

submitted to the SEC (Sec. 61)
UTAH HOTEL CO V. MADSEN (43
Utah 285, 134 Pac. 557; 1913)
Sec 332 in express terms confers
powers upon the stockholders to regulate
the mode of making subscriptions to its
capital stock and calling in the same bylaws or by express contract.
Since it may be done by express contract,
this shows that it was intended that a
contract to that effect may be entered into
even before the corporation is organized,
and the contract agreement is enforced if
the corporation is in fact organized.

WALLACE V. ECLIPSE
POCAHONTAS COAL CO (98 S.E.
293; 1919)
One who has paid his subscription to
the capital stock of the corporation may
compel the issuance of proper certificates
therefor.
Post-incorporation subscription
NOTE:
Under the Corporation
Code, there is no longer any distinction
between a
subscription and a
purchase. Thus, a subscriber is liable
to pay for the shares even

if the corporation has

become insolvent.
The Preemptive Right to Shares

WHAT IS THE PRE-EMPTIVE

RIGHT?
It is the option privilege of
an existing stockholder to
subscribe to a proportionate
part of shares subsequently
issued by the corporation,
before the same can be
disposed of in favor others.
WHY A PRE-EMPTIVE RIGHT?

To
protect
existing
stockholder equity. If the right
is not recognized, the SHs
interest in the corporation will
be diluted by the subsequent
issuance of shares.
Basis of Right; Common Law Rule
Under the prevailing view in
common law, the preemptive right is
limited to shares issued in pursuance
of an increase in the authorized capital
stock and does not apply to additional
issues of originally authorized shares
which form part of the existing capital
stock.

This common law principle which

was generally understood to be
applicable in this jurisdiction has now
to give way to the express provisions
of the Corporation Code on the matter.

Extent and Limitations of

Preemptive Right under the Code
WHAT IS THE EXTENT OF THE
PRE-EMPTIVE RIGHT?
All stockholders of a stock
corporation shall enjoy preemptive right to subscribe to
all issues or dispositions of
shares of any class, in
proportion to their respective

shareholdings.
Exception: When such right
is denied by the AOI or an
amendment thereto.
LIMITATIONS:
The
preemptive right does not extend
to: (Sec. 39)
1)
Initial Public Offerings
(IPOs);
2)
Issuance of shares in
exchange
for
property
needed
for
corporate
purposes, including cases
wherein
an
absorbing
corporation issues new
stocks to the SHs in

pursuance to the merger

agreement (Sec. 39)
Why? (a) Because it is
beneficial for the corporation
to save its
cash;
(b) A swap is more
expedient than determining
the monetary
equivalent
of the property.
3)
Issuance of shares in
payment of a previously
contracted debt (Sec. 39)
Why?
obligation is
outright;

(a)
The
extinguished

(b) Corporation
does not have to shell out
money to fulfill its
obligations;
(c) Money that
would have otherwise been
used for interest
payments can be channelled to
more
productive
corporate activities.
Note: In Nos. (2) and
(3), such acts require approval
of 2/3 of the OCS or
2/3 of total
members.

In Close Corporations
In
close
corporations,
the
preemptive rights extends to ALL stock
to be issued, including re-issuance of
treasury shares, EXCEPT if provided
otherwise by the AOI.
(Sec.
102). Note that the limitations in Sec.
39 do not apply.
Waiver of Preemptive Right
The waiver of the preemptive right
must appear in the Articles of
Incorporation or an amendment
thereto in order to be binding on ALL
stockholders,
particularly
future
stockholders. (Sec. 39)

If it appears merely in a waiver

agreement and NOT in the AOI, and
was unanimously agreed to by all
existing stockholders:
The existing stockholders
cannot later complain since they
are all bound to their
private agreement.
However, future stockholders
will NOT be bound to such an
agreement.
Any stockholder who has not
exercised his preemptive right within a
reasonable time will be deemed to
have waived it.

When the issue is in breach of trust

The issue of shares may still be
objectionable if the Directors have
acted in breach of trust and their
primary purpose is to perpetuate or
shift control of the corporation, or to
freeze out the minority interest.
Remedies when right
violated/denied
WHAT ARE THE REMEDIES
WHEN THE PRE-EMPTIVE
RIGHT
IS
UNLAWFULLY
DENIED?
(1) Injunction;

(2) Mandamus;
(3) Cancellation of the
shares (NOTE: but only if no
innocent 3rd parties are
prejudiced)
(4) In certain cases, a
derivative suit
STOKES V. CONTINENTAL TRUST
CO. (78 N.E. 1090; 1906)
The directors were under the legal
obligation to give the SH-plaintiff an
opportunity to purchase at the price fixed
before they could sell his property to a
third party. By selling to strangers without
first offering to sell to him, the defendant
wrongfully deprived him of his property

and is liable for such damages as he

actually sustained.
THOM V. BALTIMORE TRUST (148
Atl. 234; 1930)
Independently of the charters, the SHs
of a corporation have a preferential right to
purchase new issues of shares, to the
proportional extent of their respective
interests in the capital stock then
outstanding, when the privilege can be
exercised consistently with the object
which the disposition of the additional
stock is legally designed to accomplish. In
the present case, every SH of the bank, for
each of the shares, was to receive 1 1/2
shares of the stock co. (share in exchange
for property). It would not be feasible to
consummate a transfer based upon such

consideration if the preemptive right were

to be held enforceable with respect to
every new issue of stock regardless of the
object of the disposition.
FULLER V. KROGH (113 N.W. 2d 25;
1962)
Preemptive right is not to be denied
when the property is to be taken as
consideration for the stock except in those
peculiar
circumstances
when
the
corporation has great need for the
particular property, and the issuance of
stock is the only practical and feasible
method by which the corp. can acquire it
for the best interest of the SHs. Ground:
practical necessity. [cf. Sec. 39]

DUNLAY V. M. GARAGE AND

REPAIR (170 N.E. 917; 1930)
If the issue of shares is reasonably
necessary to raise money to be issued in
the business of the corporation rather than
the expansion of such business beyond
original limits, the original SHs have no
right to count on obtaining and keeping
their proportional part of original stock.
But even if preemptive right does not
exist, the issue of shares may still be
objectionable if the directors have acted in
breach of trust and their primary purpose is
to perpetuate or shift control of the
corporation, or to freeze out minority
interest.

ROSS TRANSPORT V.
CROTHERS (45 A. 2d 267; 1946)
The doctrine of preemptive right is not
affected by the identity of the purchasers.
What it is concerned with is who did not
get it. But when officers and directors sell
to themselves and thereby gain an
advantage, both in value and in voting
power, another situation arises. In the case
at bar, the directors were not able to prove
good faith in the purchase and equity of
transaction, since the corp. was a financial
success. There was constructive fraud
upon the other SHs.
Debt Securities

Borrowings
Borrowings are usually
represented
by
promissory
notes, bonds or debentures.
Oftentimes, a financial
institution will be willing to lend
large
amounts
to
private
corporations
only
on
the
condition that such institution will
have some representation on the
Board of Directors. The role of
such representative is to see to it
that his institution's investment is
protected from mismanagement
or
unfavorable
corporate
policies.

Bonds and Debentures

BONDS:
secured by a
mortgage or pledge of corporate
property
must be registered
with the SEC, as
provided by Sec. 38 of
the
Corporation
Code
DEBENTURES: issued on the
general credit of the corporation
not secured by any
collateral;
THEREFORE, are not
bonded indebtedness

in the true sense, and

stockholder approval is
NOT required (although
it would generally be a
good idea to obtain it)
Convertible securities; stock
options
NOTE: Under the SEC rules,
stock option must first be
approved by the SEC.
Also, if the stock option is
granted to nonstockholders, or
to directors, officers, or
managing groups, there
must first be SH approval
of 2/3 of the OCS before

the matter is submitted to

the SEC for approval.
Of course it goes
without saying that the
corporation must set aside
enough of the junior
securities in case the
holders of the option
decide to exercise such
option.
MERRITT-CHAPMAN & SCOTT
CORP. VS. NEW YORK TRUST
CO. (184 F. 2d 954; 1950)
If the corporation is allowed to declare
stock dividends without taking account of
the warrant holders (who have not yet
exercised their warrant), the percentage of

interest in the common stock capital of the

corporation which the warrant holders
would acquire, should they choose to do
so, could be substantially reduced/diluted.
Thus, the corporation is wrong in
contending that a warrant holder must first
exercise his warrant before they may be
issued stock dividend.
Hybrid securities
Because preferred shares and
bonds are created by contract, it is
possible to create stock which
approximates the characteristics of
debt securities. Hybrid securities, as
the name implies, therefore combine
the features of preferred shares and
bonds.

Determining the true nature of the

security is crucial for tax purposes.
The American courts use the following
criteria:
(1) Is the corporation liable to pay
back the investor at a fixed
maturity date?
(2) Is
interest
payable
unconditionally
at
definite
intervals, or is it dependent on
earnings?
(3) Does the security rank at least
equally with the claims of other
creditors, or is it subordinate to
them?

WHAT IS THE NATURE OF

THE SECURITY AND THE
PAYMENT MADE?
BONDS STOCK
WHAT IS
PAID?

Interest Dividend
s

TO WHOM Creditor Stockhol

PAID?
der
investor
WHEN
PAID?

Whethe Only if
r the
there are
corporat profits
ion has
profits
or not

NATURE

Expens Not an
e
expense

TAXABILI Can be CANNOT

TY
deducte be
d for tax deducted
purpose
s
MATURIT
Y DATE?

Yes

No

RANK ON Ranked Superior

DISSOLU together to
TION
with
stockhold
other
ers,
corporat inferior to
e
corporate
creditor creditors
s

JOHN KELLY VS. CIR TALBOT

MILLS VS. CIR (326 U.S. 521; 1946)
In the Kelly case, the annual payments
made were interest on indebtedness
(therefore, a bond is held) because there
were sales of the debentures as well as
exchanges of preferred stock for
debentures, a promise to pay a certain
annual amount if earned, a priority for the
debentures over common stock and a
definite maturity date in the reasonable
future.
In the Talbot Mills case, the annual
payments made were dividends and not
interest (therefore, shares are held),

because of the presence of fluctuating

annual payments with a 2% minimum, and
the limitation of the issue of notes to
stockholders in exchange only for stock.
Besides, it is the Tax Court which has final
determination of all tax issues which are
not clearly delineated by law.
JORDAN CO. VS. ALLEN (85 F. Supp.
437; 1949)
The payments made, regardless of what
they are called, are in fact dividends (on
stocks) because of the absence of a
maturity date and the right to enforce
payment of the principal sum by legal
action, among other factors.

The following criteria should be used in

determining whether a payment is for
interest or dividends:
(1) maturity date and the right to
enforce collection;
(2) treatment by the parties;
(3) rank on dissolution;
(4) uniform rate of interest payable
or income payable only out of
profits;
(5) participation in management
and the right to vote.
It must be noted that these criteria are not
of equal importance and cannot be relied
upon individually. E.g. treatment accorded
the issuance by the parties cannot be
sufficient as this would allow taxpayers to
avoid taxes by merely naming payments as
interest.

The trust indenture

Here, the bond
involves 3 parties:

issue

usually

(1) debtor-corporation
(2) creditor-bondholder
(3) trustee: representative of all
the bondholders

ALADDIN HOTEL CO. VS.

BLOOM (200 F. 2d 627; 1953)

The rights of bondholders are to be

determined by their contract and courts
will not make or remake a contract merely
because one of the parties may become
dissatisfied with its provisions. If the
contract is legal, the courts will interpret
and enforce it.
In the deed of trust and bonds in this
case, there are provisions empowering
bondholders of 2/3 of the principal amount
or more, by agreement with the company,
to modify and extend the date of payment
of the bonds provided such extension
affected all bonds alike. When this was
done, the bondholders only followed such
provisions in good faith. The company
benefited because of such move, and the
bondholders
were
not
necessarily
prejudiced, as defendants Joneses in this

case were themselves owners of 72% of

the bond issue.

CONSIDERATION FOR ISSUANCE

OF SHARES
Form of Consideration

WHAT
FORMS
CONSIDERATION
ARE ACCEPTABLE FOR
ISSUANCE OF SHARES?

OF

cash;
property
actually
received by the corporation:

must be necessary or
convenient for its use and
lawful purposes;

labor performed for or

services actually rendered
to the corporation
(NOTE: Future services
are NOT acceptable!);

previously
incurred
indebtedness
by
the
corporation;

amounts
transferred
from unrestricted retained
earnings to stated capital;

outstanding
shares
exchange for stocks in the
event of reclassification or
conversion

WHAT
FORMS
ARE UNACCEPTABLE?

future services
promissory notes
value less than
stated par value

the

HOW IS THE ISSUED PRICE

OF NO-PAR SHARES FIXED?
It may be fixed as follows:
(1)

In the AOI; or

(2) By the BOD pursuant to

authority conferred upon it
by the AOI or the by-laws; or

(3) In the absence of the

foregoing, by the SHs
representing at least a
majority of the outstanding
capital stock at a meeting
duly called for the purpose
(Sec. 62)
IF THE CONSIDERATION FOR
SHARES IS OTHER THAN
CASH, HOW IS THE VALUE
THEREOF DETERMINED?
It is initially determined by
the incorporators or the Board of
Directors, subject to approval by
the SEC. (Sec. 62)

Watered Stocks

WHAT IS WATERED STOCK?

Stocks issued as fully paid
up in consideration of property
at
an
overvaluation.
Oftentimes, the consideration
received is less than the par
value of the share.
NOTE: No-par shares CAN
be watered stock: when they
are issued for less
than their issued
value as fixed by the corp. in
accordance with law.

WHAT ARE THE WAYS BY

WHICH WATERED STOCK
CAN BE ISSUED?
(1)
Gratuitously, under an
agreement that nothing
shall be paid to the
corporation;
(2)
Upon payment of less
than its par value in money
or for cost at a discount;
(3)
Upon payment with
property, labor or services,
whose value is less than
the par value of the shares;
and

(4)
In the guise of stock
dividends
representing
surplus
profits
or
an
increase in the value of
property, when there are no
sufficient profits or sufficient
increases in value to justify
it.
WHAT IS THE LIABILITY OF
DIRECTORS
FOR
THE
ISSUANCE
OF
WATERED
STOCK?
Directors and officers who
consented to the issuance of
watered stocks are solidarily
liable with the holder of such
stocks to the corp. and its
creditors for the difference

between the fair value received

at the time of the issuance and
the par or issued value of the
share.
The liability will be to all
creditors, whether they became
such prior or subsequent to the
issuance of the watered stock.
Reliance by the creditors on
the
alleged
valuation
of
corporate capital is immaterial
and fraud is not made an
element of liability.
NOTE:
In
the
Philippines, it is the statutory obligation
theory that is controlling
(cf. Sec. 65).

PRIVATE TRIPLEX SHOE V. RICE &

HUTCHINSTC \L 1 "TRIPLEX SHOE
V. RICE & HUTCHINS" (72 A.L.R.
932; 1930)
In this case, the stocks issued to the
Dillman faction were no par value shares,
the consideration for which were never
fixed as required by law. Hence, their
issuance was void. Moreover, the stocks
were issued to the Dillmans for services
rendered and to be rendered. Future
services are not lawful consideration for the
issuance of stock.

PRIVATE MCCARTY V.
LANGDEAUTC \L 1 "MCCARTY V.
LANGDEAU" (337 S.W. 2d 407; 1960)
McCarty agreed to purchase shares
of a corp. with a downpayment of only $20,
with the balance due to be evidenced by a
note. McCarty failed to pay a big portion of
the balance. The Court affirmed the
judgement against McCarty for the balance
due on the contract.
McCarty contends that the contract
is void. But the law only prohibits the
issuance of stock. If it is understood that
the stock will not be issued to the
subscriber until the note is paid, the
contract is valid and not illegal.

If a security such as a note, which is

not a valid consideration, is accepted, the
law does not say that such note, or the
stock issued for it, shall be void. What is
void by express provision of law is the
fictitious increase of stock or indebtedness.
The law was designed for the protection of
the corporation and its creditors. It
emphasizes the stockholders obligations to
make full and lawful payment in accord
with its mandate, rather than furnish him
with a defense when he has failed in that
obligation. Its purpose is to give integrity
to the corporations capital. None of these
objects would be promoted by declaring a
note given by a subscriber for stock
uncollectible in the hands of a bona fide
stockholder.

RHODE V. DOCK-HOP CO. (12 A.L.R.

437; 1920)
This case involves an action to
collect unpaid balances on par value of
shares. It was held that innocent
transferees of watered stock cannot be held
to answer for the deficiency of the stocks
even at the suit of the creditor of the
company. The creditors remedy is against
the original owner of the watered stock.
PRIVATE BING CROSBY V.
EATONTC \L 1 "BING CROSBY V.
EATON" (297 P. 2d 5; 1956)
A subscriber to shares who pays
only part of what he agreed to pay is liable
to creditors for the balance.

Holders of watered stock are

generally held liable to the corporations
creditors for the difference between the par
value of the stock and the amount paid in.
Under the misrepresentation theory,
the creditors who rely on the
misrepresentation of the corporations
capital stock are entitled to recover the
water from holders of the watered stock.
Reliance
of
creditors
on
the
misrepresentation is material.
However, under the statutory obligation
theory, reliance of creditors on the capital
stock of the corporation is irrelevant. (It
must be noted that here in the
Philippines, it is the statutory obligation
theory which is prevailing.)

Issuance of Certificate

Certificate of stock
CONDITION FOR ISSUANCE:
payment of full amount of subscription
price plus
interest, if any is
due (Sec. 64)
CERTIFICATION THAT: person
named therein is a holder or owner of
a
stated number
of shares in the corporation.

INDICATES:
kind of shares

1.

2. date of issuance
3. par
value, if par value shares
BEARS:
Sign
atures of the proper officers, usually
president
or secretary, as well as
the corporate seal
AMOUNT ISSUED:
For
no more than the number of shares
authorized in
articles
of
incorporation;
excess
would be void

Nature and function of a certificate

of stock
A certificate of stock is
not necessary to render one a
stockholder in a corporation.
Nevertheless, a certificate of
stock is the paper representation
or tangible evidence of the stock
itself and of the various interests
therein. The certificate is not
stock in the corporation but is
merely evidence of the holder's
interest and status in the
corporation, his ownership of the
shares represented thereby, but
is not in law the equivalent of

such ownership. It expresses

the
contract
between
the
corporation and the SH, but it is
not essential to the existence of
a share in stock or the creation
of the relation of shareholder to
the corporation. (Tan v. SEC,
206 SCRA 740)
Requisites for valid issuance of
formal certificate of stock (Sec. 63)
(1) The certificates must be
signed by the President / VicePresident, countersigned by the
secretary or assistant secretary,
and sealed with the seal of the
corporation.

 A mere typewritten
statement advising a SH of the
extent of his ownership in a
corporation without qualification
and/or authentication cannot be
considered as a formal
certificate of stock. (Bitong v.
CA, 292 SCRA 503)
(2)

Delivery of the certificate

There is no issuance of a
stock certificate where it is never
detached from the stock books
although blanks therein are
properly filled up if the person
whose name is inserted therein
has no control over the books of
the company. (Bitong v. CA, 292
SCRA 503)

(3) Par value of par value

shares / Full subscription of no
par value shares must be fully
paid.
(4) Surrender of the original
certificate if the person
requesting the issuance of a
certificate is a transferee from a
SH.
BITONG V. CA (292 SCRA 503)
Stock issued without authority and
in violation of law is void and confers no
rights on the person to whom it is issued
and subjects him to no liabilities. Where
there is an inherent lack of power in the

corporation to issue the stock, neither the

corporation nor the person to whom the
stock is issued is estopped to question its
validity since an estoppel cannot operate to
create stock which under the law cannot
have existence.

Unpaid Subscriptions

Unpaid subscriptions are

not due and payable until a call
is made by the corporation for
payment. (Sec. 67)

An obligation arising from

non-payment
of
stock

subscriptions to a corporation
cannot be offset against a
money claim of an employee
against
the
employer.
(Apodaca v. NLRC, 172 SCRA
442)

Interest on all unpaid

subscriptions shall be at the
rate of interest fixed in the bylaws. If there is none, it shall
be the legal rate. (Sec. 66)

How Payment of Shares Enforced

HOW ARE UNPAID

SUBSCRIPTIONS COLLECTED?
(1) Call for payment as
necessary, i.e. the BOD
declares the unpaid
subscriptions due and payable
(Sec. 67);
(2) Delinquency sale (Sec. 68;
to be discussed in the next
section)
(3) Court action for collection
(Sec. 70)
VELASCO VS POIZAT (37 Phil. 802;
1918)

Poizat subscribed to 20 shares but only

paid for 5. Board made a call for payment
through a resolution. Poizat refused to
pay. Corporation became insolvent.
Assignee in insolvency sued Poizat whose
defense was that the call was invalid for
lack of publication.
It was held that the Board call became
immaterial
in
insolvency
which
automatically
causes
all
unpaid
subscriptions to become due and
demandable.
LINGAYEN GULF ELECTRIC VS
BALTAZAR (93 Phil. 404; 1953)

Companys president subscribed to

shares and paid partially. The Board made
a call for payment through a resolution.
However, the president refused to pay,
prompting the corporation to sue. The
defense was that the call was invalid for
lack of publication.
It was held that the call was void for
lack of publication required by law. Such
publication is a condition precedent for the
filing of the action. The ruling in Poizat
does not apply since the company here is
solvent.
DA SILVA VS ABOITIZ (44 Phil. 755;
1923)

Da Silva subscribed to 650 shares and

paid for 200. The company notified him
that his shares will be declared delinquent
and sold in a public auction if he does not
pay the balance. Da Silva did not pay.
The company advertised a notice of
delinquency sale. Da Silva sought an
injunction because the by-laws allegedly
provide that unpaid subscriptions will be
paid from the dividends allotted to
stockholders.
The Court held that by-laws provide
that unpaid subscriptions may be paid from
such dividends. Company has other
remedies provided for by law such as a
delinquency sale or specific performance.

NATIONAL EXCHANGE VS
DEXTER (51 Phil. 601; 1928)
Dexter subscribed to 300 shares. The
subscription contract provided that the
shares will be paid solely from the
dividends. Company became insolvent.
Assignee in insolvency sued Dexter for the
balance. Dexter's defense was that under
the contract, payment would come from
the dividends. Without dividends, he
cannot be obligated to pay.
The Court held that the subscription
contract was void since it works a fraud on
creditors who rely on the theoretical
capital of the company (subscribed
shares).
Under the contract, this
theoretical value will never be realized
since if there are no dividends,

stockholders will not be compelled to pay

the balance of their subscriptions.
LUMANLAN VS CURA (59 Phil. 746;
1934)
Lumanlan had unpaid subscriptions.
Companys receiver sued him for the
balance and won. While the case was on
appeal, the company and Lumanlan
entered into a compromise whereby
Lumanlan would directly pay a creditor of
the company. In exchange, the company
would forego whatever balance remained
on the unpaid subscription. Lumanlan
agreed since he would be paying less than
his unpaid subscription. Afterwards, the
corporation still sued him for the balance
because the company still had unpaid

creditors. Lumanlans defense was the

compromise agreement.
The Court held that the agreement
cannot
prejudice
creditors.
The
subscriptions constitute a fund to which
they have a right to look to for satisfaction
of their claims. Therefore, the corporation
has a right to collect all unpaid stock
subscriptions and any other amounts which
may be due it, notwithstanding the
compromise agreement.
Rights and Obligations of Holders
of Unpaid but Non-delinquent
Stock
WHAT
ARE
THE
RIGHTS OF UNPAID SHARES?

Holders of subscribed
shares not fully paid which
are not delinquent shall have
all the rights of a stockholder.
(Sec. 72)
FUA CUN V. SUMMERS (44 Phil. 704;
1923)
Chua Soco bought 500 shares of China
Banking Corp. at par value of P100.00,
paying the sum of P25,000.00, 50% of the
subscription price. Chua mortgaged the
said shares in favor of plaintiff Fua Cun to
secure a promissory note for the sum of
P25,000.00. In the meantime, Chua Soco's
interest in the 500 shares were attached
and levied upon to satisfy his debt with
China Banking Corp. Fua Cun brought an
action to have himself declared to hold

priority over the claim of China Bank, to

have the receipt for the shares delivered to
him, and to be awarded damages for
wrongful attachment, on the ground that he
was owner of 250 shares by virtue of Chua
Soco's payment of half of the subscription
price.
The Court held that payment of half the
subscription price does not make the
holder of stock the owner of half the
subscribed shares. Plaintiff's rights consist
in an equity in 500 shares and upon
payment of the unpaid portion of the
subscription price he becomes entitled to
the issuance of certificate for the said 500
shares in his favor.

BALTAZAR V. LINGAYEN GULF

ELECTRIC POWER (14 SCRA 522;
1965)
Baltazar, et al. subscribed to a certain
number of shares of Lingayen Gulf
Electric Power. They had made only
partial payment of the subscription but the
corporation issued them certificates
corresponding to shares covered by the
partial payments. Corporation wanted to
deny voting rights to all subscribed shares
until total subscription is paid.
The Court held that shares of stock
covered by fully paid capital stock shares
certificates are entitled to vote.
Corporation may choose to apply
payments to subscription either as: (a) full
payment for corresponding number of

stock the par value of which is covered by

such payment; or (b) as payment pro-rata
to each subscribed share. The corporation
chose the first option, and, having done so,
it cannot unilaterally nullify the certificates
issued.
Note: The Camposes are of the
opinion that 64 of Corporation Code
makes
the Lingayen Gulf inapplicable at
present.
NAVA V. PEERS MARKETING (74
SCRA 65; 1976)
Teofilo Co subscribed to 80 shares of
Peers Marketing Corp. at P100.00 a share
for a total of P8,000.00. He, however, paid
only P2,000.00 corresponding to 20 shares
or 25% of total subscription. Nava bought

20 shares from Co and sought its transfer

in the books of the corporation. The
corporation refused to transfer said shares
in its books.
It was held that the transfer is effective
only between Co and Nava and does not
affect the corporation. The Fua Cun ruling
applies. Lingayen Gulfdoes not apply
because, unlike in Lingayen Gulf, no
certificate of stock was issued to Co.
Effect of delinquency

WHAT
IS
DELINQUENT
STOCK? (Sec. 67)

Stock that remains unpaid 30

days after the date specified
in the subscription contract or
the date stated in the call
made by the Board.
WHAT ARE THE EFFECTS OF
DELINQUENCY?
1.
The
holder
thereof
loses all his rights as a
stockholder except only the
rights to dividends;
2.
Dividends will not be
paid to the stockholder but
will be applied to the unpaid
balance of his subscription
plus costs and expenses.
Also, stock dividends will be

withheld until full payment is

made.
3.
Such
stockholder
cannot vote at the election
of directors or at any
meeting on any matter
proper
for
stockholder
action.
4.
Stockholder cannot be
counted as part of the
required quorum.
5.
Stockholder cannot be
voted for as director of the
corporation.

WHAT IS THE PROCEDURE FOR

THE
CONDUCT
OF
A
DELINQUENCY SALE? (Sec. 68)
(1) Issuance
resolution

of

Board

The
BOD
issues
a
resolution ordering the sale
of
delinquent
stock,
specifically
stating
the
amount due on each
subscription plus all accrued
interest, and the date, time
and place of the sale.
Note: The sale shall not
be less than 30 days nor
more than 60 days from

the date the stocks

become delinquent.
(2) Notice of
publication

sale

and

Notice of the date of

delinquency sale and a copy
of the resolution is sent to
every
delinquent
stockholder
either
personally or by registered
mail. The notice is likewise
published once a week for 2
consecutive weeks in a
newspaper
of
general
circulation in the province or
city where the principal
office of the corporation is
located.

(3)

Sale at public auction

If the delinquent stockholder

fails to pay the corporation
on or before the date
specified
for
the
delinquency
sale,
the
delinquent stock is sold at
public auction to such
bidder who shall offer to pay
the full amount of the
balance on the subscription
together
with
accrued
interest,
costs
of
advertisement
and
expenses of sale, for
the smallest number of
shares or fraction of a
share.

(4) Transfer and issuance

of certificate of stock
The stock so purchased is
transferred
to
such
purchaser in the books of
the corporation and a
certificate of stock covering
such shares is issued.
If there is no bidder at the
public auction who offers to
pay the full amount of the
balance on the subscription
and its attendant costs, the
corporation may bid for the
shares, and the total amount
due shall be credited as paid
in full in the books of the
corporation. Title to all the

shares of stock covered by

the subscription shall be
vested in the corporation as
treasury shares and may be
disposed
of
by
said
corporation in accordance
with the Code.
Note that this is subject to
the restrictions imposed by
the Code on corporations
as regards the acquisition
of their own shares. (See
the
discussion
under
Dividends and Purchase
by Corporation of its Own
Shares.)

SALE
69)

CAN A DELINQUENCY
BE QUESTIONED? (Sec.

Yes. This is done by filing a

complaint within 6 months from
the date of sale, and paying or
tendering to the party holding the
stock the sum for which said
stock was sold, with interest at
the legal rate from the date of
sale. No action to recover
delinquent stock sold can be
sustained upon the ground of
irregularity or defect in the notice
of sale, or in the sale itself of the
delinquent stock unless these
requirements are complied with.

Lost or Destroyed Certificate

WHAT IS THE PROCEDURE

FOR THE ISSUANCE OF NEW
CERTIFICATES TO REPLACE
THOSE STOLEN, LOST OR
DESTROYED? (Sec. 73)
(1) File an affidavit in triplicate
with the corporation. The
affidavit
must
state
the
following:
(a) Circumstances as to
how the certificates were
SLD;
(b) Number of shares
represented; and

(c) Serial number of the

certificate
(d) Name
of
issuing
corporation
(2) The
corporation
will
publish
notice after
the
affidavit and other information
and evidence have been
verified with the books of the
corporation, (Note however
that this is not mandatory. The
corporation has the discretion
to decide whether to publish or
not.)
The notice will contain the
following information:

(a) Name
of
the
corporation
(b) Name
of
the
registered owner;
(c) Serial number of the
certificate;
(d) Number of shares
represented
by
the
certificate;
(e) Effect of expiration of
1 year period from
publication and failure to
present contest within
that period.
(3) SLD certificate is removed
from the books if after one
year from
date
of
last
publication, no contest is
presented.

NOTE: One-year period will

not be required if the
applicant files a bond good
for
1 year.
(4) The corporation will
then issue new certificates.
However, if a contest has been
presented to the corporation,
or if an action is pending court
regarding the ownership of the
SLD certificate, the issuance of
the new certificate shall be
suspended until the final
decision by the court.
NOTE: Should corporation
issue new certificates without

the conditions being fulfilled

and a third party proves that
he is the rightful owner of the
shares, the corporation may
be held liable to the latter
EVEN IF it acted in good
faith.
NOTE: Even if the above
procedure was followed, if
there was fraud, bad faith,
or negligence on the part of
the corporation and its
officers, the corporation may
be held liable.
TRANSFER OF SHARES

HOW ARE SHARES OF

STOCK TRANSFERRED?
By delivery of the certificate/s
indorsed by the owner or his
attorney-in-fact or other person
legally authorized to make the
transfer. (Sec. 63)
WHAT
REQUISITES
TRANSFER?
(1)

ARE
FOR A

THE
VALID

Delivery;

(2) Indorsement by the

owner or his attorney-in-fact
or other persons legally

authorized
transfer

to

make

the

Indorsement of the
certificate of stock is a
mandatory requirement of
law for an effective transfer
of a certificate of stock.
(Razon v. CA, 207 SCRA
234)
(3) Recording
of
the
transfer in the books of the
corporation (so as to make
the transfer valid as against
third parties)
Until registration is
accomplished, the transfer,
though valid between the

parties, cannot be effective

as
against
the
corporation.
Thus, the
unrecorded
transferee
cannot enjoy the status of
a SH: he cannot vote nor
be voted for, and he will
not
be
entitled
to
dividends.
RURAL BANK OF SALINAS, INC. V.
CA (210 SCRA 510)
A corporation, either by its board,
its by-laws or the act of its officers, cannot
create restrictions in stock transfers.
TAN V. SEC (206 SCRA 740)

A by-law which prohibits a transfer

of stock without the consent or approval of
all the SHs or of the President or Board of
Directors is illegal as constituting undue
limitation on the right of ownership and in
restraint of trade (citing Fleisher v. Botica
Nolasco Co., Inc., 47 Phil. 583)
While Sec. 47 (9) of the
Corporation Code grants to stock
corporations the authority to determine in
the by-laws the "manner of issuing
certificates" of shares of stock, however,
the power to regulate is not the power to
prohibit, or to impose unreasonable
restrictions of the right of SHs to transfer
their shares. To uphold the cancellation of
a stock certification as null and void for
lack of delivery of the cancelled "mother"

certificate whose endorsement was

deliberately withheld by petitioner, is to
prescribe certain restrictions on the
transfer of stock in violation of the
Corporation Code as the only law
governing transfer of stocks.

USON V. DIOSOMITO (61 Phil. 535;

1935)
Toribia Uson filed a civil action for
debt against Vicente Dioisomito. Upon
institution of said action, an attachment
was duly issued and D's property was
levied upon, including 75 shares of the
North Electric Co., which stood in his
name on the books of the company when
the attachment was levied on 18 January

1932. The sheriff sold said shares at a

public auction with Uson being the highest
bidder. Jollye claims to be the owner of
said certificate of sock issued to him by
the co. on 13 February 1933.
There is no dispute that Diosomito was
the original owner of said shares, which he
sold to Barcelon. However, Barcelon did
not present these certificates to the
corporation for registration until 19
months after the delivery thereof by
Barcelon, and 9 months after the
attachment and levy on said shares. The
transfer to Jollye was made 5 months after
the issuance of a certificate of stock in
Barcelon's name.
Is a bona fide transfer of the shares of
corp., not registered or noted on the books

of the corp., valid as against a subsequent

lawful attachment of said shares,
regardless of whether the attaching
creditor had actual notice of said transfer
or not.
NO, it is not valid. The transfer of the
75 shares in the North Electric Co., Inc
made by the defendant Diosomito as to the
defendant Barcelon was not valid as to the
plaintiff. Toribia Uson, on 18 Jan. 1932,
the date on which she obtained her
attachment lien on said shares of stock
which still stood in the name of Diosomito
on the books of the corp. Sec. 35 says that
No transfer, however, is valid, except as
between the parties, until the transfer is
entered and noted upon the books of the
corporation so as to show the names of the
parties to the transaction, the date of the

transfer, the number of the certificate, and

the number of shares transferred.
All transfers of shares not so entered
are invalid as to attaching or execution
creditors of the assignors, as well as to the
corporation and to subsequent purchasers
in good faith, and indeed, as to all persons
interested, except the parties to such
transfers.
No registration of transfer of
unpaid shares
No shares of stock against
which the corporation holds any
unpaid claim shall be transferable in
the books of the corporation. (Sec.
63)

Remedy if registration refused

The proper remedy is a
petition for a writ of mandamus
to compel the corporation to
record the transfer or issue a
new certificate in favor of the
transferee, as the case may be.
The writ will be granted provided
it is shown that he transferee
has no other plain, speedy and
adequate remedy and that there
are no unpaid claims against the
stocks whose transfer is sought
to be recorded. It must be noted
that unless the latter fact is
alleged, mandamus will be
denied due to failure to state a
cause of action. (Campos &
Campos)

RURAL BANK OF SALINAS, INC. V.

CA (210 SCRA 510)
The right of a transferee/assignee
to have stocks transferred to his name is an
inherent right flowing from his ownership
of the stocks. Thus, whenever a
corporation refuses to transfer and register
stock, mandamus will lie to compel the
officers of the corporation to transfer said
stock in the books of the corporation. This
is because the corporation's obligation to
register is ministerial. (Note, however,
that in such cases, the person requesting
the registration must be the prima facie
owner of the shares. Cf. Lim Tay v. CA,
293 SCRA 634)

TORRES V. CA (278 SCRA 793)

It is the corporate secretary's duty
and obligation to register valid transfers of
stocks and if said corporate officer refuses
to comply, the transferor SH may
rightfully
bring
suit
to
compel
performance.
Note: In this case, Judge Torres
had no right to enter the assignments
(conveyances) of
his shares himself in the
corporation's stock and transfer
book since he was not corporate
secretary.
RIVERA V. FLORENDO (144 SCRA
647; 1986)

Isamu Akasako, a Japanese national

who was allegedly the real owner of the
shares of stock in the name of one
Aquilino Rivera, a registered SH of
Fujuyama Hotel and Restaurant, Inc., sold
2550 shares of the same to Milagros
Tsuchiya along with the assurance that
Tsuchiya would be made President of the
corporation after the purchase. Rivera
assured her that he would sign the stock
certificates because Akasako was the real
owner. However, after the sale was
consummated and the consideration paid,
Rivera refused to make the indorsement
unless he is also paid.
Tsuchiya, et al. attempted several times
to have the shares registered but were
refused compliance by the corp. They

filed a special action for mandamus and

damages.
The Supreme Court held that
mandamus was improper in this case since
the shares of stock were not even indorsed
by the registered owner who was
specifically resisting the registration
thereof in the books of the corporation.
The rights of the parties would have to be
threshed out in an ordinary action.
Restrictions on Transfer; Close
Corporations

General rule: Shares of stock are

freely transferable, without
restriction.
Exception:
In
close
corporations, restrictions
may be placed on the
transfer of shares. Such
restrictions must appear in
the AOI and in the by-laws,
as well as in the certificate
of stock. Otherwise, the
restriction shall not be
binding on any purchaser
thereof in good faith.
The restrictions
imposed shall be no more
onerous than granting the
existing stockholders or

the corporation the option

to purchase the shares of
the
transferring
stockholder with such
reasonable
terms,
conditions or period stated
therein. If this option is not
exercised
upon
the
expiration of the period,
the
transferring
stockholder may sell his
shares
to
any
third
person. (Sec. 98)
WHAT IS THE EFFECT OF
ISSUANCE OR TRANSFER OF
STOCK IN BREACH OF THE
RESTRICTIONS?

The corporation may, at

its option, refuse to register the
transfer of stock in the name of
the
transferee.
(Sec.
99.4) However, this shall not be
applicable if the transfer, though
otherwise
contrary
to
subsections (1), (2) and (3) of
Sec. 99, has been consented to
by all the stockholders of the
close corporation, or if the close
corporation has amended its AOI
in accordance with Title XII of
the Code.
For his part, the
transferee may rescind the
transfer or recover from the
transferor under any applicable

warranty, whether express or

implied.

UNAUTHORIZED TRANSFERS

Certificates indorsed in blank;

when quasi-negotiable
A possessor, even without
authority, may transfer good title
to a bona fide purchaser if:

the
real
owner
endorses the certificate in
blank


the conveyance is for
purposes other than transfer

that relying on the stock

certificate, the purchaser
believes the possessor to be
the owner thereof or has
authority to transfer the same.
This proceeds from the theory of
quasi-negotiability
which
provides that in endorsing a
certificate in blank, the real
owner clothes the possessor
with apparent authority, thus,
estopping
him
later
from
asserting his rights over the
shares of stock against a bona
fide purchaser.

Quasi-negotiability does not

apply in cases where the real
owner:
a.
did not entrust the
certificate to anyone; and
b.
is
not
otherwise
guilty of estoppel
For example, in case the
transfer is made by a
finder or a thief.
Forged Transfers
A corporation does not incur
any misrepresentation in the
issuance of a certificate made
pursuant to a forged transfer. It

can always recall from the

person the certificate issued, for
cancellation.
In case where the certificate
so issued comes into the hands
of a bona fide purchaser for
value
from
the
original
purchaser, the corporation is
estopped from denying its
liability. It must recognize both
the original and the new
certificate. But if recognition
results to an over-issuance of
shares,
only
the
original
certificate may be recognized,
without prejudice to the right of
the bona fide purchaser to sue
the corporation for damages.

SANTAMARIA VS. HONGKONG (89

Phil. 780; 1951)
Santamaria secured her order for a
number of shares with Campos Co. with
her stock certificate representing her
shares with Batangas Minerals. The said
certificate was originally issued in the
name of her broker and endorsed in blank
by the latter. As Campos failed to make
good on the order, Santamaria demanded
the return of the certificate. However, she
was informed that Hongkong Bank had
acquired possession of it inasmuch as it
was covered by the pledge made by
Campos with the bank. Thereafter, she
instituted an action against Hongkong
Bank for the recovery of the certificate.

Trial court decided in her favor. The bank

appealed.
Issues: 1) WON Santamaria was
chargeable with negligence which gave
rise to the case
2) WON the Bank was obligated to
inquire into the ownership of the
certificate
(1) The facts of the case justify the
conclusion that she was negligent. She
delivered the certificate, which was
endorsed in blank, to Campos without
having taken any precaution. She did not
ask the Batangas Minerals to cancel it and
instead, issue another in her name. In
failing to do so, she clothed Campos with
apparent title to the shares represented by

the certificate. By her misplaced

confidence in Campos, she made possible
the wrong done. She was therefore
estopped from asserting title thereto for it
is well-settled that where one of the
innocent parties must suffer by reason of a
wrongful or unauthorized act, the loss
must fall on the one who first trusted the
wrongdoer.
(2) The subject certificate is what is
known as a street certificate. Upon its face,
the holder is entitled to demand its transfer
into his name from the issuing corporation.
The bank is not obligated to look beyond
the certificate to ascertain the ownership of
the stock. A certificate of stock, endorsed
in blank, is deemed quasi-negotiable, and
as such, the transferee thereof is justified

in believing that it belongs to the

transferor.
DE LOS SANTOS VS. MCGRATH (96
Phil. 577; 1955)
De los Santos filed a claim with the
Alien Property Custodian for a number of
shares of the Lepanto corporation. He
contended that said shares were bought
from one Campos and Hess, both of them
dead. The Philippine Alien Property
Administrator rejected the claim. He
instituted the present action to establish
title to the aforementioned shares of stock.
The US Attorney General, the
successor of the Alien Property
Administrator, opposed the action on the

ground that the said shares of stock were

bought by one Madrigal, in trust for the
true owner, Matsui, and then delivered to
the latter indorsed in blank.
Issue: Had de los Santos in fact
purchased the shares of stock?
De los Santos sole evidence that he
purchased the said shares was his own
unverified testimony. The alleged vendors
of the stocks who could have verified the
allegation, were already dead. Further, the
receipt that might have proven the sale,
was said to have been lost in a fire. On the
other hand, it was shown that the shares of
stock were registered in the records of
Lepanto in the name of Madrigal, the
trustee of Matsui; that Matsui was
subsequently given possession of the

corresponding stock certificates, though

endorsed in blank; and, that Matsui had
neither sold, conveyed nor alienated these
to anybody.
It is the rule that if the owner of the
certificate has endorsed it in blank, and is
stolen, no title is acquired by an innocent
purchaser of value. This is so because even
though a stock certificate is regarded as
quasi-negotiable, in the sense that it may
be transferred by endorsement, coupled
with delivery, the holder thereof takes it
without prejudice to such rights or
defenses as the registered owner or credit
may have under the law, except in so far as
such rights or defenses are subject to the
limitations imposed by the principles
governing estoppel.

Collateral Transfers
Shares of stock are personal
property. Thus, they can either be
pledged or mortgaged. However, such
pledge or mortgage cannot have any
legal effect if it is registered only in the
corporate books.
Where a certificate is delivered to
the creditor as a security, the contract
is considered a pledge, and the Civil
Code will apply.
If the certificate of stock is not
delivered to the creditor, it must be
registered in the registry of deeds of
the province where the principal office

of the corporation is located, and in

case where the domicile of the
stockholder is in a different province,
then registration must also be made
there.
In a situation where, the chattel
mortgage having been registered, the
stock certificate was not delivered to
the creditor but transferred to a bona
fide purchaser for value, it is the rule
that the bona fide purchaser for value
is bound by the registration in the
chattel mortgage registry. It is said that
such a rule tends to impair the
commercial value of stock certificates.
CHUA GUAN VS. SAMAHANG
MAGSASAKA (62 Phil. 473; 1935)

To guarantee payment of a debt, Co

mortgaged his shares of Samahang
Magsasaka stock to Chiu. The said
mortgage was duly registered in the City
of Manila. Chiu later assigned his rights in
the mortgage to Guan who soon foreclosed
the same after Co failed to pay. Guan won
in the public bidding. He requested the
corporation that new certificates be issued
in his name. The corporation refused
because apparently prior to Guans
demand, several attachments against the
shares covered by the certificates had been
recorded in its books.
Did the chattel mortgage in the registry of
deeds of Manila gave constructive notice
to the attaching creditors?

The Chattel Mortgage Law provides

two ways of executing a valid chattel
mortgage: 1) the possession of mortgaged
property is delivered and retained by the
mortgagee; and, 2) without delivery, the
mortgage is recorded in the register of
deeds. But if chattel mortgage of shares
may be made validly, the next question
then becomes: where should such
mortgage be properly registered?
It is the general rule that the situs of
shares is the domicile of the owner. It is
also generally held that for the purpose of
execution, attachment, and garnishment, it
is the domicile of the corporation that is
decisive. Going by these principles, it is
deemed reasonable that chattel mortgage
of shares be registered both at the owners
domicile and in the province where the

corporation has its principal office. It

should be understood that the property
mortgaged is not the certificate but the
participation and share of the owner in the
assets of the corporation.
It is recognized that this method of
hypothecating shares of stock in a chattel
mortgage
is
rather
tedious
and
cumbersome. But the remedy lies in the
legislature.
Note: The provision of the
Chattel Mortgage Law (Act No.
1508) providing for delivery of
mortgaged property to the
mortgagee as a mode of
constituting a chattel mortgage
is no longer valid in view of the

Civil Code provision defining

such as a pledge.
NONTRANSFERABIL
ITY
IN NON-STOCK
Although shares
CORPORATION
of stock are as a
S
rule
freely
transferable, membership in a nonstock corporation is personal and nontransferable, unless the articles of
incorporation or by-laws provide
otherwise. The court may not strip him
of his membership without cause.
(Sec. 90)

DIVIDENDS AND PURCHASE BY

CORPORATION OF ITS OWN
SHARES
Form of Dividends
IN
WHAT
FORMS
CAN
DIVIDENDS BE ISSUED?
1.

Cash

2.

Property

scrip - certificate issued

to SHs instead of cash
dividends which entitles them

to a certain amount in the

future
3.

Stock dividends

Stock
dividends
are
distribution to the SHs of the
companys own stock.

Stock dividends cannot

be declared without first
increasing the capital stock
unless unissued shares are
available.

New shares are issued to

the SHs in proportion to their
interest.

No new income unless

sold for cash.

Civil fruits belong to the

usufructuary and not to the
naked owner.

Can only be issued to

SHs.

Whenever
fractional
shares result, corp may pay
in cash or issue fractional
share warrants.
DIFFERENTIATE
BETWEEN
CASH
DIVIDENDS
AND
STOCK DIVIDENDS.
Cash
Stock
Dividend Dividend
Voting
Boar
requireme d
of
nts
for Direct

Board
of
Direct

issuance

ors

ors +
2/3
OCS

Effect on Shall be
delinquen applied
t stock
to
the
unpaid
balance
on
the
subscript
ion plus
costs
and
expense
s.

Shall be
withheld
from the
delinque
nt
stockhol
der until
his
unpaid
subscript
ion
is
fully
paid.

Can this No.

be issued (Sec.

No,
since

by
35)
Executive
Committe
e?

this
requires
SH
approval
. (Sec.
35)

NIELSON v LEPANTO (26 SCRA 540;

1968)
Stock dividends are issued only to SHs
This is so because only stockholders are
entitled to dividends. A stock dividend
really adds nothing to the interest of each
stockholder; the proportional interest of
each stockholder remains the same. If a
stockholder is deprived of his stock
dividends - and this happens if the shares
of stock forming part of the stock

dividends are issued to a non-stockholder then the proportion of the stockholder's

interest changes radically. Stock dividends
are civil fruits of the original investment,
and to the owners of the shares belong the
civil fruits.
FROM
WHERE
CAN
DIVIDENDS BE SOURCED?
Dividends can be sourced
only out of the unrestricted
retained
earnings
of
the
corporation.
Unrestricted
retained
earnings is defined as "the
undistributed earnings of the
corporation which have not been
allocated for any managerial,

contractual or legal purposes

and
which
are
free
for
distribution to the stockholders
as dividends." (SEC Rules
Governing Redeemable and
Treasury Shares, 1982)
Retained earnings has been
defined as "net accumulated
earnings of the corporation out
of transactions with individuals
or
firms
outside
the
corporation." (Simmons, Smith,
Kimmel,
Intermediate
Accounting,
1977,
ed.
P.
635) The term implies the
limitation that no corporation can
declare dividends unless its legal
or stated capital is maintained. It
does not include:

premium on par stock

i.e. difference between par
value and selling price of
stock by corp since this is
regarded
as
paid-in
capital; but SEC allowed
declaration
of
stock
dividends out of such
premiums

transactions involving
treasury stocks which are
considered
expansions
and contractions of paid-in
capital;

donations
as
additional paid- in capital;

increase in value of
existing assets, being
merely unrealized capital
element

If subscribed shares have not

been fully paid, the unpaid
portion of subscribed capital
stock is an asset, and as long as
the net capital asset (after
payment of liabilities) including
this unpaid portion is at least
equal to the total par value of the
subscribed shares, any excess
would be surplus or earnings
from which dividends may be
declared. However, if a deficit
exists, subsequent profits must
first be applied to cover the
deficit.

Restrictions
on
distribution include:

dividend

BODs
appropriation of certain
earnings for certain
purposes;

Agreements with
creditors, bondholders
and
preferred
SHs
requiring retention of
certain
percent
of
corporate earnings to
protect their interest
and
to
secure
redemption of their
securities
upon
maturity;

SEC-imposed
restrictions pursuant to
law, like those imposed
on banks and insurance
companies;

Restriction on the
retained
earnings
equivalent to the cost of
treasury shares held by
the corporation, which
is lifted only after such
shares are reissued or
retired (Sec. 195, PD
612)

BERKS
BROADCASTING
CRAUMER (52 A.2d 571; 1947)

Dividends can only be declared only

from the surplus, i.e. the excess in the
value of the assets over the liabilities and
the issued capital stock. To do otherwise
would be illegal The object of the
prohibition is to protect the creditors in
view of the limited liability of the SHs and
also to protect the SHs by preserving the
capital so that the purposes of the corp.
may be performed.
Surplus must be bona fide i.e. founded
upon actual earnings or profits and not to
be dependent for its existence upon a
theoretical estimate of an appreciation in
the value of the companys assets.
The prohibition does not apply,
however, to stock dividends because

creditors and SHs will not be affected by

their declaration since they do not decrease
the companys assets.
LICH V UNITED STATES
RUBBER (39 F. Supp. 675; 1941)
Dividends on non-cumulative preferred
stock are payable only out of net profits
and for the years in which said net profits
are actually earned.
The right to dividends is conditional
upon: (1) accrual of net profits, and (2)
retention in the business.
If the annual net earnings of a corp. are
justifiably applied to legitimate corp.
purposes, such as payment of debts,

reduction of deficits and restoration of

impaired capital, the right of noncumulative preferred stockholders to the
payments of dividends is lost. If they are
applied against prior losses and thereby
completely absorbed, there are no net
profits from which dividends may be
lawfully paid.

SOME
RULES
DECLARATION:

ON

DIVIDEND

1.
BOD
has
discretion
whether or not to declare
dividends and in what form.

Exception:
Stock
dividends, in which case a 2/3
vote of OCS is necessary.
However,
such
discretion
cannot be abused and the
BOD
cannot
accumulate
surplus profits unreasonably on
the excuse that it is needed for
expansion or reserves.
2.
BOD
should
declare
dividends when surplus profits
of the corporation exceed
100% of the corporation's paidin capital stock.
Exceptions:

(a) When
justified
by
definite corporate expansion
projects
or
programs
approved by the Board;
(b) When creditors prohibit
dividend declaration without
their consent as a condition
for the loan, and such
consent has not yet been
secured;
(c)
When
retention
is
necessary
under
special
circumstances obtaining in
the
corporation, e.g. when
there is a need for special
reserve
for
probable
contingencies. (Sec. 43)

4.
The corporation may be
subjected to additional tax
when it fails to declare
dividends,
thereby
unreasonably
accumulating
profits. (See Sec. 25, NIRC)
5.
The dividends received are
based on stock held whether or
not paid. However, if the
stocks are delinquent, the
amount will first be applied to
the payment of the delinquency
plus costs and expenses; stock
dividends will not be given to a
delinquent SH.

KEOGH v ST. PAUL MILK (285 N.W.

809; 1939)
The mere fact that a large corporate
surplus exists is not enough to warrant
equitable intervention; the test is good
faith and reasonableness of the policy of
retaining the profits. However, where
dividends are withheld for an unlawful
purpose to deprive a SH of his right to a
just proportion of the corporation's profit,
the court may compel the corporation to
declare dividends.
DODGE v FORD MOTOR CO (170
N.W. 668; 1919)
This case involves an action
against the Ford Motor Company to

compel declaration of dividends. At the

time this complaint was made, Ford had
concluded its most prosperous year of
business, and the demand for its cars at the
price of the previous year continued.
While it had been the practice, under
similar circumstances, to declare larger
dividends, the corporation refused to
declare any special dividends. The Board
justified its refusal to declare larger
dividends on the expansion plans of the
company by erecting a smelting plant, but
maintaining the selling price of its cars
(instead of reducing it as had been the
practice in previous years). The plaintiffs
contend that such a proposal would be
tantamount to the business being
conducted as a semi-eleemosynary (or
charitable) institution instead of a business
institution.

The court pointed out that a business

corporation is organized and carried on
primarily for the profit of SHs. The
discretion of the directors is to be
exercised in the choice of means to attain
that end and does not extend to a change in
the end itself reduction of profits or to
devote profits to another purpose. While
the Court noted the capable management
of the affairs of the corporation and
therefore was not convinced that the
motives of the directors were prejudicial to
the company's interests, it likewise noted
that the annual dividends paid were very
small in relation to the profits that the
company had been making. It therefore
affirmed the amount fixed by the lower
court to be distributed to the stockholders.

Note: Prof. Jacinto is of the opinion

that what happened in this case is
possible under the present Code,
even without changing the AOI.

Preference as to Dividends

Review discussion under kinds

of stock.
WABASH RAILWAY CO. V.
BARCLAY (67 A.L.R. 762; 1930)
In the AOI and the certificate of stock
of Stock A, it was stated that the holders of
said stocks are entitled to receive to
receive preferential dividends of 5% per

fiscal year, non-cumulative, before

dividends are paid to other stocks. From
1915 to 1926, no dividends were declared.
The net earnings were instead used for the
improvements and additions to property
and equipment. Due to this, the
corporation became prosperous and
proposed to pay dividends to A & B
common stock. Plaintiffs filed this case in
order to collect the dividends for fiscal
years 1915-1926 before the other classes
of stock are paid.
Were the Class A stockholders entitled to
dividends for FY 1915 to 1926?
No, they were not. By the plain
meaning of the words in the AOI and the
certificates of stock, the holders are not
entitled to dividends unless directors

declare so. It is likewise generally

understood that in cases where the
company's net earnings are applied for
improvements and no dividend is declared,
the claim for such year is gone in case of
non-cumulative stock, and cannot be later
asserted.
BURK V. OTTAWA GAS & ELECTRIC
CO. (123 Pac. 875; 1912)
An action was brought by the preferred
SHs of Ottawa against the directors of
Ottawa to (1) require the directors to
account for all the property and assets of
the corporation, (2) declare such dividends
from the net profits of the business of such
co. as should have been declared since 1
Jan. 1906, and (3) restrain the officers and

directors during the pendency of the action

from paying out any of the money or
disposing of the assets of the company
except such amounts as should be
necessary to pay the actual necessary
current expenses of conducting the
business of the corporation.
The BOD maintained that the
corporation's funds were exhausted by
expenditures for the extension of the cos
plant, hence it was unable to declare
dividends. Expenditures were said to be
necessary and for the betterment of the
plant.
Were the corp funds were wrongfully
diverted, and were preferred SHs entitled
to dividends?

The case was remanded to the trial

court, with instructions to make further
findings to protect the preferred SHs in
their rights.
The fair interpretation of the contract
between Ottawa and its SHS is that if in
any year net profits are earned, a dividend
is to be declared. To hold otherwise,
meaning if the BOD had absolute
discretion when to declare dividends and
when not to, when the corporation has
funds for such dividends, would result in
temptation to unfair dealing, giving one
party the option to pay the other or not. In
the case at bar, the accumulated profits
would be lost forever since the dividends
were non-cumulative.

Preferred SHs, however, are not

generally creditors until dividends are
declared. In the case at bar, if dividends
should have been declared to such SHs,
they are considered creditors from that
time.
When Right to Dividends Vests;
Rights of Transferee

WHEN DOES THE RIGHT TO

DIVIDENDS VEST?
As soon as the BoD has
declared dividends. From this
time, it becomes a debt owed
by
the
corporation,
and

therefore can no longer be

revoked (McLaran v. Crescent
Planning).
EXCEPTION:
If the
declaration has not yet been
announced or communicated
to the stockholders.
NOTE: When no dividends
are
declared
for
3
consecutive
years,
preferred SHs are given the
right to vote for directors
until dividends are declared.
NOTE: The extent of the
SHs share in the dividends
will depend on the capital

contribution;
NOT
the
number of shares he has.
MCLARAN V. CRESCENT
PLANNING MILL CO. (93 S.W. 819;
1906)
CPM Corp., having a surplus of
$29,000, declared a 6% cash dividend
payable in four installments. The first
installment was paid by the Board after
which an error was discovered in the
computation of the assets: from the initial
recognized surplus of $29,000 to $6,000.
Mainly for this reason, the Board adopted
a resolution rescinding the dividends
payable on the three other installments
despite the solvency of the corp and the
existence of ample funds to pay said

dividends. The original P was Humber, a

SH, and was substituted by McLaran, the
administrator of his estate when he died.
The defendant corp maintained that there
was no valid declaration of dividends
because the corporation failed to set aside
funds to pay for the same.
A cash dividend, properly declared,
cannot be revoked by the subsequent
action of the corp. for by its declaration,
the corp had become the debtor of the SH
and it goes without saying that the debtor
cannot revoke, recall or rescind the debt or
otherwise absolve itself from its payment
by a unilateral action or without the
consent of the creditor. Thus, the
rescission by the BOD of the subsequent
installments was of no force.

Dividends are defined as portions of

profits/surplus funds of the corp. which
have been actually set apart by a valid
board resolution or by the SH at a corp.
mtg. for distribution among SH according
to their respective interests. The mere
declaration of the dividend, without more,
by competent authority under proper
circumstances, creates a debt against the
corporation in favor of the stockholders the
same as any other general creditor of the
corporation. By the mere declaration, the
dividend becomes immediately fixed and
absolute in the stockholder and from
henceforth the right of each individual
stockholder is changed by the act of
declaration from that of partner and part
owner of the corporate property to a status
absolutely, adverse to every other
stockholder and to the corporation itself,

insofar as his pro rata proportion of the

dividend is concerned.

Liability for Illegal Dividends

WHAT
ARE
DIVIDENDS?

ILLEGAL

Illegal
dividends
are
dividends declared in violation of
law.
WHAT ARE THE EFFECTS OF
THE ILLEGAL DECLARATION
OF DIVIDENDS?

(1) If the directors acted

wilfully, or with negligence or
in bad faith, they will be liable
to the corporation. If the
corporation has become
insolvent, they are liable to
the corporation's creditors for
the amount of dividends
based out of capital. (Based
on Sec. 31)
(2) If the directors cannot be
held liable because they
acted with due diligence and
in good faith, in the absence
of an express provision of
law, aninnocent stockholder
is not liable to return the
dividends received by him

out of capital, unless the

corporation was insolvent at
the
time
of
payment.
(Majority view; Campos)
Purchase by Corporation of its
own shares

WHAT ARE THE REQUISITES

FOR ACQUISITION BY THE
CORPORATION OF ITS OWN
SHARES? (Sec. 41)
1.
unrestricted
retained
earnings to cover the shares
to be acquired;

2.
legitimate
purpose

corporate

FOR WHAT PURPOSES CAN A

CORPORATION ACQUIRE ITS
OWN SHARES? (Sec. 41)
1.
To eliminate fractional
shares arising out of stock
dividends;
2.
To
collect
or
compromise
an
indebtedness
to
the
corporation, arising out of
unpaid subscription, in a
delinquency sale, and to
purchase delinquent shares
sold during said sale;

3.
To pay dissenting or
withdrawing
stockholders
entitled to payment for their
shares
under
the
Corporation
Code (Appraisal Right).
Appraisal Right (Sec. 81)
WHAT IS
RIGHT?

THE APPRAISAL

The appraisal right refers to

the right of a stockholder who
dissented and voted against a
proposed fundamental corporate
action to get out of the
corporation
by
demanding

payment of the fair value of his

shares.
IN WHAT INSTANCES CAN
THE APPRAISAL RIGHT BE
EXERCISED?
The Corporation Code lists
4 instances:
(1) In case any amendment
to the AOI has the effect of
changing or restricting the
rights of any SH or class of
shares, or of authorizing
preferences in any respect
superior
to
those
of
outstanding shares of any
class, or of extending or
shortening the term of

corporate existence (Sec.

81);
(2) In case of sale, lease,
exchange,
transfer,
mortgage, pledge or other
disposition
of
all
or
substantially all of the
corporate
property
and
assets as provided in this
Code (Sec. 81; Sec. 40);
(3) In case of merger or
consolidation (Sec. 81);
(4) In case the corporation
invests its funds in any other
corporation or business or
for any purpose other than
the primary purpose for

which it
(Sec. 42)

was

organized

WHAT ARE THE REQUISITES

FOR THE EXERCISE OF THE
APPRAISAL RIGHT? (Sec. 82)
(1) SH must have voted
against
he
proposed
corporate action;
(2) Written demand on the
corporation for payment of
the fair value of his shares;
(3) Such demand must have
been made within 30 days
after the date on which the
vote was taken;

(4) Surrender of the stock

certificate/s representing his
shares;
(5) Unrestricted
retained
earnings in the books of the
corporation to cover such
payment.
WHAT IS THE EFFECT OF
DEMAND FOR PAYMENT IN
ACCORDANCE WITH THE
APPRAISAL RIGHT? (Sec. 83)
All rights accruing to the
shares, including voting and
dividend rights, are suspended
in
accordance
with
the
Corporation Code, except for the

right of the SH to receive

payment of the fair value thereof.
Such suspension shall be
from the time of demand until
either:
(1) abandonment of the
corporate action involved; or
(2) the purchase of the said
shares by the corporation.
However, if said dissenting
SH is not paid the value of his
shares within 30 days after the
award, his voting and dividend
rights shall immediately be
restored.

WHAT ARE THE DUTIES OF

THE
DISSENTING
STOCKHOLDER IN RELATION
TO THE EXERCISE OF THE
APPRAISAL RIGHT?
The dissenting SH must
submit the certificates of stock
representing his shares to the
corporation for notation thereon
that such shares are dissenting
shares within
10
days after
demanding payment for his
shares. Failure to do so shall, at
the option of the corporation,
terminate his rights under Title X
of the Corporation Code. (Sec.
86)

WHAT ARE THE EFFECTS OF

TRANSFER
OF
THE
CERTIFICATES BEARING THE
NOTATION
THAT
THEY
REPRESENT
DISSENTING
SHARES?
If the certificates are
consequently cancelled, the
rights of the transferor as a
dissenting SH cease and the
transferee has all the rights of a
regular stockholder. All dividend
contributions which would have
accrued on the shares will be
paid to the transferee. (Sec. 86)

AMENDMENTS OF CHARTER
The charter of a private corporation
consists of its articles of incorporation as
well as the Corporation Code and such
other law under which it is organized.
Amendment by Legislature

Subject to the limitation that

no accrued rights or liabilities be
impaired, the legislature has the
power to make changes in
existing corporations through an

amendment to the Corporation

Code.
Amendment by Stockholders

One of the powers expressly

granted
by
law
to
all
corporations is the power to
amend
its
articles
of
incorporation. This, in effect, is a
grant of power to owners of 2/3
of the outstanding stocks to
change the basic agreement
between the corporation and its
stockholders,
making
such
change binding on all the

stockholders, subject only to the

right of appraisal, if proper.
WHAT ARE THE LIMITATIONS
ON THE POWER TO AMEND?
PURPOSE:
legitimate
VOTE:
membership
(1)

must

be

2/3 of OCS /

The appraisal right

must be recognized in case
the amendment has the
effect of changing rights of
any stockholder or class of
shares, or of authorizing
preferences in any respect

superior
to
those
of
outstanding shares of any
class, or extending or
shortening the term of
corporate existence.
(2)

Extension
of
corporate
term
cannot
exceed 50 yrs. in any one
instance

(3)

A copy of the
amended articles should be
filed with the SEC, and with
the proper governmental
agencies, as appropriate
(e.g., in the case of banks,
public utilities, etc.)

(4)

Original
and
amended articles should
contain all matters required
by law to be set out in said
articles.

(5)

An amendment to
increase/decrease
capital
stock as well as to
extend/shorten
corporate
term cannot be made under
Sec. 16, but must be made
under
Sec.
37-38,
respectively, both of which
require a meeting; and

(6)

Amendment must
be in the form prescribed by
the Code

ON WHAT GROUNDS CAN

THE SEC DISAPPROVE THE
PROPOSED AMENDMENTS?
The same grounds as for the
disapproval of the original articles
(Sec. 17):

Not
substantially
in
accordance with the form
prescribed by the Code;

Purpose(s)
patently
unconstitutional,
illegal,
immoral, or contrary to
government
rules
and
regulations;

Treasurers
Affidavit
concerning amount of capital
stock subscribed/paid is false;

Required percentage of
ownership of capital stock to
be owned by citizens of the
Phils. has not been complied
with as required by the
Constitution or existing laws;

Absence of a favorable
recommendation from the
appropriate
government
agency.

Amendment changing
stockholders rights

The law expressly allows

amendments
which
would
change or restrict existing rights
of stockholders or any class of
shares. (Sec. 81)
MARCUS V. RH MACY (74 N.E.
2d 228; 1947)
The Board of Directors gave notice to
SH that among the matters to be acted
upon in its annual meeting would be a
proposal to amend certificate of
incorporation to add to the rights of
preferred stockholders, voting rights equal
to those of common stockholders. Marcus,
objected and demanded payment for the
common stock owned by her.

The Court held that Marcus may invoke

her appraisal right. The aggregate number
of shares having voting rights equal to
those of common shares was substantially
increased and thereby the voting power of
each common share outstanding prior to
the meeting was altered or limited by the
resultingpro rata diminution of its
potential worth as a factor in the
management of the corporate affairs.
Considering that she held diminished
voting power; that she notified the corpo
of her objection; that her shares were voted
against the amendmentthese were
sufficient to qualify her to invoke her
statutory appraisal right.
Effectivity of amendment

Amendments take effect only

from the approval by the SEC.
However, such approval or
rejection must be made within
six
months
of
filing
of
amendment; otherwise it shall
take effect even w/o such
approval (as of the date of
filing), unless cause of delay is
attributable to the corporation.
(Sec. 16)
Special amendments
Increase of capital stock
After the authorized capital
stock
has
been
fully
subscribed
and
the

corporation
needs
to
increase its capital, it will
have to amend its articles to
increase its capital stock. A
corporation does not have the
implied power to increase
capital stock; such a power
can only be granted by law.
The power to increase or
decrease capital stock must
be exercised in accordance
with the provisions of Sec. 38
of the Code.
Reduction of capital stock
Reduction of capital stock
is not allowed if it will

prejudice
the
rights
corporate creditors.

of

PHILIPPINE TRUST CO. V.

RIVERA (44 Phil. 469; 1923)
It is established doctrine that
subscriptions to the capital of a corporation
constitute a fund to which creditors have a
right to look for satisfaction of their claims
and that the assignee in insolvency can
maintain an action upon any unpaid stock
subscription in order to realize assets for
the payment of its debts.
A corporation has no power to release
an original subscriber to its capital stock
from the obligation of paying for his
shares, without valuable consideration for

such release; and as against creditors a

reduction of the capital stock can take
place only in the manner and under the
conditions prescribed by the statute or
charter or the articles of incorporation.
Change in corporate term
The
Code
allows
a
corporation not only to extend
but also to shorten its term of
existence. As in the case of
increase/decrease of capital
stock, change must be approved
at a members/stockholders
meeting by 2/3 of the
members/outstanding
capital
stock.

Amendments in close
corporations
To recall, the provisions
required to be contained in the
AOI of a close corporation:
(1) All issued stock of all
classes should be held by
not more than 20;
(2) All issued stock shall be
subject to one or more
specified restrictions on
transfer permitted by law;
(3) Corporation should not be
listed in the stock exchange
or make any public offering
of its stock.

If any of these are deleted,

then the corporation will cease
to be a close corporation and
will lose the special privileges of
such corporations. Thereafter, it
will be governed by the general
provisions of the Code. Since
such amendment involves a
change in the nature of the
corporation, even non-voting
stocks are given a voice in the
decision.
A
stockholders
meeting is required and a 2/3
vote
must
approve
the
amendment, unless otherwise
provided by the articles of
incorporation.

DISSOLUTION
Modes of Dissolution

HOW MAY A CORPORATION

BE DISSOLVED?
(1) Failure to organize and
commence business (Sec. 22);
(2) Cessation of business for 5
years (Continuous inoperation;
Sec. 22);
(3) Expiration of original,
extended, or shortened term;

(4) Voluntary dissolution (Sec.

118-119);
(a) Where no creditors are
affected (Sec. 118)
This is effected by majority
vote of the BOD and a 2/3
vote of the OCS or
members.
(Note
the
special
notice
requirements.) The copy
of
the
resolution
authorizing the dissolution
shall be certified by a
majority of the BOD and

countersigned
by
the
secretary
of
the
corporation. THE SEC
shall thereupon issue the
certificate of dissolution.
(b) Where creditors are
affected (Sec. 119)
(1) Filing of petition for
dissolution with SEC
A petition for dissolution
must be filed with the
SEC after having been
signed by a majority of
the BOD, verified by the
president or secretary or
one of the directors, and
resolved upon by the

affirmative vote of 2/3 of

the OCS or members.
The petition must set
forth all claims and
demands against the
corporation, and the fact
that the dissolution was
approved by the SHs
with the requisite 2/3
vote.
(2) Fixing of date by
SEC
for
filing
of
objections to petition
If
the
petition
is
sufficient in form and
substance, the SEC shall
fix a date on or before
which objections thereto

may be filed by any

person.
Date: not less than 30
days nor more than 60
days after the
entry of the order
(3)

Publication of order

Before the date fixed by

the SEC, the SEC order
shall be published and
posted accordingly.
Newspaper: Once a
week for 3 weeks
in a newspaper of
general
circulation

published in the
municipality
or
city where the
corporation's
principal office is
situated, or there
be
no
such
newspaper, in a
newspaper
of
general
circulation in the
Philippines
Posting:
For
3
consecutive
weeks in 3 public
places in the city
or
municipality
where
the
corporation's

principal office is
situated
(4) Hearing
of
the
petition for dissolution
Upon 5 days notice,
given after the date on
which the right to file
objections to the order
has expired, the SEC
shall proceed to hear
the petition and try any
issue made by the
objections filed.
If no objection is
sufficient,
and
the
material allegations are
true, the SEC shall

render
judgment
dissolving
the
corporation
and
directing
such
disposition of its assets
as justice requires.
Note:
The SEC
may
appoint
a
receiver to collect
such
assets and pay
the debts of the
corporation.

(3) Involuntary
dissolution (Sec. 121):

(a) Revocation of Certificate

of Registration by SEC
(Sec. 121)
A corporation may be
dissolved by the SEC
upon filing of a verified
complaint and after proper
notice and hearing on
grounds
provided
by
existing laws, rules and
regulations.
(b) Quo
Warranto
proceedings (See Sec. 5b,
PD 902-A and Rule 66,
Rules of
Court.
Previously, the
SEC
had
exclusive

jurisdiction
over
quo
warranto
proceedings
involving
corporation.
Under
the
Securities
Regulation Code or RA
8799,
however,
the
jurisdiction of the SEC
over all cases enumerated
under Sec. 5 of PD 902-A
have been transferred to
the Regional Trial Courts.
The grounds for
involuntary dissolution of a
corporation
under quo
warranto proceedings are:
(1) When
the
corporation
has
offended against a

provision of an act
for its creation or
renewal;
(2) When it has
forfeited
its
privileges
and
franchises by nonuser;
(3) When it has
committed
or
omitted an act
which amounts to a
surrender of its
corporate
rights,
privileges
or
franchises;

(4) When
it
misused a right,
privilege
or
franchise conferred
upon it by law, or
when
it
has
exercised a right,
privilege
or
franchise
in
contravention
of
law
(PNB v. CFI,
209
SCRA
294; 1992)
(4) Shortening of corporate
term (Sec. 120)

NOTE:
The simplest and most
expedient way of effecting
dissolution
is by shortening
the corporate term and waiting
for such term
to expire.
Dissolution of close corporations
In close corporations, any
stockholder may, by written
petition to the SEC, compel the
dissolution of such corporation
when:

(1) Any of the acts of the

directors, officers, or those
in control
of the corporation is:

Illegal;
Fraudulent;
Dishonest;
Oppressive
or
unfairly prejudicial to the
corporation
or any other SH;

(2) Corporate assets

being
misapplied
wasted. (Sec. 105)

are
or

Effects of Dissolution

WHAT ARE THE EFFECTS OF

DISSOLUTION?

Corporation ceases to be
a juridical person and
consequently can no longer
continue transacting its
business.

Corporate existence
continues for 3 years
following dissolution for the ff.
purposes only:

(a) winding up of affairs;

and
(b) liquidation of corporate
assets.

Corporation can no
longer continue its business,
except for winding up.

Corporation CANNOT
even be a de
facto corporation.

Corporate existence may

be subject to COLLATERAL
attack.

NOTE that
the
subsequent
dissolution of a corporation may
not remove or impair any right or

remedy in favor of or against,

nor any liability incurred by, any
corporation, its stockholders,
members, directors, trustees or
officers. (Sec. 145)
Loss of juridical personality
NATIONAL ABACA V. PORE (2 SCRA
989; 1961)
Plaintiff National Abaca Corporation
filed a complaint against Pore for the
recovery of a sum of money advanced to
her for the purchase of hemp. She moved
to dismiss the complaint by citing the fact
that National Abaca had been abolished by
EO 372 dated Nov. 24, 1950. Plaintiff
objected to such by saying that it shall

nevertheless be continued as a corporate

body for a period of 3 years from the
effective date of said order for the purpose
of prosecuting and defending suits by or
against it and to enable the Board of
Liquidators to close its affairs.
Can an action commenced within 3 years
after the abolition of plaintiff corporation
be continued by the same after the
expiration of said period?
The Corp. Law allows a corporation to
continue as a body for 3 years after the
time when it would have been dissolved
for the purposes of prosecuting and
defending suits by or against it. But at any
time during the 3 years, the corporation
should convey all its property to trustees
so that the latter may be the ones to

continue on with such prosecution, with no

time limit on its hands. Since the case
against Pore was strong, the corp.'s
amended complaint was admitted and the
case was remanded to the lower court.
CLEMENTE V. CA (242 SCRA 717)
The termination of the life of a
juridical entity does not by itself cause the
extinction or diminution of the right and
liabilities of such entity nor those of its
owners and creditors. If the 3-year
extended life has expired without a trustee
or receiver having been expressly
designated by the corporation itself within
that period, the board of directors or
trustees itself may be permitted to so
continue as "trustees" by legal implication

to complete the corporate liquidation. In

the absence of a board of directors or
trustees, those having any pecuniary
interest in the assets, including not only the
shareholders but likewise the creditors of
the corporation, acting for and in its
behalf, might make proper representations
with the SEC, which has primary and
sufficiently broad jurisdiction in matters of
this nature, for working out a final
settlement of the corporate concerns.
Executory contracts
The prevailing view is that
executory contracts are not
extinguished by dissolution.
Sec. 145 of the Code states that
"No right or remedy in favor of or
against any corporation.nor

any liability incurredshall be

removed or impaired either by
the subsequent dissolution of
said corp. or by any subsequent
amendment or repeal of this
Code or of any part thereof."
Liquidation

WHAT IS LIQUIDATION? (Sec.

122)
Liquidation, or winding up,
refers to the collection of all
assets of the corporation,
payment of all its creditors, and
the distribution of the remaining

assets, if any, among the

stockholders
thereof
in
accordance with their contracts,
or if there be no special contract,
on the basis of their respective
interests.
WHAT ARE THE METHODS OF
LIQUIDATING
A
CORPORATION? AND WHO
MAY
UNDERTAKE
THE
LIQUIDATION
OF
A
CORPORATION?
1.
Liquidation
by
the
corporation itself through
its board of directors

Although there is no
express
provision
authorizing this method,
neither
is
there
any
provision in the Code
prohibiting it.
2.
Conveyance
of
all
corporate
assets
to
trustees who will take
charge of liquidation.
If this method is used, the
3-year limitation will not
apply
provided
the
designation of the trustees
is made within said period.
There is no time limit within
which the trustee must finish
liquidation, and he may sue

and be sued as such even

beyond the 3-year period
unless the trusteeship is
limited in its duration by the
deed of trust. (See Nat'l
Abaca Corp. v. Pore, supra)
3.
Liquidation
is
conducted by the receiver
who may be appointed by
the SEC upon its decreeing
the dissolution of the corp.
As with the previous
method, the three-year rule
shall not apply. However,
the mere appointment of a
receiver, without anything
more, does not result in the
dissolution
of
the

corporation nor bar it from

the
exercise
of
its
corporation rights.
FOR HOW LONG MAY THE
LIQUIDATION
OF
A
CORPORATION
BE
UNDERTAKEN?
Generally, a corporation
may be continued as a body
corporate for the purpose of
liquidation for 3 years after the
time when it would have so
dissolved. (Sec. 122) However,
it was held in the case
of Clemente v. CA (supra) that if
the 3-year period has expired
without a trustee or receiver

having
been
expressly
designated by the corporation
itself within that period, the BOD
itself may be permitted to so
continue as "trustees" by legal
implication to complete the
corporate liquidation.
WHAT CAN AND SHOULD BE
DONE DURING THE PERIOD
OF LIQUIDATION?
(Sec. 122)
(1)
Collection of corporate
assets and property;
(2)
Conveyance of all
corporate
property
to
trustees for the benefit of

SHs, members, creditors,

and other persons in interest;
(3)
Payment
corporation's
debts
liabilities;

of
and

(4)
Distribution of assets
and property
Distribution of assets after payment
of debts
GENERAL
RULE:
No
corporation
shall
distribute any of its
assets
or
property
except upon lawful
dissolution and after

payment of all its debts

and liabilities. (Sec.
122)
EXCEPTION:
In cases
of decrease of capital
stock, and as otherwise
allowed
by
the
Corporation Code
WHAT HAPPENS IF AN ASSET
CANNOT BE DISTRIBUTED TO
THE PERSON ENTITLED TO
IT?
Any asset distributable
any creditor or stockholder
member who is unknown
cannot be found shall

to
or
or
be

escheated to the city or

municipality where such assets
are located. (Sec. 122)
CHINA BANKING V. MICHELIN &
CIE. (58 Phil. 261; 1933)
The appointment of a receiver by
the court to wind up the affairs of the
corporation upon petition of voluntary
dissolution does not empower the court to
hear and pass on the claims of the creditors
of the corporation at first hand. In such
cases, the receiver does not act as a
receiver of an insolvent corporation. Since
"liquidation" as applied to the settlement
of the affairs of a corporation consists of
adjusting the debts and claims, that is, of
collecting all that is due the corporation,

the settlement and adjustment of claims

against it and the payment of its just debts,
all claims must be presented for allowance
to the receiver or trustees or other proper
persons during the winding-up proceedings
within the 3 years provided by the
Corporation Law as the term for the
corporate existence of the corporation, and
if a claim is disputed so that the receiver
cannot safely allow the same, it should be
transferred to the proper court for trial and
allowance, and the amount so allowed then
presented to the receiver or trustee for
payment. The rulings of the receiver on
the validity of claims submitted are subject
to review by the court appointing such
receiver though no appeal is taken to the
latter ruling, and during the winding-up
proceedings after dissolution, no creditor
will be permitted by legal process or

otherwise to acquire priority, or to enforce

his claim against the property held for
distribution as against the rights of other
creditors.
Note:
Under
the
Corporation Code, it is the SEC which
may
appoint the receiver.
RP V. MARSMAN DEVELOPMENT
COMPANY (44 SCRA 418; 1972)
Defendant corp. was a timber license
holder with concessions in Camarines
Norte. Investigations led to the discovery
that certain taxes were due on it. BIR
assessed Marsman 3 times for unpaid
taxes. Atty. Moya, in behalf of the corp.,

received the first 2 assessments. He

requested for reinvestigations. As a result,
corp. failed to pay within the prescribed
period. Numerous BIR warnings were
given. After 3 years of futile notifications,
BIR sued the corp.
Although Marsman was extrajudicially
dissolved, with the 3-year rule, nothing
however bars an action for recovery of
corporate debts against the liquidators. In
fact, the 1st assessment was given before
dissolution, while the 2nd and 3rd
assessments were given just 6 months after
dissolution (within the 3-year rule). Such
facts definitely established that the
Government was a creditor of the corp. for
whom the liquidator was supposed to hold
assets of the corp.

TAN TIONG BIO V. CIR (G.R. No. L15778; April 23, 1962)
The creditor of a dissolved corp. may
follow its assets, as in the nature of a trust
fund, once they pass into the hands of the
stockholders. The dissolution of a corp.
does not extinguish the debts due or owing
to it.
An indebtedness of a corp. to the
government for income and excess profit
taxes is not extinguished by the dissolution
of the corp. The hands of government
cannot, of course, collect taxes from a
defunct corporation, it loses thereby none
of its rights to assess taxes which had been
due from the corporation, and to collect
them from persons, who by reason of

transactions with the corporation hold

property against which the tax can be
enforced and that the legal death of the
corporation no more prevents such action
than would the physical death of an
individual prevent the government from
assessing taxes against him and collecting
them from his administrator, who holds the
property which the decedent had formerly
possessed. Thus, petitioners can be held
personally liable for the corporation's
taxes, being successors-in-interest of the
defunct corporation.
Distribution of assets of non-stock
corporations
WHAT ARE THE RULES FOR
DISTRIBUTION OF ASSETS

OF
NON-STOCK
CORPORATIONS? (Sec. 9495)
(1)
All
liabilities
and
obligations
of
the
corporation shall be paid,
satisfied, and discharged,
or adequate provision shall
be made therefor.
(2)
Assets held by the
corporation
upon
a
condition requiring return,
transfer or conveyance,
and which condition occurs
by
reason
of
the
dissolution,
shall
be
returned, transferred or

conveyed in accordance
with such requirements.
(3)
Assets received and
held by the corporation
subject
to
limitations
permitting their use only for
charitable,
religious,
benevolent, education or
similar purposes, but not
subject to condition (2)
above, shall be transferred
or conveyed to one or more
corporations, societies or
organization engaged in
activities in the Philippines
substantially
similar
to
those of the dissolving
corp. according to a plan of
distribution
adopted

pursuant to Sec. 95 of the

Code.
(4)
Assets other than
those
mentioned
in
preceding paragraphs shall
be
distributed
in
accordance with the AOI or
by-laws.
(5)
In any other case,
assets may be distributed
to such persons, societies,
organizations
or
corporations, whether or
not organized for profit, as
may be specified in a plan
of
distribution
adopted
pursuant to Sec. 95.

* The plan of distribution of

assets may be adopted by a
majority vote of the Board of
trustees and approval of 2/3
of the members having voting
rights present or represented
by proxy at the meeting
during which said plan is
adopted.
It must be noted that the plan
of distribution of assets must
not be inconsistent with the
provisions of Title XI of the
Code.

CORPORATE COMBINATIONS
Techniques to achieve corporate
combinations

WHAT ARE THE TECHNIQUES

TO ACHIEVE A CORPORATE
COMBINATION?
(1) Merger (A + B = A)
(2) Consolidation (A + B = C)
(3) Sale of substantially all
corporate assets and
purchase thereof by another
corporation;

(4) Acquisition of all /

substantially all of the stock
of one corporation from its
SHs in exchange for the
stock of the acquiring
corporation
Merger or Consolidation

WHAT IS THE PROCEDURE

FOR
MERGER
OR
CONSOLIDATION?
(1) Board of Directors of the
constituent
corporations
must prepare and approve a

plan
of
merger
consolidation.

or

(2) 2/3 vote of OCS of the

constituent corporations.
(3) Execution of the Articles
of Merger/Consolidation, to
be signed by the Pres/VP
and
certified
by
the
secretary
/
assistant
secretary.
(4) Submission to the SEC
for approval.
WHAT ARE THE EFFECTS OF
MERGER OR
CONSOLIDATION? (Sec. 80)

(1) The constituent

corporation shall become a
single corporation:
If merger:
the
surviving corporation
designated in the plan of
merger
If consolidation: the
consolidated corporation
designated in the plan of
Consolidation.
(2) The separate existence
of
the
constituent
corporations shall cease,
except that of the surviving
or consolidated corporation.

(3) The
surviving
or
consolidated
corporation
shall possess all rights,
privileges, immunities and
powers and shall be subject
to all the duties and
liabilities of a corporation
organized
under
the
Corporation Code.
(4) The
surviving
or
consolidated
corporation
shall
thereupon
and
thereafter possess all the
rights, privileges, immunities
and franchises of each of
the constituent corporations;

(5) All property (real or

personal) and
all
receivables
due
on
whatever account (including
subscriptions to shares and
other choses in action), and
all and every other interest
of, or belong to, or due to
each
constituent
corporation,
shall
be
deemed transferred and
vested in such surviving or
consolidated
corporation without further
act or deed.
(6) The
surviving
or
consolidated
corporation
shall be responsible and
liable for all the liabilities

and obligations of each of

the constituent corporations
in the same manner as if
such
surviving
or
consolidated
corporation
had itself incurred such
liabilities or obligations; and
any pending claim, action or
proceeding brought by or
against
any
of
such
constituent
corporations
may be prosecuted by or
against the surviving or
consolidated corporation.
(Note:
The merger or
consolidation
does not impair the rights of
creditors or liens upon the
property of any such
constituent corporations.)

LOZANO V. DE LOS SANTOS (274

SCRA 452)
Consolidation becomes effective
not upon mere agreement of the members
but only upon issuance of the certificate of
consolidation by the SEC. There can be
no intra-corporate nor partnership relation
between 2 jeepney drivers' and operators'
associations whose plans to consolidate
into a single common association is still a
proposal.
WHAT ARE THE RULES
GOVERNING MERGER OR
CONSOLIDATION INVOLVING A
FOREIGN CORPORATION

LICENSED IN THE
PHILIPPINES? (Sec. 132)

A foreign corporation
authorized
to
transact
business in the Philippines
may merge or consolidate
with
any
domestic
corporation if such is
permitted under Philippine
law and by the law of its
incorporation.

The requirements on
merger or consolidation as
provided in the Corporation
Code must be complied
with.

Whenever a foreign
corporation authorized to
transact business in the
Philippines is a party to a
merger or consolidation in
its home country or state,
such foreign corporation
shall file a copy of the
articles
or
merger
or
consolidation with the SEC
and
the
appropriate
government agencies within
60 days after such merger
or consolidation becomes
effective. Such copy of the
articles must be duly
authenticated by the proper
officials of the country or
state under the laws of

which
merger
or
consolidation was effected.
If the absorbed corporation
in such a merger /
consolidation happens to be
the
foreign
corporation
doing business in the
Philippines, it shall file a
petition for withdrawal of its
license in accordance with
Sec. 136.
Sale of substantially all corporate
assets

WHEN IS A SALE OR OTHER

DISPOSITION DEEMED TO
COVER SUBSTANTIALLY ALL
THE CORPORATE PROPERTY
AND ASSETS?
If by the sale the corporation
would be rendered incapable of
continuing the business or
accomplishing the purpose for
which it was incorporated. (Sec.
40)
WHAT
ARE
THE
REQUIREMENTS? (Sec. 40)
(1) Majority vote of BOD +
2/3 vote of OCS or

members at a meeting duly

called for the purpose;
(2) Compliance with the
laws on illegal combinations
and monopolies
Note, however, that after
such approval by the SHs, the
BOD may nevertheless, in its
discretion, abandon such sale or
other disposition without further
action or approval by the SHs.
This, of course, is subject to the
rights of third parties under any
contract relating thereto.
WHEN
IS
SH
APPROVAL NOT NECESSARY

FOR
THE
DISPOSITION?

ABOVE

(1) If the disposition is

necessary in the usual and
regular course of business;
or
(2) If the proceeds of the
disposition be appropriated
for the conduct of its
remaining business (Sec.
40)
IS THE APPRAISAL RIGHT
AVAILABLE TO DISSENTING
STOCKHOLDERS?

Yes. However, it must be

stressed that this right is
generally available only to
dissenting
stockholders
of
the selling corporation, not the
purchasing corporation. (It can
be argued, though, that in
instances wherein the purchase
constitutes an investment in a
purpose other than its primary
purpose, stockholders' approval
of such investment is necessary,
and anyone who objects thereto
will have the appraisal right
under Sec. 42.)
Exchange of stocks

In this method, all or

substantially
all
the
stockholders of the "acquired"
corporation
are
made
stockholders of the acquiring
corporation.
With
the
exchange,
the
acquired
corporation
becomes
a
subsidiary of the acquiring
corporation.
Although this
method does not combine the
2 businesses under a single
corporation as in merger and
sale of assets, from the point of
view of the acquiring (parent)
corporation, there is hardly any
difference between owing the
acquired
corporation's
business directly and operating

it
through
a
controlled
subsidiary. In fact, the parent
corporation would have the
power
to
buy
all
the
subsidiary's
assets
and
dissolve it, achieving the same
result as in the other methods
of combination. (Campos &
Campos)

FOREIGN CORPORATIONS
WHAT
IS
A
FOREIGN
CORPORATION? (Sec. 123)
A corporation formed and
organized under laws other

than those of the Philippines,

regardless of the citizenship of
the
incorporators
and
stockholders.
Such
corporation must have been
organized and must operate in
a country which allows Filipino
citizens and corporations to do
business there.
In times of war:
For
purposes of security
of the state, the
citizenship of the
controlling
stockholders
determines
the
corporations
nationality.

IN WHAT WAYS CAN A

FOREIGN CORPORATION DO
BUSINESS IN THE PHILS.?
(1) Wholly-owned
subsidiary; or
(2)

Branch office; or

(3) Joint venture

local partner.

with

Permitted areas of investment

100% EQUITY:
media, except recording

Mass

The
practice of a profession (law, medicine,
etc.)
Operation of rural banks
Cooperatives
Private
security agencies
Smallscale mining
Utilization of marine resources
Ownership, operation,
and management of
cockpits;

Manufacture, repair,
stockpiling of nuclear,
biological, chemical,
and radiological weapons;
Note: Retail trade is no longer
required to be 100% Filipinoowned on account
of the Retail Trade
Liberalization Act.
75%-25% EQUITY:
Interisland shipping (R.A. 1937, Sec. 8)
Private recruitment
Contracts for
construction and repair of
locally-funded public
works

Except: Public
works that would fall
under the BuildOperateTransfer Law, as
well as those
that are foreignfunded
70%-30% EQUITY:
60%-40% EQUITY:
industries.

Advertising
Other

WHAT IS THE SOCALLED "GRANDFATHER RULE"?

Where
a
domestic
corporation which has both

Philippine
and
foreign
stockholders is an investor in
another domestic corporation
which
has
also
both
Philippine
and
foreign
stockholders, the so-called
"grandfather rule" is used to
determine whether or not the
latter corporation is qualified
to engage in a partially
nationalized business, i.e. by
determining the extent of
Philippine equity therein.
Under present SEC rules,
if the percentage of Filipino
ownership
in
the
first
corporation is at least 60%,
then said corporation will be
considered as a Philippine

national and all of its

investment in the second
corporation would be treated
as Filipino equity. On the
other hand, if the Philippine
equity in the first corporation
is less than 60%, then only
the
number
of
shares
corresponding
to
such
percentage shall be counted
as of Philippine nationality.
(See SEC Rule promulgated
on 28 Feb. 1967, cited in
Opinion # 18, Series of 1989,
Department of Justice, dated
19 January 1989.)
NOTE: The reader would
be well-advised to crossreference this

definition
of
the
"grandfather rule" with a
trusted commentary.
Legal Requirements Prior to
Transaction of Business
Documentary Requirements (Sec.
125)
(1) BOI certificate
The BOI certificate is issued
upon a finding of the Board of
Investments that the business
operations of the foreign corp.
will contribute to the sound and
balanced development of the

national economy on a selfsustaining

basis.
(See
Omnibus Investments Code,
Sec. 48-49)
NOTE: Applications, if not
acted upon within 10 days
from
official
acceptance
thereof, shall be considered
automatically approved! (Art.
53, Omnibus Investments
Code)
(2) SEC license to do
business (Sec. 125)

Application under oath

setting forth the information
specified in Sec. 125;

Additional information
as may be necessary or
appropriate to enable the
SEC to determine whether
the corporation is entitled to
a
license
to
transact
business in the Philippines,
and to determine and
assess the fees payable;

Duly
executed
certificate under oath by
authorized official/s of the
jurisdiction of the company's
incorporation, attesting to
the fact that the laws of the
country of the applicant
allow Filipino citizens and
corporations to do business
therein,
and
that
the

applicant is
corporation
standing;

an
in

existing
good

Statement under oath

of the president or any other
person authorized by the
corporation showing that the
applicant is solvent and in
good financial condition,
and setting forth the assets
and
liabilities
of
the
corporation within 1 year
immediately prior to the
application.

(3)
Certificate
from
appropriate
government
agency

NOTE: Certain sectors such

as banking, insurance, etc.
require prior approval
from the government
agencies concerned. (Sec.
17)
Deposit requirement (Sec. 126)
Within 60 days after the
issuance of the license, the
licensee shall deposit with the SEC
securities with an actual market
value of at least P 100,000.00.
These securities are for the benefit
of present and future creditors, and
shall consist of any of the following:

Bonds
or
other
evidence of indebtedness of
the Government or its
instrumentalities, etc.;

Shares of stock in
"registered enterprises" as
defined in R.A. 5186;

Shares of stock in
domestic
corporations
registered in the stock
exchange;

Shares of stock in
domestic
insurance
companies and banks.
Once the licensee ceases to do
business in the Philippines, these
deposited securities shall be returned,
upon the licensee's application and
proof to the satisfaction of the SEC

that the licensee has no liability to

Philippine residents or the Philippine
government.
Note:
Foreign banking and
insurance corporations are the
exceptions to this requirement.
Designation
of
agent (Sec. 128)

resident

The designation of a resident

agent is a condition precedent to the
issuance of the license to transact
business in the Philippines.
WHO:
resident of the Philippines.

PURPOSE:
To be served
any
summons
and
other legal processes
which may be served in
all actions or other legal
proceedings
against
such
corporation.
Service upon such
resident
shall
be
admitted and held as
valid as if served upon
the duly authorized
officers of the foreign
corporation at its home
office.

Laws applicable to foreign

corporations
Foreign corporations lawfully
doing business in the Philippines are
bound by all laws, rules and
regulations applicable to domestic
corporations of the same class.
Exceptions: (1) As regards
the
creation,
formation,
organization or dissolution
of the corporation;
(2) As regards the
fixing
of
relations,
liabilities, responsibilities,
or
duties
of
stockholders,

members, or officers
or corporations to
each other or to the
corporation
(Sec.
129)

Effects of Failure to Secure SEC

License

WHAT ARE THE EFFECTS OF

FAILURE TO SECURE A
LICENSE?
(1) The corporation will not be
permitted to maintain agency
in the Philippines;
(2) The corporation will be
subject to penalties and fines;
(3) The corporation will not be
permitted to maintain or
intervene in any action before

Philippine courts or
administrative agencies; it
can be SUED.
Isolated transactions
MARSHALL WELLS V. ELSER (46
Phil. 71; 1924)
Marshall
Wells,
a
corporation
organized under the State of Oregon, sued
a domestic corp. for the unpaid balance on
a bill of goods. Defendant demurred to the
complaint on the ground that it did not
show that plaintiff had complied with the
law regarding corp. desiring to do business
in the Phil., nor that the plaintiff was
authorized to do business in the Phil.

The Supreme Court, in ruling for

Marshall Wells, stated that the object of
the statute was to subject the foreign corp.
doing business in the Phil. to the
jurisdiction of its courts. The object of the
statute was not to prevent it from
performing single acts but to prevent it
from acquiring a domicile for the purpose
without taking the steps necessary to
render it amenable to suit in the local
courts. The implication of the law is that it
was never the purpose of the Legislature to
exclude a foreign corp. which happens to
obtain an isolated order for business from
the Phil., from securing redress in Phil.
Courts, and thus, in effect to permit
persons to avoid their contract made with
such foreign corporation.

ATLANTIC MUTUAL V. CEBU

STEVEDORING (G.R. No. 18961; Aug.
31, 1966)
A foreign corp. engaged in business in
the Phil. can maintain suit in this
jurisdiction if it is duly licensed. If a
foreign corp. is not engaged in business in
the Phil., it can maintain such suit if the
transaction sued upon is singular and
isolated, in which no license is required. In
either case, the fact of compliance with the
requirement of license, or the fact that the
suing corp. is exempt therefrom, as the
case may be, cannot be inferred from the
mere fact that the party suing is a foreign
corp. The qualifying circumstance, being
an essential part of the element of the
plaintiffs capacity to sue, must be
affirmatively pleaded. In short, facts

showing foreign corporations capacity to

sue should be pleaded.
Curing of defect
HOME INSURANCE V. EASTERN
SHIPPING (123 SCRA 424; 1983)
A contract entered into by a foreign
insurance corp. not licensed to do business
in the Phil. is not necessarily void and the
lack of capacity to sue at the time of
execution of the contract is cured by its
subsequent registration.
Protection of intellectual property
rights

GENERAL GARMENTS CORP. V.

DIR. OF PATENTS (41 SCRA 50; 1971)
Domestic
corporation
General
Garments registered Puritan trademark
for its mens wear. US corporation Puritan
Sportswear petitioned the Phil. Patent
Office for cancellation of said trademark,
alleging its ownership and prior use in the
Phil.
The Supreme Court held that a foreign
corp. which does not do business in the
Phil. and is unlicensed but is widely
known in the Phil. through the use of its
products here has legal right to maintain an
action to protect its reputation, corporate
name and goodwill. The right to use the
corporate name is a property right which

the corp. may assert and protect in any of

the courts of the world.
LE CHEMISE LACOSTE V.
FERNANDEZ (129 SCRA 377; 1984)
A foreign corporation not doing
business in the Phil. needs no license to
sue in the Phil. for trademark violations.
Where a violation of our unfair trade
laws which provide a penal sanction is
alleged, lack of capacity to sue of injured
foreign corp. becomes immaterial (because
a criminal offence is essentially an act
against the State).

NOTE: Sec. 160 of R.A.

8293 (Intellectual Property
Code) provides that any
foreign national or juridical
person who meets the
requirements of Sec. 3 of
the Act (i.e., is a national
or is domiciled in a country
party to any convention,
treaty
or
agreement
relating
to
intellectual
property rights or the
repression
of
unfair
competition, to which the
Philippines is also a party,
or
extends
reciprocal
rights
to
Philippine
nationals by law) and does
not engage in business in
the Philippines may bring

a civil or administrative
action
for
opposition,
cancellation, infringement,
unfair competition, or false
designation of origin and
false description, whether
or not it is licensed to do
business in the Philippines
under existing laws.
What Constitutes Transacting
Business

WHAT
IS
CONSIDERED
AS NOT DOING
BUSINESS,
AND
THEREFORE
NOT

SUBJECT TO THE LICENSING

REQUIREMENT?

Mere investment as a
shareholder and the
exercise of the rights as
such investor;

Having a nominee
director or officer represent
the foreign investors
interests;

Appointing a
representative or distributor
in the Philippines who
transacts business in his
own name and for his own
account

Example:
Rustans
exclusive distributorship of
Lacoste t-shirts

Publication of a general
advertisement;
NOTE: Under the Code of
Commerce, the publication
of an ad is prima
facie evidence (or at
least creates a
presumption) of doing
business in the
Philippines.

Maintaining stock of
goods for processing by
another entity in the
Philippines;

Consignment of
equipment to be used in
processing products for
export;

Collecting information
in the Philippines;

Performing services
incidental to an isolated
contract of sale
Example: Installing
machinery sold by a
foreign corporation to a
Philippine buyer

WHAT IS THE TEST OF DOING

BUSINESS
IN
THE
PHILIPPINES?
Whether or not there is
continuity of transactions which
are in pursuance of the normal
business of the corporation.
(Metholatum v. Mangaliman)
MENTHOLATUM V.
MANGALIMAN (72 Phil. 525; 1941)
The true test as to whether a foreign
corporation is doing business in the
Philippines seems to be whether the
foreign corp. is continuing the body or
substance of the business for which it was
organized or whether it has substantially

retired from it and turned it over to

another. The term implies a continuity of
dealings
and
arrangements
and
contemplates performance of acts/works or
the exercise of the functions normally
incident to and in progressive prosecution
of the purpose and object of its
organization.
FACILITIES MANAGEMENT CORP.
V. DE LA OSA (89 SCRA 131; 1979)
The Court of Industrial Relations
ordered
Facilities
Management
Corporation (FMC) to pay Dela Osa his
overtime compensation, swing shift and
graveyard shift premiums. FMC filed a
petition for review on certiorari on the
issue of whether the CIR can validly

affirm a judgment against persons

domiciled outside and not doing business
in the Phil. and over whom it did not
acquire jurisdiction.
The Supreme Court held that the
petitioner may be considered as doing
business in the Philippines within the
scope of Sec. 14, Rule 14 of the Rules of
Court:
Sec. 14. Service upon private
foreign corp. - If the defendant is
a foreign corp., or a non-resident
joint stock corporation or
association, doing business in
the Phil., service may be made
on its resident agent, on the
government official designated
by law to the effect, or to an y of

its officers or agents within the

Philippines.
FMC had appointed Jaime Catuira as
its agent with authority to execute
Employment Contracts and receive, on
behalf of the corp., legal services from,
and be bound by processes of the Phil.
Courts, for as long as he remains an
employee of FMS. If a foreign corp. not
engaged in business in the Phil., through
an Agent, is not barred from seeking
redress from courts in the Phil., that same
corp. cannot claim exemption done against
a person or persons in the Phil..
NOTE: Under Sec. 12, Rule
14 of the 1997 Rules of
Civil Procedure, the term
"doing business" has been

replaced with the phrase

"has
transacted
business," thereby
allowing suits based on
isolated transactions.
MERRILL LYNCH FUTURES INC. V.
CA (211 SCRA 824)
Merrill Lynch Futures, Inc. (MLF) filed
a complaint against the spouses Lara for
the recovery of a debt. MLF is a nonresident foreign corp. not doing business in
the Phil., organized under the laws of
Delaware, USA.
It is a futures
commission merchant duly licensed to act
as such in the futures markets and
exchanges in the US, essentially
functioning as a broker executing orders to

buy and sell futures contract received from

its
customers
on
US
futures
exchanges. (Futures contract is a
contractual commitment to buy and sell a
standardized quantity of a particular item
at a specified future settlement date and at
a price agreed upon with the purchase or
sale being executed on a regulated futures
exchange.)
The spouses refused to pay and moved
to dismiss the case alleging that plaintiff
had no legal capacity to sue because (1)
MLF is doing business in the country
without a license; and (2) the transactions
were made with Merrill Lynch Pierce,
Fenner and Smith and not with plaintiff
MLF.

Issue: Can MLF sue in Philippine courts

to establish and enforce its rights against
spouses in light of the undeniable fact that
it had transacted business without a
license?
Legal capacity to sue may be
understood in two senses: (1) That the
plaintiff is prohibited or otherwise
incapacitated by law to institute suit in the
Phil. Courts, or (2) although not otherwise
incapacitated in the sense just stated, that it
is not a real party in interest.
The Court finds that the Laras were
transacting with MLF fully aware of its
lack of license to do business in the Phils.,
and in relation to those transactions had
made payments and the spouses are
estopped to impugn MLF's capacity to sue

them. The rule is that a party is estopped

to challenge the personality of a corp after
having acknowledged the same by entering
into a contract with it. The principle is
applied to prevent a person contracting
with a foreign corporation from later
taking advantage of its noncompliance
with the statutes, chiefly in cases where
such person has received the benefits of
the contract.
PACIFIC VEGETABLE OIL V.
SINGSON (G.R. No. 7917; April 29,
1955)
This is an action instituted by the
plaintiff, a foreign corporation, against the
defendant to recover a sum of money for
damages suffered by the plaintiff as a

consequence of the failure of the defendant

to deliver copra which he sold and bound
himself to deliver to the plaintiff.
Defendant filed a motion to dismiss on the
ground that the plaintiff failed to obtain a
license to transact business in the Phil and,
consequently, it had no personality to file
an action.
Has appellant transacted business in the
Philippines in contemplation of law?
Contrary to the findings of the trial
court, the copra in question was actually
sold by the defendant to the plaintiff in the
US, the agreed price to be covered by an
irrevocable letter of credit to be opened at
the Bank of California, and delivery to be
made at the port of destination. It follows
that the appellant corporation has not

transacted business in the Phil in

contemplation of Sec. 68 and 69 which
require any foreign corporation to obtain a
license before it could transact business, or
before it could have personality to file a
suit in the Phil.. It was never the purpose
of the Legislature to exclude a foreign
corporation which happens to obtain an
isolated order of business from the Phil.,
from securing redress in the Phil. Courts,
and thus, in effect, to permit persons to
avoid their contracts made with such
foreign corp.. The lower court erred in
holding that the appellant corporation has
no personality to maintain the present
action.

AETNA CASUALTY & SURETY CO.

VS. PACIFIC STAR LINE (80 SCRA
635; 1977)
Aetna as subrogee of I. Shalom sued
Pacific Star Line (PSL), the common
carrier for the loss of Linen & Cotton piece
goods due to pilferage and damage
amounting to US$2,300.00. PSL contends
that Aetna has no license to transact
insurance business in the Philippines as
gathered from the Insurance Commission
and SEC . It also argues that since said
company has filed 13 other civil suits, they
should be considered as doing business
here and not merely having entered into an
isolated transaction.
Based on rulings in Mentholatum and
Eastboard Navigation, the Supreme Court

held that Aetna is not transacting business

in the Philippines for which it needs to
have a license. The contract was entered
into in New York and payment was made
to the consignee in the New York branch.
Moreover, Aetna was not engaged in the
business of insurance in the Philippines but
was merely collecting a claim assigned to
it by consignee. Because it was not doing
business in the Philippines, it was not
subject to Sec. 68-69 of the Corporation
Law and therefore was not barred from
filing the instant case although it had not
secured a license to transact insurance
business in the Philippines.
TOPWELD MANUEL VS. ECED (138
SCRA 120; 1985)

Topweld entered into 2 separate

contracts with foreign entities: a license
and technical assistance agreement with
IRTI, and a distributor agreement with
ECED, SA. When Topweld found out that
the foreign corporations were looking into
replacing Topweld as licensee and
distributor, the latter went to court to ask
for a writ of preliminary injunction to
restrain the foreign corporations from
negotiating with 3rd parties as violative of
RA 5445 (4).
Although IRTI and ECED were doing
business in the Philippines, since they had
not secured a license from BOI, the foreign
corporations were not bound by the
requirement on termination and Topweld
could not invoke the same against the
former. Moreover, it was incumbent upon

Topweld to know whether or not IRTI and

ECED were properly authorized to engage
in such agreements. The Supreme Court
held that both parties were guilty of
violating RA 5445. Being in pari delicto,
Topweld was not entitled to the relief
prayed for.
ANTAM CONSOLIDATED VS.
CA (143 SCRA 289; 1986)
Stokely Van Camp Inc. filed a
complaint against Banahaw, Antam,
Tambunting and Unicorn for the collection
of a sum of money for failure to deliver
500 tons of crude coconut oil. Antam et al
asked for dismissal of case on ground that
Stokely was a foreign corporation not
licensed to do business in the Philippines

and therefore had no personality to

maintain the suit.
The SC held that the transactions
entered into by Stokely with Antam et al (3
transactions, either as buyer or seller) were
not a series of commercial dealings which
signify an intent on the part of the
respondent to do business in Philippines
but constitute an isolated transaction. The
records
show
that
the
2nd and
3rd transactions were entered into because
Antam wanted to recover the loss it
sustained from the failure of the petitioners
to deliver the crude oil under the first
transaction and in order to give the latter a
chance to make good on their obligation.
There was only one agreement between the
parties, and that was the delivery of the
500 tons of crude coconut oil.

How Courts Acquire Jurisdiction

over Foreign Corporations

As a rule, jurisdiction over a foreign

corporation is acquired by the courts
through service of summons on its
resident agent.
If there is no assigned resident
agent,
the
government
official
designated by law can receive the
summons on their behalf and transmit
the same to them by registered mail
within 10 days. This will complete the
service of the summons. Summons
can also be served on any of the
corporation's officers or agents within

the Philippines.(See Sec. 128; Rule

14, Sec. 12, Rules of Court. Note that
while Sec. 128 presupposes that the
foreign corporation has a license, Rule
14 does not make such an
assumption.)
Note that if there is a designated
agent, summons served upon the
government official is not deemed a
valid process.

Johnlo Trading case holds

that the service on the attorney
of an FC who was also
charged with the duty of
settling claims against it is valid
since no other agent was duly
appointed.


Service on Officers or
Agents
of
an
foreign
corporations
domestic
subsidiary will only vest
jurisdiction if there is sufficient
ground to disregard the
separate personalities.
GENERAL CORPORATION OF THE
PHILIPPINES VS UNION
INSURANCE (87 Phil. 313; 1950)
General Corporation and Mayon
investment sued Union Insurance and
Firemens Fund Insurance (FFI) for the
payment of 12 marine insurance policies.
The summons was served on Union which
was then acting as FFIs settling agent in
the country. At that time, it was not yet

registered and authorized to transact

business in the Philippines.
Issue: Did the trial court acquire valid
jurisdiction over FFI?
Yes. The service of summons for FFI
on its settling agent was legal and gave the
court jurisdiction upon FFI. Section 14,
Rule 7 of ROC embraces Union in the
phrase, or agents within the Philippines.
The law does not make distinctions as to
corporations with or without authority to
do business in the Philippines. The test is
whether a foreign corporation was actually
doing business here. Otherwise, a foreign
corporation doing business illegally
because of its refusal or neglect to obtain
the corresponding authority to do business
may successfully though unfairly plead

such neglect or illegal act so as to avoid

service and thereby impugn the
jurisdiction of the courts.
Withdrawal of Foreign Corporation
(Sec. 136)
HOW: By filing a petition for
withdrawal of license
REQUISITES FOR ISSUANCE
OF CERTIFICATE OF
WITHDRAWAL:
(1) All claims which have
accrued in the Philippines
have
been
paid,
compromised and settled;

(2) All
taxes,
imposts,
assessments, and penalties,
if any, lawfully due to the
Philippine Government or
any of its agencies or
political subdivisions have
been paid; and
(3) The
petition
for
withdrawal of license has
been published once a
week for 3 consecutive
weeks in a newspaper of
general circulation in the
Philippines.
Revocation and Suspension of
License
(Sec. 134)

WHAT ARE THE GROUNDS

FOR
REVOCATION
OR
SUSPENSION OF A LICENSE
OF
A
FOREIGN
CORPORATION?
(1)
Failure to file its
annual report or pay any
fees as required by the
Corporation Code;
(2)
Failure to appoint and
maintain a resident agent in
the Philippines as required;
(3)
Failure, after change
of resident agent or of his
address, to submit to the
SEC a statement of such
change;

(4)
Failure to submit to
the SEC an authenticated
copy of any amendment to
its AOI or by-laws or of any
articles of merger or
consolidation within the
time prescribed by the
Code;
(5)
A misrepresentation
of any material matter in
any application, report,
affidavit or other document
submitted
by
such
corporation pursuant to Title
XV;
(6)
Failure to pay any
and all taxes, imposts,

assessments or penalties, if
any, lawfully due to the
Philippine government or
any of its agencies or
political subdivisions;
(7)
Transacting business
in the Philippines outside of
the purpose/s for which
such
corporation
is
authorized
under
its
license;
(8)
Transacting business
in the Philippine as agent of
or acting for and in behalf of
any foreign corporation or
entity not duly licensed to
do
business
in
the
Philippines; or

(9)
Any other ground as
would render it unfit to
transact business in the
Philippines.
SPECIAL AND MISCELLANEOUS
PROVISIONS
Educational corporations
(Sec. 106-108)

Educational corporations
other than government-run
institutions are governed first
by special laws, second, by the
special provisions of the

Corporation Code, and lastly,

by the general provisions of the
Corporation Code. (Sec. 106)

At least 60% of the

authorized capital stock of
educational corporations must
be owned by Filipino citizens,
and Congress may require
increased
Filipino
equity
participation therein. (With the
exception
of
educational
institutions
established
by
religious groups and mission
boards, which are not subject
to
this
equity
requirement.) However,
control and administration of
educational institutions must be
vested exclusively in citizens of

the Philippines. (Art. XIV, Sec.

4 (2), 1987 Constitution) This
means that no alien may be
elected as a member of the
BOD
nor
appointed
as
Principal or officer thereof.

Once a school, college or

university has been granted
government recognition by the
DECS, it must incorporate
within 90 days from the date of
such recognition, unless it is
expressly exempt by DECS for
special reasons. (Act 2706,
Sec. 5) In addition, it must file
a copy of its AOI and by-laws
with the DECS. Without the
favorable recommendation of
the DECS Secretary, the SEC

will not accept or approve such

articles.
(Sec.
107,
Corporation Code)
Religious corporations
(Sec. 109-116)
Religious corporations are
governed by Title XIII, Chapter II of
the Corporation Code and by the
general provisions of the Code on
non-stock corporations insofar as
they may be applicable. (Sec. 109)
Corporation sole (Sec. 110-115)
A corporation sole is an
incorporated office, composed of a
single individual who may be a

bishop, priest, minister or presiding

officer
of
a
religious
sect,
denomination or church.
Its
purpose is to administer and
manage as trustee the property and
affairs of such religious sect,
denomination or church, within the
territorial jurisdiction of such office.
(Sec. 110; Sec. 111 (3))
In
case
of
death,
resignation, transfer or removal of
the person in office, his successor
replaces him and continues the
corporation sole. The property is
not
owned
but
is
merely
administered by the corporation
sole, and ownership pertains to the
church
or
congregation
he
represents. On the other hand, he

is the person authorized by law as

the administrator thereof and the
court may take judicial notice of
such fact and of the fact that the
parish priests have no control over
such property.
In determining whether the
constitutional provision requiring
60% Filipino capital for corporation
ownership of private agricultural
lands, the Supreme Court has held
that it is the nationality of the
constituents of the diocese, and not
the nationality of the actual
incumbent of the office, which must
be taken into consideration. Thus,
where at least 60% of the
constituents are Filipinos, land may
be registered in the name of the

corporation sole, although the

holder of the office is an alien. This
ruling is based on the fact that the
corporation sole is not the owner
but merely the administrator of the
property, and that he holds it in trust
for the faithful of the diocese
concerned. (See Gana v. Roman
Catholic Archbishop of Manila, 43
O.G. No. 8, 3225; 1947)
Religious societies (Sec. 116)
In contrast to a corporation
sole,
religious
societies
are
composed of more than one
person. The requirements for
incorporation of such societies are
set forth in Sec. 116 of the Code.

Close Corporations
(Sec. 96-105)
WHAT ARE THE REQUISITES
OF A CLOSE
CORPORATION? (Sec. 96)
A close corporation, within the
meaning of the Corporation
Code, is one whose articles of
incorporation provide that:
(1) All the corporation's
issued stock of all
classes, exclusive of
treasury shares, shall
be held of record by not
more than a specified

number of persons not

exceeding 20;
(2) All the issued stock
of all classes shall be
subject to one or more
specified restrictions on
transfer permitted by
Title XII of the Code;
and
(3) The
corporation
shall not list in any
stock
exchange
or
make
any
public
offering of any of its
stock of any class.
Notes:

A narrow distribution
of ownership does not, by
itself, make a close
corporation. (San Juan
Structural
and
Steel
Fabricators v. CA, 296
SCRA 631)

A corporation shall not

be deemed a close
corporation when at least
2/3 of its voting stock or
voting rights is owned or
controlled
by
another
corporation which is not a
close corporation.

CAN
A CORPORATION
THAT IS NOT A CLOSE
CORPORATION
BE
A

STOCKHOLDER
IN
A
CLOSE CORPORATION?
YES, provided that said
corporation owns less than
2/3 of voting stock or voting
rights.
WHAT ENTITIES MAY NOT BE
ORGANIZED
AS
CLOSE
CORPORATIONS? (Sec. 96)

Mining
Oil
Stock Exchange
Bank
Insurance
Public Utilities

Educational Institutions
Corporations
declared
vested with public interest

DISTINGUISH CLOSE
CORPORATIONS FROM
REGULAR CORPORATIONS.
Close
"Regular
Corporati
"
on
Corporati
on
No. of
Not more
stockhold than 20
ers
(Sec. 96)

No limit

Managem Can be
Managed
ent
managed by Board

by the
of
stockhold Directors
ers (Sec.
97)
Meetings

May be
dispensed
with (Sec.
101)

Actual
meetings
are
required.

Quorum
and
Voting

Greater
quorum
and voting
requireme
nts
allowed.
(Sec. 97)

Pre-

Extends to Does not

emptive
right

all stock, extend to

including treasury
treasury
shares.
shares
(Sec. 102)

Buy-back Must
May be <
of shares be > par par value
value
(Sec. 105)
Resolutio SEC has
n of
the power
deadlocks to
arbitrate
disputes
in case of
deadlocks
,
upon
written

petition by
any
stockhold
er. (Sec.
104) This
includes
the power
to appoint
a
provisiona
l director,
as well as
to dissolve
the
corporatio
n.
Dissolutio May
be Generally
n
petitioned requires a

by
any
stockhold
er
whenever
any of the
acts of the
directors
or officers
or those in
control of
the
corporatio
n is illegal,
fraudulent,
dishonest,
oppressiv
e
or
unfairly
prejudicial
to
the

2/3 vote
of
the
stockhold
ers and a
majority
vote
of
the BOD.
(Note
however
that
in
case
of
involuntar
y
dissolutio
n under
Sec. 121,
a
corporatio
n may be

corporatio
n or any
stockhold
er,
or
whenever
corporate
assets are
being
misapplie
d
or
wasted.
(Sec. 105)

dissolved
by
the
SEC upon
filing of a
verified
complaint
and after
proper
notice
and
hearing.)

WHAT IS A PROVISIONAL
DIRECTOR? (Sec. 104)
A provisional director is an
impartial person who is neither a
stockholder nor a creditor of the
corporation or of any subsidiary

or affiliate of the corporation, and

whose qualifications, if any, may
be determined by the SEC. He
is not a receiver of the
corporation and does not have
the title and powers of a
custodian or receiver. However,
he has all the rights and powers
of a duly-elected director of the
corporation, including the right to
notice of and to vote at meetings
of directors, until such time as he
shall be removed by order of the
SEC or by all the stockholders.
(Sec. 104)
COMPARE APPRAISAL RIGHT AND
WITHDRAWAL RIGHT IN CLOSE
CORPORATIONS. (Sec. 105)

Withdraw Appraisal
al Right
Right
Type of Close
"Regular"
corporati corporatio corporatio
on
n
n
involved
When
For
any
availed of reason
(Sec.
105)

Only the
grounds
enumerat
ed in Sec.
81
and
Sec. 42

Fair
Must
value of be > par
shares
or issued
value

May be <
par or
issued
value

(Sec.
105)
Miscellaneous Provisions
(Sec. 137-149)

The SEC has the power to

issue rules and regulations
reasonably
necessary
to
enable it to perform its duties
under the Code, particularly in
the prevention of fraud and
abuses on the part of the
controlling
stockholders,
members, directors, trustees or
officers. (Sec. 143)

Whenever
the
SEC
conducts any examination of

the operations, books and

records of any corporation, the
results thereof must be kept
strictly confidential, unless the
law requires them to be made
public or where they are
necessary evidence before any
court. (Sec. 142)

All domestic and foreign

corporations doing business in
the Philippines must submit an
annual report to the SEC of its
operations, with a financial
statement of its assets and
liabilities and such other
requirements as the SEC may
impose. (Sec. 141)

No right or remedy in favor

of or against, nor any liability
incurred by, any corporation, its
stockholders,
members,
directors, trustees or officers,
may be removed or impaired
by the subsequent dissolution
of said corporation or by any
subsequent amendment or
repeal of the Code. (Sec. 145)

Violations
of
the
Corporation
Code
not
otherwise specifically penalized
therein are punishable by a fine
of not less than P 1,000.00 but
not more than P 10,000.00 or
by imprisonment for not less
than 30 days but not more than
5 years, or both, in the

discretion of the court. If the

violation is committed by a
corporation, the same may be
dissolved
in
appropriate
proceedings before the SEC.
(Sec. 144)