Corpo

CORPORATION
LAW REVIEWER (2013-2014) ATTY. JOSE MARIA G. HOFILEA

HISTORICAL BACKGROUND o A little more detailed in certain aspect. This is very
similar to the later law B.P. Blg. 68

It had piece-meal amendments during its 74-year history, but
The corporate form has been around for around 100 years and
became antiquated and not adapted to the changing times.
has established a manner in which business has been conducted

that makes it an attractive medium.
III. The Corporation Code (Batas Pambansa Bilang 68)

I. Philippine Corporate Law 1 A-sort-of codification of American The current Corporation Code of the Philippines took effect on 1
Corporate Law May 1980,
o Adopting various corporate doctrines enunciated by the
Why Drawn: When attention was drawn to the fact that there
Supreme Court under the old Corporation Law;
was no entity in Spanish law corresponding to the notion of the
o Clarified the obligations of corporate directors and
American corporation, the Philippine Commission enacted the
officers;
Corporation Law (Act No. 1459).
o Expressed in statutory language established principles
Purpose: To introduce the American corporation in the
and doctrines; and
Philippines as the standard commercial entity and to hasten the
o Provided for a chapter on close corporations.2
day when the sociedad annima of the Spanish law would be
As of date, the Securities and Exchange Commission (SEC) has
obsolete. The statute is a sort of codification of American
proposed that a new Corporation Code be adopted since it has
Corporate Law. Harden v. Benguet Consolidated Mining, 58
been 30 years since B.P. Blg. 68 has been implemented.
Phil. 141 (1933).

When the Americans came over, they noted that whatever was
IV. Proper Treatment of Philippine Corporate Law
in place at that time were unfamiliar with them. As such, they
Although we have a Corporation Code that provides for
caused the adoption of the first corporation law.
statutory principles, since Philippine Corporate Law comes from

the U.S. common law system, Philippine Corporate Law is
II. The Corporation Law (Act No. 1459)
essentially, and continues to be, a common law system and
The first corporate statute, the 1906 Corporation Law became
subject to developments in commercial developments, much of
effective on 1 April 1906.
which can be expected to happen in the world of commerce,
and some expressed jurisprudential rules that try to apply and
1
The whole body of statutory and jurisprudential rules pertaining to
2
corporations is referred to as "Corporate Law" to differentiate it from the old Corporation Code applies even to corporations organized under the old
statute known as "The Corporation Law," or Act No. 1459. Corporation Law. Castillo v. Balinghasay, 440 SCRA 442 (2004).

NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)
CORPORATION LAW REVIEWER (2013-2014) ATTY. JOSE MARIA G. HOFILEA

adopt corporate principles into the changing concepts and
mechanism of the commercial world.


CONCEPTS Partnerships and associations for private interest or purpose are
governed by the provisions of this Code concerning partnerships. (36
I. Definition (Section 2; Articles 44(3), 45, 46, and 1775, Civil Code) and 37a)

Article 46.
Section 2. Corporation defined.
Juridical persons may acquire and possess property of all kinds, as well
A corporation is an artificial being created by operation of law, having
as incur obligations and bring civil or criminal actions, in conformity
the right of succession and the powers, attributes and properties
with the laws and regulations of their organization. (38a)
expressly authorized by law or incident to its existence. (2)

Article 1775.
CIVIL CODE
Associations and societies, whose articles are kept secret among the
Article 44. The following are juridical persons:
members, and wherein any one of the members may contract in his
1. The State and its political subdivisions;
own name with third persons, shall have no juridical personality, and

shall be governed by the provisions relating to co-ownership. (1669)
2. Other corporations, institutions and entities for public interest or

purpose, created by law; their personality begins as soon as they have
Juridical persons are those who have an identity granted to it by
been constituted according to law;
law with powers granted and subject to the law.

o As such, they can own property and conduct business as
3. Corporations, partnerships and associations for private interest or
well as sue and be sued.
purpose to which the law grants a juridical personality, separate and
o Juridical capacity the capacity/ability to enter into
distinct from that of each shareholder, partner or member. (35a)
legal relations and be bound by them.

Article 45. A corporation is an:
Juridical persons mentioned in Nos. 1 and 2 of the preceding article are o Artificial being essentially means that it has a
governed by the laws creating or recognizing them. fictional existence.
o Created by operation of law absence of the law
Private corporations are regulated by laws of general application on would mean that a corporation cannot exist.
the subject. o Invested by law upon coming into existence with a
personality separate and distinct from the persons
composing it, and from any other legal entity to which it


may be related. PNB v. Andrada Electric & Engineering strong legal personality of the corporation is an
Co., 381 SCRA 244 (2002).1 attribute that has made it most attractive to
businessmen when compared to other media.4
II. FOUR (4) CORPORATE ATTRIBUTES BASED ON SECTION 2: (d) Creature of Limited Powers: It has only such powers,
(a) An Artificial Being: It has juridical capacity to contract and attributes and properties as are expressly authorized by law or
enter into legal relationships. incident to its existence.
It is a basic postulate that before a corporation may
o o As opposed to a natural person, who has the ability to
acquire juridical personality, the State must give its exercise any power and enter into any business activity
consent either in the form of a special aw or a general and the only limitation would be that an individual has
enabling act.2 no right to enter into an act or transaction that is
(b) Creature of the Law: It is created by operation of law and not contrary to law, morals and public policy.5
by mere agreement. A corporation has no powers except for those which are:
o There must first be an underlying contract among the o Expressly conferred on it by the Corporation Code
individuals forming the corporation upon which the o Found in its charter, and
state grant may be conferred. Therefore, you have an o Those that are implied by or are incidental to its
inter-play of State grant and contractual relations existence.
between the parties. Which principle has precedence in It exercises its powers through its Board of Directors and/or its
resolving conflict would depend upon the public duly authorized officers and agents. Pascual and Santos, Inc. v.
interest or issue to be resolved.3 The Members of the Tramo Wakas Neighborhood Assn. Inc.,
(c) Strong Juridical Personality: It has a right of succession. 442 SCRA 438 (2004).6
o The corporation has the capacity for continuous
existence despite the death or replacement of its
shareholders or members, for it has a personality

separate and distinct from those who compose it. The 4
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.
(2013 ed.). Manila, Philippines: Rex Book Store.
1 5
Construction & Dev. Corp. of the Phils. v. Cuenca, 466 SCRA 714 (2005); EDSA Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.
Shangri-La Hotel and Resorts, Inc. v. BF Corp., 556 SCRA 25 (2008). (2013 ed.). Manila, Philippines: Rex Book Store.
2 6
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. De Liano v. Court of Appeals, 370 SCRA 349 (2001); Monfort Hermanos
(2013 ed.). Manila, Philippines: Rex Book Store. Agricultural Dev. Corp. v. Monfort III, 434 SCRA 27 (2004); United Paragon
3
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. Mining Corp. v. Court of Appeals, 497 SCRA 638 (2006); Cebu Bionic Builders
(2013 ed.). Manila, Philippines: Rex Book Store. Supply, Inc. v. DBP, 635 SCRA 13 (2010).


NOTE: Corporations are products of relationships. They cannot come Between and among the shareholders in a common
into force unless persons agree to form one, and unless the State agrees venture
and allows them to form a corporation. Since a corporation is formed by
relationship, it does not have a body of its own and as such requires that (c) EXTRA-CORPORATE LEVEL, which views the relationship
its actions be made through its agents. The officers of a corporation are between the corporation and third-parties or outsiders,
the ones who smell, touch and see for the corporation and it is through essentially governed by Contract Law and Labor Law.
them that the corporation reaches out to the real world.
Relationship Governing Law
III. TRI-LEVEL EXISTENCE OF THE CORPORATION: Between the corporation and its employees Labor Law
(a) Assets-Only Level: The corporation is an aggregation of Between the corporation and those it contracts Contract Laws
Assets and Resources and transacts with
(b) Business Enterprise Level: The corporations primary Between the corporation and the publics it Torts or Quasi-Delict
purpose is to pursue business. affects with its enterprise Laws
(c) Juridical Entity Level: The corporation is a medium of
pursuing a business enterprise. V. THEORIES ON THE FORMATION OF CORPORATION

IV. TRI-LEVEL RELATIONSHIPS IN THE CORPORATE SETTING: A. Theory of Concession: Tayag v. Benguet Consolidated, 26 SCRA 242
(a) JURIDICAL ENTITY LEVEL, which treats of the aspects of the (1968).
State-corporation relationship.
(b) INTRA-CORPORATE LEVEL, which considers that the corporate Tayag v. Benguet Consolidated
setting is at once a contractual relationship on four (4) levels:
Facts: Idonah Slade Perkins owned two stocks certificates under
Relationship Governing Benguet Consolidated Inc. (a Philippine corporation). Perkins died in
Law New York in 1960, and the stock certificates were held in trust by
Between the corporation and its agents/representatives to Law on County Trust Company [CTC] of New York, who was the domiciliary
act in the real world, i.e., directors and officers Agency administrator of her estate. On the other hand, Renato D. Tayag was
Between the corporation and its shareholders or members appointed ancillary administrator of Perkins properties in the
Between the shareholders and the corporate directors, Philippines. A dispute arose between the domiciliary administrator in
trustees and officers New York and the ancillary administrator in the Philippines as to which


of them was entitled to the possession of the stock certificates. creature without any existence until it has received the imprimatur of
the State acting according to law. It is logically inconceivable therefore
The Court of First Instance of Manila ordered CTC to produce and that it will have rights and privileges of a higher priority than that of its
deposit the certificates with Tayag, but the former refused. Tayag was creator. More than that, it cannot legitimately refuse to yield obedience
able to have a court order issued declaring the certificates lost and new to acts of its state organs, specifically the judiciary. It is not immune
ones should be issued by Benguet Consolidated Inc. However, the latter from judicial control.
refused because as far as it was concerned, the certificates were not lost
being in the possession of CTC. Theory of Concession Since a corporation is created by law,
then its existence and actions concedes to the law.
Issue: Whether or not the lower court erred in declaring the certificates o The theory of concession, therefore, looks at a
as lost. corporation simply as a creature of the State and of
limited powers and capabilities, completely within the
Held: NO. Since there was a refusal by the domiciliary administrator in control of the State.1
New York to deliver the shares of stocks of Benguet to the ancillary To organize a corporation that could claim a juridical personality
administrator in the Philippines, there was nothing unreasonable or of its own and transact business as such, is not a matter of
arbitrary in considering them as lost and requiring the appellant to issue absolute right, but a privilege which may be enjoyed only under
new certificates in lieu thereof. Moreover, the view adopted by Benguet such terms as the State may deem necessary to impose. cf. Ang
Consolidated that it cannot issue new certificates because doing so Pue & Co. v. Section of Commerce and Industry, 5 SCRA 645
under the circumstances would be a violation of its by-laws is fraught (1962).
with implications at war with the basic postulates of corporate theory. A It is a basic postulate that before a corporation may acquire
corporation is an artificial being created by operation of law. To assert juridical personality, the State must give its consent either in the
that it can choose which court order to follow and which to disregard is form of a special law or a general enabling act, and the
to confer upon it not autonomy which may be conceded but license procedure and conditions provided under the law for the
which cannot be tolerated. It is to argue that it may, when so minded, acquisition of such juridical personality must be complied with.
overrule the state, the source of its very existence; it is to contend that Although the statutory grant to an association of the powers to
what any of its governmental organs may lawfully require could be purchase, sell, lease and encumber property can only be
ignored at will. So extravagant a claim cannot possibly merit approval. construed the grant of a juridical personality to such an

1
Doctrine: A corporation as known to Philippine jurisprudence is a Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.


associationnevertheless, the failure to comply with the enterprise, which by these very qualities and operations
statutory procedure and conditions does not warrant a finding acquires an entity of its own, recognized by law.2
that such association acquired a juridical personality, even when The theory draws its vitality from the fact that it is not legal
it adopts constitution and by-laws. Intl Express Travel & Tour fiction alone that creates a corporate entity. Any State grant
Services, Inc. v. CA, 343 SCRA 674 (2000). must presuppose the existence of consent or common venture
All corporations, big or small, must abide by the provisions of among those who will form the corporation.
the Corporation Code; even a simple family corporation cannot o Although it is within the power of the State to give such
claim an exemption nor can it have rules and practices other grant or to deny it, the corporate fiction cannot be
than those established by law. Torres v. Court of Appeals, 278 created unless there is an enterprise or group upon
SCRA 793 (1997). whom it would be conferred.
o But once granted, and the entity acquires juridical
B. Theory of Enterprise Entity: BERLE, 47 COLUMBIA LAW REV. 343 personality, it does not mean that the group, as
(1947) distinguished from the juridical entity, becomes a
Theory of Enterprise Entity The enterprise theory hinges creature of the State, but actually becomes a creature
itself on the fact that there can be no corporate existence of its own volition and maintains either singly or
without persons to compose it; there can be no association collectively their inherent rights under the law, which
without associates.1 may tend to project to their business dealings done
o The entity commonly known as "corporate entity" takes through the corporation.
its being from the reality of the underlying enterprise, A corporation is a creation of law and a creation of a set of
formed or in formation; that the state's approval of the relationships between individuals.
corporate form sets up a prima facie case that the o It takes 5 people to form a corporation and it is formed
assets, liabilities and operations of the corporation are by the agreement of the individuals to establish the
those of the enterprise. But that where the corporate corporation.
entity is defective, or otherwise challenged, its o Even as a corporation has an identity separate from the
existence, extent and consequences may be determined individuals, you cannot do away completely with the
by the actual existence and operations of the underlying notion that there are individuals behind the
corporation.

1 2
Arnold v. Willets & Patterson, Ltd. 45 Phil. 634 (1923). Berle, The Theory of Enterprise, 47 COL. L. REV. No. 3 (April, 1947).


o As such, in cases where there is defect in the corporate corporate assets and properties. Stockholders of F. Guanzon
identity, your recourse is to the individuals. This is why and Sons, Inc. v. Register of Deeds of Manila, 6 SCRA 373
the Supreme Court has ruled that the corporation is (1962).
entitled to rights because individuals form the Execution pending appeal may be allowed when the prevailing
corporation and these individuals have rights. party is already of advanced age and in danger of extinction,
A corporation is but an association of individuals, allowed to but not in this case where the winning party is a corporation.
transact under an assumed corporate name, and with a distinct [A] juridical entitys existence cannot be likened to a natural
legal personality. In organizing itself as a collective body, it personits precarious financial condition is not by itself a
waives no constitutional immunities and perquisites appropriate compelling circumstance warranting immediate execution and
to such a body. PSE v. Court of Appeals, 281 SCRA 232 (1997). does not outweigh the long standing general policy of enforcing
Corporations are composed of natural persons and their only final and executory judgment. Manacop v. Equitable
separate corporate personality is not a shield for the PCIBank, 468 SCRA 256 (2005).
commission of injustice and inequity, such as to avoid the As distinguished from a partnership, it has a strong legal
execution of the property of a sister company. Tan Boon Bee & personality having a separate and distinct personality from the
Co. v. Jarencio, 163 SCRA 205 (1988). members composing it, unaffected by the death, resignation,
insolvency of any of its stockholders or members. Its credit-
VI. ADVANTAGES AND DISADVANTAGES OF CORPORATE FORM: worthiness and the certainty of long-term contractual dealings
with a stable person, are strengthened by such continuity of
A. Four Advantageous Characteristics of Corporate Medium: existence.1
1. STRONG AND SOLEMN JURIDICAL PERSONALITY (Section 2) o A corporation can survive the death of its stockholders
A corporation is an entity separate and distinct from its or members (i.e. right of succession). In contrast to a
stockholders. While not in fact and in reality a person, the law partnership where the death of a partner dissolves the
treats the corporation as though it were a person by process of partnership.
fiction or by regarding it as an artificial person distinct and The shareholders cannot be held liable as an individual for the
separate from its individual stockholders. Remo, Jr. v. IAC, 172 liabilities of the corporation (see LIMITED LIABILITY TO
SCRA 405 (1989). INVESTORS AND OFFICERS).
The transfer of the corporate assets to the stockholders is not in o The function of the corporation is to absorb the risk.
the nature of a partition among co-owners but is a conveyance
1
from one party to another. Stockholders are not co-owners of Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.


2. CENTRALIZED MANAGEMENT (Section 23) stockholders approval for certain specific acts. Great Asian
Sales Center Corp. v. Court of Appeals, 381 SCRA 557 (2002).
Section 23. The board of directors or trustees. Shareholders are not agents of the corporation, nor can they
Unless otherwise provided in this Code, the corporate powers of all bind the corporations, unlike in a partnership setting, where
corporations formed under this Code shall be exercised, all business each partner may bind the partnership, even without the
conducted and all property of such corporations controlled and held knowledge of the other partners.1
by the board of directors or trustees to be elected from among the o Therefore, in its legal relationship, a corporation
holders of stocks, or where there is no stock, from among the presents a more stable and efficient system of
members of the corporation, who shall hold office for one (1) year governance and dealings with third parties, since
until their successors are elected and qualified. (28a) management prerogatives are centralized in its board of
directors.2
Every director must own at least one (1) share of the capital stock of 3. LIMITED LIABILITY TO INVESTORS AND OFFICERS
the corporation of which he is a director, which share shall stand in his One of the advantages of the corporation is the limitation of an
name on the books of the corporation. Any director who ceases to be investors liability to the amount of investment, which flows
the owner of at least one (1) share of the capital stock of the from the legal theory that a corporate entity is separate and
corporation of which he is a director shall thereby cease to be a distinct from its stockholders. San Juan Structural and Steel
director. Trustees of non-stock corporations must be members Fabricators, Inc. v. CA, 296 SCRA 631 (1998).
thereof. A majority of the directors or trustees of all corporations It is hornbook law that corporate personality is a shield against
organized under this Code must be residents of the Philippines. personal liability of its officersa corporate officer and his
spouse cannot be made personally liable under a trust receipt
As can be gleaned from Section 23 of Corporation Code It is the where he entered into and signed the contract clearly in his
board of directors or trustees which exercises almost all the official capacity. Consolidated Bank and Trust Corp. v. Court of
corporate powers in a corporation. Firme v. Bukal Enterprises Appeals, 356 SCRA 671 (2001).3
and Dev. Corp., 414 SCRA 190 (2003).
1
o Management is lodged essentially with the board of Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.
directors. (2013 ed.). Manila, Philippines: Rex Book Store.
2
The exercise of corporate powers rest in the Board of Directors, (2013 ed.). Manila, Philippines: Rex Book Store.
3
save in those instances where the Corporation Code requires Ever Electrical Manufacturing, Inc. (EEMI) v. Samahang Manggagawa ng Ever
Electrical/NAMAWU Local 224, 672 SCRA 562 (2012); Gotesco Properties, Inc. v.
Fajardo, 692 SCRA 319 (2013).


Obligations incurred by the corporation acting through its laws. Shares of stock so issued are personal property and may be
directors, officers and employees, are its sole liabilities. transferred by delivery of the certificate or certificates endorsed by
Malayang Samahan ng mga Manggagawa sa M. Greenfield v. the owner or his attorney-in-fact or other person legally authorized to
Ramos, 357 SCRA 77 (2001). make the transfer. No transfer, however, shall be valid, except as
However, the statutorily granted privilege of a corporate veil between the parties, until the transfer is recorded in the books of the
may be used only for legitimate purposes. On equitable corporation showing the names of the parties to the transaction, the
considerations, the veil can be disregarded when it is utilized as date of the transfer, the number of the certificate or certificates and
a shield to commit fraud, illegality or inequity; defeat public the number of shares transferred.
convenience; confuse legitimate issues; or serve as a mere alter
ego or business conduit of a person or an instrumentality, No shares of stock against which the corporation holds any unpaid
agency or adjunct of another corporation.1 claim shall be transferable in the books of the corporation. (35)
Where the creditor of the corporation sues not only the
company but also all stockholders to reach their unpaid Transfer of shares is a matter of right of the holder. The
subscription which appear to be the only visible assets of the corporation cannot prevent such transfer. You need to have to
company, then the controlling doctrine is that a stockholder is exit from the corporation.
personally liable for the financial obligations of the corporation o It is the inherent right of the stockholder to dispose of
to the extent of his unpaid subscription. Halley v. Printwell, his shares of stock (which he owns as any other
Inc. 649 SCRA 116 (2011). property of his) anytime he so desires. Remo, Jr. v. IAC,
4. FREE-TRANSFERABILITY OF UNITS OF OWNERSHIP (SHARES) 172 SCRA 405 (1989); PNB v. Ritratto Group, Inc., 362
FOR INVESTORS (Section 63) SCRA 216 (2001).
Authority granted to regulate the transfer of its stock does not
Section 63. Certificate of stock and transfer of shares. empower the corporation to restrict the right of a stockholder
The capital stock of stock corporations shall be divided into shares for to transfer his shares, but merely authorizes the adoption of
which certificates signed by the president or vice president, regulations as to the formalities and procedure to be followed
countersigned by the secretary or assistant secretary, and sealed with in effecting transfer. Thomson v. Court of Appeals, 298 SCRA
the seal of the corporation shall be issued in accordance with the by- 280 (1998).
o If the transfer would cause violations of the law (such as
the ratio requirement for local-foreign holdings), then
1


the corporation may restrict the right transfer of the Article 1775 of the Civil Code provides that associations and
holders shares. societies, whose articles are kept secret among the members,
However, the system of free transferability of the units of and wherein any one of the members may contract in his own
investments in the corporate setting presumes a well-developed name with third persons, shall have no juridical personality, and
market for shares of stocks.1 shall be governed by the provisions relating to co-ownership.
By provision of law, while it is true that in so far as the buyer
and seller is concerned the sale (and transfer of the certificates) B. Disadvantages of the Corporate Medium:
is made by meeting of the minds, there is a provision in the law Note on disadvantages: Anything can be abused. Anything can
that before such sale is binding to the whole word it must be be to a devious mind be used for wrongdoing.
recorded in the books of the corporation. o To a large extent, the corporate medium cannot be
5. Advantages Over Unregistered Associations used to solve all needs, but the disadvantages have a lot
A corporation established in accordance with the Corporation to do with the manner in which it is being used.
Code has benefits or advantages over that of an unregistered o It is a tool to do business, but not to commit illegality.
association. These advantages are: It enjoys perpetual 1. ABUSE OF CORPORATE MANAGEMENT; BREACH OF TRUST
succession under its corporate name and in an artificial form; it There is ordinarily lack of personal element in view of the
has the capacity to take and grant property, and contract transferability of shares, and the vesting of management
obligations; it can sue and be sued in its corporate name as a powers in the Board of Directors who may be professional
juridical person; it has the capacity to receive and enjoy managers. This has spawned corporate irresponsibility under
common grants of privileges and immunities; and its the theory that those vested with corporate powers have no
stockholders or members have generally no personal liability personal or proprietary stake in the corporate business
beyond the value of their shares. 2 The advantages of the enterprise.4
corporation over unregistered association is subject to the rules 2. ABUSE OF LIMITED LIABILITY FEATURE
pertaining to the corporation by estoppel doctrine.3 The limited liability feature of the corporation has often been
abused by business in order to avoid having to provide
adequate protection and compensation for victims of the
business ventures they undertake.
1
2
SEC Opinion, 26 June 1989, XIII SEC QUARTERLY BULLETIN, 19-20 (No. 3, Sept.
4
1989) Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.
3
See Chapter 5 on Corporate Contract Law. (2013 ed.). Manila, Philippines: Rex Book Store.


This has been countered by the development of jurisprudence Sole proprietorships are less saddled with the many
of the doctrine of piercing the veil of corporate fiction. requirements and regulations which corporations are often
3. HIGH COST OF MAINTENANCE OF THE CORPORATE MEDIUM subjected to by law.
The corporation is relatively complicated in formation and The owner is in command of his whole business and he stands
management. When compared to other media like the single to lose as much as he puts in and even more to the extent of all
proprietorship or the partnership, the corporation entails his personal holdings.
relatively high cost of formation and operation. There is a Sole proprietorships work well only for carrying-on simple or
greater degree of governmental control and supervision than in small business endeavors, and do not function well in cases of
other forms of business organization.1 large enterprises which require huge capital investments and
4. DOUBLE TAXATION. specialized management skills.
Dividends received by individuals from domestic corporations
are subject to final 10% tax for income earned on or after 01 B. Partnerships and Other Associations (Arts. 1768 and 1775, Civil
January 1998 (Section 24(B)(2), 1997 NIRC) Code)
Inter-corporate dividends between domestic corporations,
however, are not subject to any income tax (Section 27(D)(4), Partnership Corporation
1997 NIRC) Separate and distinct juridical personality
There is re-imposition of the 10% improperly accumulated The withdrawal, death or A corporation has a stronger legal
earnings tax for holding companies (Section 29, 1997 NIRC). insolvency of any partner would personality, enabling it to continue
automatically bring about the despite the death, insolvency or
VII. COMPARED WITH OTHER BUSINESS MEDIA dissolution of the partnership. withdrawal of any of its
stockholders or members.
A. Sole Proprietorships Partners are liable even with their Limited liability of investors
A sole proprietorship is not vested with juridical personality to personal properties
file or defend an action. Excellent Quality Apparel, Inc. v. Win Every partner is an agent capable Only the Board of Directors or
Multiple-Rich Builders, Inc., 578 SCRA 272 (2009). of binding the partnership constituted agents can bind the
corporation

There is a flexibility that partnerships have over corporations.
1


o The corporation is required to have a primary purpose owners of the aircrafts and were not privy to the chattel mortgage and
and this should be specified. In this sense, it is less so it cannot be foreclosed.
flexible than partnerships since deviation from the
primary purpose would make the act ultra vires. Issue: Whether or not Bormaheco, Maglana and the Cervanteses are
"Can a Defective Attempt to Form a Corporation Result at Least liable to share the obligations incurred by Lim, as de facto partners, in
in a Partnership? view of the failed incorporation.
o Pioneer Insurance v. Court of Appeals, 175 SCRA 668
(1989). Held: NO. Lim never had the intention to form a corporation with the
o Lim Tong Lim v. Philippine Fishing Gear Industries, Inc., respondents despite his representations to them. This gives credence to
317 SCRA 728 (1999). the cross-claims of the respondents to the effect that they were induced
and lured by Petitioner to make contributions to a proposed corporation
Pioneer Insurance v. Court of Appeals which was never formed because the petitioner reneged on their
agreement when Lim executed the chattel mortgage on the aircrafts
Facts: Jacob S. Lim was engaged in the airline business as owner- without the knowledge nor consent of Bormaheco, et al. The record
operator of Southern Air Lines [SAL]. He entered into a sales contract shows that the petitioner was acting on his own and not in behalf of his
with Japan Domestic Airlines [JDA] for the purchase of 2 DC-3A Type other would-be incorporators in transacting the sale of the airplanes
aircrafts and necessary spare parts. Pioneer Insurance and Surety and spare parts. Therefore, Bormaheco et al cannot be held liable to
Corporation became a surety in behalf of Lim. To pay for the aircrafts, contribute and share the obligation with Lim.
Lim used funds contributed by Bormaheco, Francisco and Modesto
Cervantes & Constancio Maglana to a new corporation proposed by Lim Doctrine: When parties come together intending to form a corporation,
to expand his airline business. The 3 contributors also executed 2 but no corporation is formed due to some legal cause, then:
indemnity agreements in favor of Pioneer. The agreements stipulated General Rule: Parties who had intended to participate or
that the indemnitors principally bind themselves as surety in favor of actually participated in the business affairs of the proposed
Pioneer. Lim, in behalf of SAL, also then executed a registered deed of corporation would be considered as partners under a de facto
chattel mortgage over the aircrafts in favor of Pioneer, as security for partnership, and would be liable as such in an action for
the latters suretyship. Lim however defaulted on his subsequent settlement of partnership obligations
installment payments. JDA went after Pioneer, the latter paying 300k. Exception: Parties who took no part except to subscribed for
Pioneer then filed for extrajudicial foreclosure of the chattel mortgage. stock in a proposed corporation, do not become partners with
The Cervanteses and Maglana however alleged that they were co- other subscribers who engaged in business under the name of


the pretended corporation, and are not liable for action for would have been inconceivable for Lim to involve himself so much in
settlement of the alleged partnership contribution. buying the boat but not in the acquisition of the aforesaid equipment,
without which the business could not have proceeded. Also, under the
Lim Tong Lim v. Philippine Fishing Gear Industries, Inc. doctrine of corporation by estoppel, all those who benefited from the
transaction made by the ostensible corporation, despite knowledge of
Facts: On behalf of "Ocean Quest Fishing Corporation," Antonio Chua its legal defects, may be held liable for contracts they impliedly assented
and Peter Yao entered into a contract for the purchase of fishing nets of to or took advantage of.
various sizes from the Philippine Fishing Gear Industries, Inc. They
claimed that they were engaged in a business venture with Petitioner Doctrine:
Lim Tong Lim, who however was not a signatory to the agreement. The As far as Lim was concerned, there was a corporate entity and Lim was
buyers, however, failed to pay for the fishing nets and the floats; hence, allowing himself to be represented as part of the corporation. As such,
private respondents filed a collection suit against Chua, Yao and there is corporation by estoppel.
Petitioner Lim Tong Lim in their capacities as general partners. The
complaint alleged that "Ocean Quest Fishing Corporation" was a Harmonize: You can be held liable as a partner if you participated
nonexistent corporation and attachment was made on the fishing nets heavily and there was some form of participation on your part.
on board F/B Lourdes.
C. Joint Ventures
Issue: Whether or not by their acts, Lim, Chua, and Yao could be Joint venture is an association of persons or companies jointly
deemed to have entered into a partnership. undertaking some commercial enterprise;
Generally all contribute assets and share risks.
Held: YES. From the factual findings of both lower courts, it is clear that It requires a community of interest in the performance of the
Chua, Yao and Lim are partners. In their Compromise Agreement, they subject matter, a right to direct and govern the policy in
subsequently revealed their intention to pay the loan with the proceeds connection therewith, and duty, which may be altered by
of the sale of the boats, and to divide equally among them the excess or agreement to share both in profit and losses. Kilosbayan, Inc. v.
loss. That the parties agreed that any loss or profit from the sale and Guingona, Jr., 232 SCRA 110 (1994).
operation of the boats would be divided equally among them also Under Philippine law, a joint venture is a form of partnership
shows that they had indeed formed a partnership. Moreover, it is clear and should thus be governed by the law of partnerships, which
that the partnership extended not only to the purchase of the boat, but would then include the features of separate juridical
also to that of the nets and the floats in furtherance of their business. It


personality, mutual agency among the co-venturers, and Trust relationship is centered upon properties, and which places
unlimited liability.1 naked titled in the trustee, and beneficial title in the
beneficiary.2
D. Cooperatives (Article 3, R.A. No. 6938)
F. Sociedades Annimas
Cooperative Corporation A sociedad annima was considered a commercial partnership
Separate and distinct juridical personality where upon the execution of the public instrument in which its
Limited liability of investors articles of agreement appear, and the contribution of funds and
Primary objective of every cooperative is self-help: to Organized for personal property, becomes a juridical person an artificial
provide goods and services to its members and thus profit being, invisible, intangible, and existing only in contemplation of
enable them to attain increased income and savings law with power to hold, buy, and sell property, and to sue
Governed by principles of democratic control where Centralized and be sued a corporation not a general co-partnership
the members in primary cooperatives shall have equal management nor a limited co-partnership . . . The inscribing of its articles of
voting rights on a one-member-one-vote principle agreement in the commercial register was not necessary to
make it a juridical person; such inscription only operated to
Cooperatives are established to provide a strong social and show that it partook of the form of a commercial corporation.
economic organization to ensure that the tenant-farmers will Mead v. McCullough, 21 Phil. 95 (1911).
enjoy on a lasting basis the benefits of agrarian reforms. Corpuz The sociedades annimas were introduced in Philippine
v. Grospe, 333 SCRA 425 (2000). jurisdiction on 1 December 1888 with the extension to
Philippine territorial application of Articles 151 to 159 of the
E. Business Trusts (Article 1442, Civil Code) Spanish Code of Commerce. Those articles contained the
As compared to a corporation, a business trust is simply a deed features of limited liability and centralized management granted
of trust which is easier and less expensive to constitute for it is to a juridical entity. But they were more similar to the English
not bound by any legal requirements like the former. It does not joint stock companies than the modern commercial
have a separate juridical personality, and is mainly governed by corporations. Benguet Consolidated Mining Co. v. Pineda, 98
contractual doctrines and the common law principles on trust. Phil. 711 (1956).

1 2
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.
(2013 ed.). Manila, Philippines: Rex Book Store. (2013 ed.). Manila, Philippines: Rex Book Store.


The old Corporation Law recognized the difference between
sociedades annimas and corporations and the Court will not
apply legal provisions pertaining to the latter to the former.
Phil. Product Co. v. Primateria Societe Anonyme, 15 SCRA 301
(1965).

G. Cuentas En Participacion
A cuentas en participacion is an accidental partnership
constituted in a manner that its existence was only known to
those who had an interest in the same, there being no mutual
agreement between the partners, and without a corporate
name indicating to the public in some way that there were
other people besides the one who ostensibly managed and
conducted the business, governed under Article 239 of the Code
of Commerce.
Those who contract with the person under whose name the
business of such partnership of cuentas en participacion is
conducted, shall have only a right of action against such person
and not against the other persons interested, and the latter, on
the other hand, shall have no right of action against third person
who contracted with the manager unless such manager formally
transfers his right to them. Bourns v. Carman, 7 Phil. 117
(1906).


NATURE AND ATTRIBUTES OF A CORPORATION
B. Examples

I. NATURE OF POWER TO CREATE A CORPORATION (Section 16, Article P.D. 1717 creating New Agrix, Inc. violated the constitutional
XII, 1987 Constitution) prohibition on the formation of a private corporation by special
legislative act which is not a GOCC, since NDC was merely
required to extend a loan to the new corporation, and the new
1987 CONSTITUTION OF THE PHILIPPINES
stocks of the corporation were to be issued to the old investors
Section 16 (Article XII)
and stockholders of the insolvent Agrix upon proof of their
The Congress shall not, except by general law, provide for the
claims against the abolished corporation. NDC v. Philippine
formation, organization, or regulation of private corporations.
Veterans Bank, 192 SCRA 257 (1990).
Government-owned or controlled corporations may be created or
established by special charters in the interest of the common good and PNRC which was constituted under a special law, is not a GOCC
subject to the test of economic viability. because it is not by its charter owned by the Government,
although it is intended to do public functions, it is owned by the

private sector. Consequently, the PNRC Charter, insofar as it
A. Main Point
creates the PNRC as a private corporation and grants it
Congress cannot enact a law creating a private corporation with
corporate powers, is void for being unconstitutional. The other
a special charter, and it follows that Congress can create
provisions of the PNRC Charter remain valid as they can be
corporations with special charters only if such are GOCCs.
considered as recognition by the State that the unincorporated
Feliciano v. Commission on Audit, 419 SCRA 363 (2004).
PNRC is the local National Society of the International Red Cross
o When a government passes a charter for the creation of
and Red Crescent Movement, and thus entitled to the benefits,
a GOCC, implicit in that is that it has to remain as a
exemptions and privileges set forth in the PNRC Charter. Liban
GOCC. If it is transformed into a private corporation,
v. Gordon, 593 SCRA 68 (2009).
then it must divest itself of the special charter it holds.

o Doubts whether the charter would be valid if the shares
II. CORPORATION AS A PERSON:
of the GOCC are allowed to be sold, but it is allowed to
A corporation is but an association of individuals under an
retain its charter.
assumed name and with a distinct legal entity. In organizing
The Constitution explicitly prohibits the creation and regulation
itself as a collective body it waives no constitutional immunities
by special laws of private corporations, except for government-
appropriate for such body. Its property cannot be taken without
owned or controlled corporations (GOCCs). Veterans Federation
compensation; can only be proceeded against by due process of
of the Philippines v. Reyes, 483 SCRA 526 (2006).


law; and is protected against unlawful discrimination. Bache & While an individual may lawfully refuse to answer incriminating
Co. (Phil.), Inc. v. Ruiz, 37 SCRA 823 (1971). questions unless protected by an immunity statute, it does not
follow that a corporation, vested with special privileges and
A. Entitled to Due Process and Equal Protection franchises, may refuse to show its hand when charged with an
The due process clause is universal in its application to all abuse of such privilege. Hale v. Henkel, 201 U.S. 43 (1906).1
persons, and covers private corporations within the scope of the Since a corporation is made up of people, there is nothing its
guaranty insofar as their properties are concerned. Smith Bell & agents may say that will constitute as incriminating for the
Co. v. Natividad, 40 Phil. 136, 144 (1920). corporation. However, the members of the corporations (e.g.
corporate officers) may invoke this right.
B. Unreasonable Searches and Seizure Corporations may not be held criminally liable, but they may be
A corporation is protected by the constitutional guarantee held civilly liable.
against unreasonable searches and seizures, but its officers have o Criminal liability will attach to a corporation only when
no cause of action to assail the legality of the seizures, there is a law providing that such act constitutes
regardless of the amount of shares of stock or of the interest of corporate criminal liability.
each of them in said corporation because the corporation has a o They may be deprived of their corporate personality as
personality distinct and separate from those of said officers. penalty, but they cannot be imprisoned.
Stonehill v. Diokno, 20 SCRA 383 (1967). Atty. Hofilea Jurisprudence does indicate that corporations
A warrant of arrest cannot be issued against a corporation are not entitled to a right against self-incrimination. My own
because you cannot arrest a corporation. view is that the right against self-incrimination may ultimately
The agents of the corporation can question the validity of relate to the ultimate penalty of crimes i.e. imprisonment.
searches and seizures in behalf of such corporation. In such Perhaps this is the underlying reason of why corporations have
cases, the personality of the officers would be the personality of no right against self-incrimination.
the company.
Due Process and Equal Protection v. Self-Incrimination2
C. Not Entitled to Privilege Against Self Incrimination The denial of the right against self-incrimination from corporations does
It is elementary that the right against self-incrimination has no

application to juridical persons. Bataan Shipyard & 1
Wilson v. United States, 221 U.S. 361 (1911); United States v. White, 322 U.S.
Engineering v. PCGG, 150 SCRA 181 (1987). 694 (1944).
2


not really invite state authorities into the premises or physical privacy of Access to Courts YES.
the stockholders or members who compose the corporation; but would Right to be informed about cases YES.
deny acting individuals the right to abuse the corporate medium as a Speedy disposition of cases YES.
means to do folly. Right to form associations YES.
Freedom of Assembly MAYBE. Example: can a corporation be
On the other hand, to deny the due process rights or right against held liable where its employees take part in an illegal assembly
unreasonable searches and seizures to corporations would actually be wearing the corporate shirt?
to invite state authorities to physically intrude into corporate premises, Right against Involuntary Servitude MAYBE. What can
and therefore also intrude into the personal and business privacy of the corporations do that will constitute involuntary servitude?
stockholders or members who compose it. Right to bail NO.
Write of Habeas Corpus NO.
Perhaps that is the basis for the difference in stance by the Supreme Right against excessive fine or imprisonment for debt NO.
Court between two sets of constitutional rights with respect to Right to Travel NO.
corporations.
III. Practice of Profession
D. Bill of Rights Corporations cannot engage in the practice of a profession since
Note: The corporation as an artificial being is very close to a real person
they lack the moral and technical competence required by the
as it is allowed to possess and exercise many human rights.
PRC. ULEP v. The Legal Clinic, 223 SCRA 378 (1993).
Confidentiality/Privacy of Communication YES. Because the
A corporation engaged in the selling of eyeglasses and which
confidentiality of the communications of the corporations
hires optometrists is not engaged in the practice of optometry.
agents may involve the interest of the corporate entity.
Samahan ng Optometrists v. Acebedo International Corp., 270
Freedom of Speech YES. SCRA 298 (1997); Alfafara v. Acebedo Optical Company, 381
Right against double jeopardy YES. SCRA 293 (2002).
To be protected from ex post facto laws YES. COUNTER-REVOLUTION: Architectural professional
Freedom of Religion YES. Where the corporation is corporations allowed under Rep. Act No. 9266.
incorporated for religious purposes.
Right to information YES. IV. Liability for Torts
Protection of property from unjust taking YES. 1. A corporation must be held liable for all the contracts and
Non-impairment of Contracts YES. default that arise from those entered into by its agent within


the scope of his authority, or even those outside the scope of employee of the corporation, the corporation can be
his authority, by which has been ratified by the corporation. held liable on the principle of agency.
A corporation is civilly liable in the same manner as natural o The liability of the corporation with regard to the acts of
persons for torts, because the rules governing the liability of a its agents and employees is limited to instances where
principal for a tort committed by an agent are the same they are negligent in the performance of their official
whether the principal be a natural person or a corporation, and duties.
whether the agent be a natural or artificial person. That a oAtty. Hofilea the corporation as an artificial being
principal is liable for every tort which he expressly directs or has contact with the world through its employees and
authorizes, is just as true of a corporation as a natural person. officials.
PNB v. Court of Appeals, 83 SCRA 237 (1978). 2. The acting officer is solidarily liable with the corporation for
o It seems clear from the ruling that not every tortuous the damages resulting from his negligence as a joint-tortfeasor
act committed by an officer can be ascribed to the Corporate tort consists in the violation of a right given or
corporation as its liability, for it is reasonable to the omission of a duty imposed by law; a breach of a legal duty.
presume that in the granting of authority by the The failure of the corporate employer to comply with the duty
corporation to its agent, such a grant did not include a under the Labor Code to grant separation pay to employees in
direction to commit tortuous acts against third parties. case of cessation of operations constitutes tort and its
Only when the corporation has expressly directed the stockholder who was actively engaged in the management or
commission of such tortuous act, would the damages operation of the business should be held personally liable.
resulting therefrom be ascribable to the corporation. Sergio F. Naguiat v. NLRC, 269 SCRA 564 (1997).
And such a direction by the corporation, is manifested While in theory a hospital as a juridical entity cannot practice
either by its board adopting a resolution to such effect, medicine, in reality it utilizes doctors, surgeons and medical
as in the Philippine National Bank case, or having taken practitioners in the conduct of its business of facilitating medical
advantage of such an tortuous act the corporation, and surgical treatment. Within that reality, three legal
through its board, expressly or impliedly ratifies such an relationships crisscross: (1) between the hospital and the doctor
act or is estopped from impugning such an act. practicing within its premises; (2) between the hospital and the
o Where your company driver came into an accident with patient being treated or examined within its premises; and (3)
your car, will the company be held liable? In cases between the patient and the doctor. Regardless of its
where the natural person who committed the tort is an relationship with the doctor, the hospital may be held directly
liable to the patient for its own negligence or failure to follow


established standard of conduct to which it should conform as a committed within its premises. PSI committed a serious breach of its
corporation. Professional Services, Inc. v. Court of Appeals, 611 corporate duty when it failed to conduct an immediate investigation
SCRA 282 (2010). into the reported missing gauzes.

Professional Services, Inc. v. Court of Appeals Doctrine: Regardless of its relationship with the doctor, the hospital
may be held directly liable to the patient for its own negligence or
Facts: PSI together with Dr. Miguel Ampil and Dr. Juan Fuentes, was failure to follow established standard of conduct to which it should
impleaded by Enrique Agana and Natividad Agana (later substituted by conform as a corporation.
her heirs), in a complaint for damages for the injuries suffered by
Natividad when Dr. Ampil and Dr. Fuentes neglected to remove from V. Corporate Criminal Liability (Articles 102 and 103, Revised Penal
her body two gauzes which were used in the surgery they performed on Code):
her on April 11, 1984 at the Medical City General Hospital. PSI was
impleaded as owner, operator and manager of the hospital. REVISED PENAL CODE
Article 102. Subsidiary civil liability of innkeepers, tavernkeepers and
Issue: Whether or not PSI is liable for the negligence of Dr. Ampil. proprietors of establishments.
In default of the persons criminally liable, innkeepers, tavernkeepers,
Held: YES. For purposes of allocating responsibility in medical negligence and any other persons or corporations shall be civilly liable for crimes
cases, an employer-employee relationship exists between hospitals and committed in their establishments, in all cases where a violation of
their consultants. The Court denied the defense of PSI saying that the municipal ordinances or some general or special police regulation shall
defense raised by PSI consisted of a mere general denial of control or have been committed by them or their employees.
responsibility over the actions of Dr. Ampil. Furthermore, the hospital
was projecting Dr. Ampil as their agent. As such, under the doctrine of Innkeepers are also subsidiarily liable for the restitution of goods
apparent authority PSI was liable for the negligence of Dr. Ampil. taken by robbery or theft within their houses from guests lodging
therein, or for the payment of the value thereof, provided that such
Finally, as owner and operator of Medical City General Hospital, PSI was guests shall have notified in advance the innkeeper himself, or the
bound by its duty to provide comprehensive medical services to person representing him, of the deposit of such goods within the inn;
Natividad Agana, to exercise reasonable care to protect her from harm, and shall furthermore have followed the directions which such
to oversee or supervise all persons who practiced medicine within its innkeeper or his representative may have given them with respect to
walls, and to take active steps in fixing any form of negligence the care and vigilance over such goods. No liability shall attach in case


of robbery with violence against or intimidation of persons unless insolvency.
committed by the innkeeper's employees.
Issue: Whether or not West Coast can be held liable for libel.
Article 103. Subsidiary civil liability of other persons.
The subsidiary liability established in the next preceding article shall Held: NO. The courts here have no common law jurisdiction or powers.
also apply to employers, teachers, persons, and corporations engaged If they have any powers not conferred by statute, expressly or impliedly,
in any kind of industry for felonies committed by their servants, pupils, they would naturally come from Spanish and not from common law
workmen, apprentices, or employees in the discharge of their duties. sources. Under the Spanish criminal law and procedure, a corporation
could not have been proceeded against criminally, and as such it could
Corporations cannot be held criminally liable within Philippine not have committed a crime in which a willful purpose or a malicious
jurisdiction since there is no law relating to the practice and intent was required. Criminal actions would have been restricted or
procedure in criminal actions whereby a corporation may be limited, under that system, to the officials of such corporations and
brought to court to be proceeded against criminally. West Coast never would have been directed against the corporation itself.
Life Ins. Co. v. Hurd, 27 Phil. 401 (1914).
o Other reasons: (1) the impossibility of imposing penal Doctrine: Corporations cannot be indicted criminally because such acts
sanctions on a corporation and (2) lack of criminal require malicious intent, which a corporation cannot possess.
intent or malice since a corporation has no mind of its
own.1 A corporate officer who signs the trust receipt in behalf of the
corporation cannot be held criminally liable for the crime of
West Coast Life Ins. Co. v. Hurd estafa punished under the Revised Penal Code and prior to the
promulgation of the Trust Receipts Decree under the doctrine
Facts: A complaint for libel was filed against West Coast Life Insurance that the corporation was [not] directly required by law to do an
Co., alleging that its officers John Northcott and Manuel Grey caused to act in a given manner, and the same law makes the person who
be printed and distributed damaging circulars detrimental to the Insular fails to perform the act in the prescribed manner expressly
Life Insurance Company. The circulars represent that Insular Life was in liable criminally. Sia v. Court of Appeals, 121 SCRA 655 (1983).
a dangerous financial condition and on the point of going into BUT: The Trust Receipts Law recognizes the impossibility of
imposing the penalty of imprisonment on a corporation, hence,
if the entrustee is a corporation, the law makes the officers or
1
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. employees or other persons responsible for the offense liable to


suffer the penalty of imprisonment. Ong v. Court of Appeals, personally had committed any fraud or deceit in connection therewith
401 SCRA 6478 (2003). or that he had personally been responsible for or benefited from the
corporations failure to pay the bank the balance due under the trust
Sia v. Court of Appeals receipt.

Facts: Jose Sia is engaged in the manufacturing of Steel Office Note: If this case was decided today, Sia may be held liable because P.D.
Equipment. As president and general manager of Metal Manufacturing 115 punishes the officers of a corporation who violate the provisions of
of the Philippines, he obtained delivery of 150 M/T Cold Rolled Steel the trust receipt.
Sheets under a Trust Receipt Agreement. According to the Agreement,
he was obliged to hold the said steel sheets in trust and sell them then No criminal suit can lie against a corporation: Times, Inc. v.
turn over the proceeds to the Continental bank. However, he failed to Reyes, 39 SCRA 303 (1971).
perform such obligation, and instead refused to return the said cold BUT: A corporation can be a real-party-in-interest for the
rolled sheets or account for the proceeds thereof, causing damage to purpose of bringing a civil action for malicious prosecution for
Continental Bank. Sia was then charged of estafa. the damages incurred by the corporation for the criminal
proceedings brought against its officer. Cometa v. Court of
Issue: Whether or not Sia may be held criminally liable as an officer of Appeals, 301 SCRA 459 (1999).
the corporation. When a criminal statute forbids the corporation itself from
doing an act, the prohibition extends to the Board of Directors,
Held: NO. Sia was never intended to be equally liable as the and to each director separately and individually. People v.
corporation. Without being made so liable personally as the corporation Concepcion, 44 Phil. 129 (1922).
is, there would then be no basis for holding him criminally liable for any The existence of the corporate entity does not shield from
violation of the trust receipt. This is made clearly so upon consideration prosecution the corporate agent who knowingly and
of the fact that in the violation of the trust agreement, only the intentionally causes the corporation to commit the crime. The
corporation benefited and not Sia personally. corporation obviously acts, and can act, only by and through its
human agents, and it is their conduct which the law must deter.
Doctrine: (Concurring Opinion of Justice Teehankee) All of the acts The employee or agent of a corporation engaged in unlawful
involved were corporate acts with Sia representing the corporation as business naturally aids and abets in the carrying on of such
its president and general manager. There is not the slightest evidence business and will be prosecuted as principal if, with knowledge
that these corporate acts were unauthorized or that petitioner of the business, its purpose and effect, he consciously


contributes his efforts to its conduct and promotion [illegal and abets in the carrying on of such business and will be prosecuted as
recruitment in this case], however slight his contribution may principal if (with knowledge of the business, its purpose and effect) he
be. The Executive Secretary v. Court of Appeals, 429 SCRA 81 consciously contributes his efforts to its conduct and promotion,
(2004); People v. Tan Boon Kong, 54 Phil. 607 (1930). however slight his contribution may be.

The Executive Secretary v. Court of Appeals People v. Tan Boon Kong

Facts: The Asian Recruitment Council Philippine Chapter, Inc. (ARCO- Facts: Tan Boon Kong is the manager of the Visayan General Supply Co.
Phil.) filed a petition for declaratory relief to declare as unconstitutional Inc. in Iloilo which was engaged in the purchase and sale of sugar,
Section 2, paragraph (g), Section 6, paragraphs (a) to (j), (l) and (m), bayon, copra and other native products. In 1924, he filed a false return
Section 7, paragraphs (a) and (b), and Sections 9 and 10 of Republic Act for the purpose of taxation thereby failing to declare the amount of
No. 8042, otherwise known as the Migrant Workers and Overseas 200k and voluntarily and illegally not paying the Government as internal
Filipinos Act of 1995. revenue percentage taxes the sum of P3k, corresponding to 112 % of
said undeclared sales.
Issue: Whether or not Section 6 of R.A. No. 8042 which provides that
employees of recruitment agencies may be criminally liable for illegal Issue: Whether or not Tan Boon Kong, as manager of the company, may
recruitment is valid. be held criminally liable.

Held: YES. An employee of a company or corporation engaged in illegal Held: YES. A corporation can act only through its officers and agents and
recruitment may be held liable as principal, together with his employer, where the business itself involves a violation of law, that correct rule is
if it is shown that he actively and consciously participated in illegal that all who participate in it are criminally liable. Tan Boon Kong, being
recruitment. the author of the illegal act, must be held liable.

Doctrine: It has been held that the existence of the corporate entity Doctrine: For crimes committed by a corporation, the responsible
does not shield from prosecution the corporate agent who knowingly officers thereof would be personally liable for the crime. Officer of the
and intentionally causes the corporation to commit a crime. The corporation will be personally liable for the crime only if it is directly
corporation obviously acts, and can act, only by and through its human prohibited by law, and not if the act was merely in violation of the
agents, and it is their conduct which the law must deter. The employee agreement of parties.
or agent of a corporation engaged in unlawful business naturally aids


If the crime is committed by a corporation, the directors, Consolidated Bank v. Court of Appeals
officers, employees or other officers thereof responsible for the
offense shall be charged and penalized for the crime, precisely Facts: Continental Cement Corp obtained from Consolidated Bank letter
because of the nature of the crime and the penalty therefor. A of credit used to purchase 500,000 liters of bunker fuel oil. Respondent
corporation cannot be arrested and imprisoned; hence, cannot Corporation made a marginal deposit to petitioner. A trust receipt was
be penalized for a crime punishable by imprisonment. However, executed by respondent corporation, with respondent Gregory Lim as
a corporation may be charged and prosecuted for a crime if the signatory. Claiming that respondents failed to turn over the goods or
imposable penalty is fine. Even if the statute prescribes both proceeds, petitioner filed a complaint for sum of money before the RTC
fine and imprisonment as penalty, a corporation may be of Manila. In their answer, respondents aver that the transaction was a
prosecuted and, if found guilty, may be fined. Ching v. Secretary simple loan and not a trust receipt one, and that the amount claimed by
of Justice, 481 SCRA 602 (2006) petitioner did not take into account payments already made by them.
When a criminal statute designates an act of a corporation or a
crime and prescribes punishment therefor, it creates a criminal Issue: Whether or not Gregory Lim and his spouse can be held
offense which, otherwise, would not exist and such can be personally liable.
committed only by the corporation. But when a penal statute
does not expressly apply to corporations, it does not create an Held: NO. Petitioner's argument that respondent Corporation and
offense for which a corporation may be punished. On the other respondent Lim and his spouse are one and the same cannot be
hand, if the statute, defines a crime that may be committed by a sustained. The transactions sued upon were clearly entered into by
corporation but prescribes the penalty therefor to be suffered respondent Lim in his capacity as Executive Vice President of the
by the officers, directors, or employees of such corporation or corporation. We stress the hornbook law that corporate personality is a
other persons responsible for the offense, only such individuals shield against personal liability of its officers. Thus, we agree that
will suffer such penalty. Corporate officers or employees, respondents Gregory T. Lim and his spouse cannot be made personally
through whose act, default or omission the corporation liable since respondent Lim entered into and signed the contract clearly
commits a crime, are themselves individually guilty of the crime. in his official capacity as Executive Vice President. The personality of the
Ching v. Secretary of Justice, 481 SCRA 602 (2006). corporation is separate and distinct from the persons composing it
BUT SEE: Consolidated Bank v. Court of Appeals, 356 SCRA 671
(2003). Doctrine: Hornbook law that corporate personality is a shield against
personal liability of its officers


The owners of a corporate organization are its stockholders BUT: The statement in People v. Manero and Mambulao
and they are to be distinguished from its directors and officers. Lumber Co. v. PNB, that a corporation may recover moral
Stockholders, being basically investors in the corporation, and damages if it has a good reputation that is debased, resulting in
with the management of its business generally vested in the social humiliation is an obiter dictum. Recovery of a
Board of Directors, cannot be held liable for the criminal offense corporation would be under Articles 19, 20 and 21 of the Civil
committed on behalf of the corporation, unless they personally Code, but which requires a clear proof of malice or bad faith.
took part in the same. Espiritu v. Petron Corp., 605 SCRA 245 ABS-CBN Broadcasting Corp. v. Court of Appeals, 301 SCRA 589
(2009). (1999).
Apart from its sweeping allegation that respondents NONETHELESS: Likewise, an educational corporations claim for
misappropriated or converted its money placements, petitioner moral damages arising from libel falls under Article 2219(7) of
failed to establish the particular role or actual participation of the Civil Code, which expressly authorizes the recovery of moral
each respondent in the criminal act; neither was it shown that damages in cases of libel, slander or any other form of
they assented to its commission. It is basic that only corporate defamation, and does not qualify whether the plaintiff is a
officers shown to have participated in the alleged anomalous natural or juridical person. Therefore, a juridical person can
acts may be held criminally liable. Cruzvale, Inc. v. Eduque, 589 validly complain for libel or any other form of defamation and
SCRA 534, 546 (2009). claim for moral damages. Filipinas Broadcasting Network v.
Ago Medical and Educational Center, 448 SCRA 413 (2005).
VI. Recovery of Moral and Other Damages PREVAILING RULE: A corporation, being an artificial person and
A corporation may be sued for moral damages, but it cannot sue having existence only in legal contemplation, has no feelings,
for moral damages (except for human relations) emotions nor senses; therefore, it cannot experience physical
A corporation, being an artificial person, cannot experience suffering and mental anguish. Mental suffering can be
physical sufferings, mental anguish, fright, serious anxiety, experienced only by one having a nervous system and it flows
wounded feelings, moral shock or social humiliation which are from real ills, sorrows, and griefs of lifeall of which cannot be
basis for moral damages under Article 2217 of the Civil Code. suffered by an artificial person. Prime White Cement Corp. v.
However, a corporation may have a good reputation which, if IAC, 220 SCRA 103 (1993).1
besmirched, may be a ground for the award of moral damages.

Mambulao Lumber Co. v. Philippine National Bank, 22 SCRA 1
LBC Express, Inc. v. Court of Appeals, 236 SCRA 602 (1994); Acme Shoe,
359 (1968); APT v. Court of Appeals, 300 SCRA 579 (1998). Rubber & Plastic Corp. v. Court of Appeals, 260 SCRA 714 (1996); Solid Homes,
Inc. v. Court of Appeals, 275 SCRA 267 (1997); NPC v. Philipp Brothers Oceanic,
Inc., 369 SCRA 629 (2001); Flight Attendants and Stewards Association of the


VII. CORPORATE NATIONALITY: UNDER WHOSE LAWS INCORPORATED o Domestic corporations which are under the control of
(Section 123) nationals of the enemy country are deemed foreign
enemy corporations. Haw Pia v. China Banking Corp.,
Section 123. Definition and rights of foreign corporations. 80 Phil. 604 (1948).1
For the purposes of this Code, a foreign corporation is one formed, The 1987 Constitution provides for the Filipinization of public
organized or existing under any laws other than those of the utilities by requiring that any form of authorization for the
Philippines and whose laws allow Filipino citizens and corporations to operation of public utilities should be granted only to citizens of
do business in its own country or state. It shall have the right to the Philippines or to corporation or associations organized
transact business in the Philippines after it shall have obtained a under the laws of the Philippines at least sixty per centum of
license to transact business in this country in accordance with this whose capital is owned by such citizens. The evident purpose of
Code and a certificate of authority from the appropriate government the citizenship requirement is to prevent aliens from assuming
agency. (n) control of public utilities, which may be inimical to the national
interest. This specific provision explicitly reserves to Filipino
GENERAL RULE: The Incorporation Test citizens control of public utilities, pursuant to an overriding
o If a corporation is formed under the laws of the economic goal of the 1987 Constitution: to conserve and
Philippines, then it is a domestic corporation regardless develop our patrimony and to ensure a a self- reliant and
of who owns the company at that point. independent national economy effectively controlled by
o You look at the stockholding of the company when it Filipinos. We rule that the term capital in Section 11, Article
becomes necessary to comply with certain XII of the Constitution refers only to shares of stock entitled to
requirements of the law. vote in the election of directors, and thus in the present case
The national of whoever owns the controlling only to common shares, and also preferred shares that are
shares of a corporation is deemed to be either entitled to vote, and not the total outstanding capital stock
foreign or domestic depending on the comprising both common and non-voting preferred shares.
nationality of the controlling owner. Gamboa v. Teves, 652 SCRA 690 (2011); affirmed in Heirs of
A corporation may be a Philippine corporation Gamboa v. Teves, 682 SCRA 397 (2012).
Rachelle Anne Gutie, 11/13/13 2:36 PM
BUT not a Philippine national.
Comment [1]: Landmark case
EXCEPTION: Test Of Controlling Ownership

1
Philippines v. Philippine Airlines, 559 SCRA 252 (2008); Employees Union of Filipinas Compania de Seguros v. Christern, Huenefeld & Co., Inc., 89 Phil. 54
Bayer Phils. V. Bayer Philippines, Inc., 636 SCRA 473 (2010). (1951); Davis Winship v. Philippine Trust Co., 90 Phil. 744 (1952).


A. Exploitation of Natural Resources (Section 140; Section 2, Article XII, labor intensity of the activity, the export potential, as well as other
1987 Constitution) factors which are germane to the realization and promotion of
business and industry.
Section 140. Stock ownership in certain corporations.
Pursuant to the duties specified by Article XIV of the Constitution, the 1987 CONSTITUTION OF THE PHILIPPINES
National Economic and Development Authority shall, from time to Section 2. (Article XII)
time, make a determination of whether the corporate vehicle has All lands of the public domain, waters, minerals, coal, petroleum, and
been used by any corporation or by business or industry to frustrate other mineral oils, all forces of potential energy, fisheries, forests or
the provisions thereof or of applicable laws, and shall submit to the timber, wildlife, flora and fauna, and other natural resources are
Batasang Pambansa, whenever deemed necessary, a report of its owned by the State. With the exception of agricultural lands, all other
findings, including recommendations for their prevention or natural resources shall not be alienated. The exploration,
correction. development, and utilization of natural resources shall be under the
full control and supervision of the State. The State may directly
Maximum limits may be set by the Batasang Pambansa for undertake such activities, or it may enter into co-production, joint
stockholdings in corporations declared by it to be vested with a public venture, or production-sharing agreements with Filipino citizens, or
interest pursuant to the provisions of this section, belonging to corporations or associations at least 60 per centum of whose capital is
individuals or groups of individuals related to each other by owned by such citizens. Such agreements may be for a period not
consanguinity or affinity or by close business interests, or whenever it exceeding twenty-five years, renewable for not more than twenty-five
is necessary to achieve national objectives, prevent illegal monopolies years, and under such terms and conditions as may provided by law. In
or combinations in restraint or trade, or to implement national cases of water rights for irrigation, water supply, fisheries, or industrial
economic policies declared in laws, rules and regulations designed to uses other than the development of waterpower, beneficial use may
promote the general welfare and foster economic development. be the measure and limit of the grant.

In recommending to the Batasang Pambansa corporations, business or The State shall protect the nations marine wealth in its archipelagic
industries to be declared vested with a public interest and in waters, territorial sea, and exclusive economic zone, and reserve its
formulating proposals for limitations on stock ownership, the National use and enjoyment exclusively to Filipino citizens.
Economic and Development Authority shall consider the type and
nature of the industry, the size of the enterprise, the economies of The Congress may, by law, allow small-scale utilization of natural
scale, the geographic location, the extent of Filipino ownership, the resources by Filipino citizens, as well as cooperative fish farming, with


priority to subsistence fishermen and fish workers in rivers, lakes, including non-voting shares, would be entitled to vote.
bays, and lagoons. Therefore, in those eight case enumerated in Section 6, even
foreigners who hold non-voting shares would be entitled to
The President may enter into agreements with foreign-owned vote.1
corporations involving either technical or financial assistance for large-
scale exploration, development, and utilization of minerals, B. Ownership of Private Land (Section 7, Article XII, 1987 Constitution)
petroleum, and other mineral oils according to the general terms and
conditions provided by law, based on real contributions to the 1987 CONSTITUTION OF THE PHILIPPINES
economic growth and general welfare of the country. In such Section 7. (Article XII)
agreements, the State shall promote the development and use of local Save in cases of hereditary succession, no private lands shall be
scientific and technical resources. transferred or conveyed except to individuals, corporations, or
associations qualified to acquire or hold lands of the public domain.
The President shall notify the Congress of every contract entered into
in accordance with this provision, within thirty days from its Radstock, a foreign corporation with unknown owners whose
execution. nationalities are also unknown, is not qualified to own land in
the Philippines, and therefore also disqualified to own the rights
In order to exploit natural resources, the corporations must be to ownership of lands in the Philippinesit is basic that an
of Philippine nationality. assignor or seller cannot assign or sell something he does not
The constitutional provision does not distinguish between own at the time the ownership, or the rights to the ownership,
voting shares and non-voting shares. So that, even if the voting are to be transferred to the assignee or buyer. The assignment
shares are controlled by Filipinos, if the total shareholdings of by PNCC of the real properties to a nominee to be designated by
the company (both voting and non-voting) does not meet the Radstock is a circumvention of the constitutional prohibition
minimum 60% Filipino ownership requirement of the against a private foreign corporation owning lands in the
Constitution, such corporation would still not be qualified to Philippines. Strategic Alliance Dev. Corp. v. Radstock Securities
engage in activities that seek to exploit our natural resources. Ltd., 607 SCRA 413 (2009).
The broadness of the constitutional language by not
distinguishing voting from non-voting shares seems to square
with Section 6 of the Corporation Code, where in eight
1
fundamental corporate restructuring or transactions, all shares, Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.


Note: Atty. Hofilea the parties probably knew from the beginning If the foreign shareholdings in a landholding corporation exceed
that Radstock could not own property, and that is why they resorted to 40%, it is not the foreign stockholders ownership of the shares
an assignment set-up whereby Radstock has rights of ownership over which is adversely affected by the capacity of the corporation to
the property assigned. own landthat is, the corporation becomes disqualified to own
land. J.G. Summit Holdings, Inc. v. Court of Appeals, 450 SCRA
The registration of the donation of land to an unincorporated 169 (2005).
religious organization, whose trustees are foreigners, would The prohibition in the Constitution applies only to ownership of
violate constitutional prohibition and the refusal would not be land; it does not extend to immovable or real property as
in violation of the freedom of religion clause. The fact that the defined under Article 415 of the Civil Code. Otherwise, we
religious association has no capital stock does not suffice to would have a strange situation where the ownership of
escape the constitutional inhibition, since it is admitted that its immovable property such as trees, plants and growing fruit
members are of foreign nationalityand the spirit of the attached to the land would be limited to Filipinos and Filipino
Constitution demands that in the absence of capital stock, the corporations only. J.G. Summit Holdings, Inc. v. Court of
controlling membership should be composed of Filipino Appeals, 450 SCRA 169 (2005).
citizens. Register of Deeds of Rizal v. Ung Sui Si Temple, 97
Phil. 58 (1955). C. Public Utilities (Section 11, Article XII, Constitution)
BUT: A corporation sole being a creature prior to the
constitution, has no nationality. If a nationality is sought to be 1987 CONSTITUTION OF THE PHILIPPINES
determined, the same depends of the nationality of the majority Section 11. (Article XII)
of the lay members and not on the nationality of the sole No franchise, certificate, or any other form of authorization for the
corporator. Roman Catholic Apostolic Administrator of Davao, operation of a public utility shall be granted except to citizens of the
Inc. v. LRC and the Register of Deeds of Davao, 102 Phil. 596 Philippines or to corporations or associations organized under the laws
(1957). of the Philippines, at least sixty per centum of whose capital is owned
by such citizens; nor shall such franchise, certificate, or authorization
Note: Atty. Hofilea if 5 years from now, the population of the lay be exclusive in character or for a longer period than fifty years. Neither
members of the church is mostly Koreans, would that mean that the shall any such franchise or right be granted except under the condition
corporation sole can no longer own real property? that it shall be subject to amendment, alteration, or repeal by the
Congress when the common good so requires. The State shall
encourage equity participation in public utilities by the general public.


The participation of foreign investors in the governing body of any long as it does not operate them to serve the public. There is a
public utility enterprise shall be limited to their proportionate share in clear distinction between operation of a public utility and the
its capital, and all the executive and managing officers of such ownership of the facilities and equipment used to serve the
corporation or association must be citizens of the Philippines. public. Tatad v.Garcia, Jr., 243 SCRA 436 (1995).
o Note: Atty. Hofilea The nationality requirement
Unlike the provisions on the exploitation of natural resources, applies to anyone who operates a public utility. The
the aforequoted provisions expressly includes the place of nationality requirement does not need to be complied
incorporation test and requires that only domestic corporations with if it is merely setting up or owning facilities used to
with at least 60% of the capital stock owned by Filipinos may deliver public utilities.
own and operate public utilities in the Philippines.1
The nationality test for public utilities applies not at the time of D. Mass Media (Section 11(1), Article XVI, 1987 Constitution)
the grant of the primary franchise that makes a corporation a
juridical person, but at the grant of the secondary franchise that 1987 CONSTITUTION OF THE PHILIPPINES
authorizes the corporation to engage in a nationalized industry. Section 11. (Article XVI)
People v. Quasha, 93 Phil. 333 (1953). 1. The ownership and management of mass media shall be limited to
The primary franchise, that is, the right to exist as such, is citizens of the Philippines, or to corporations, cooperatives or
vested in the individuals who compose the corporation and not associations, wholly-owned and managed by such citizens.
Rachelle Anne Gutierrez 1/21/14 6:00 PM
in the corporation itself and cannot be conveyed in the absence
Comment [2]:
of a legislative authority to do so. The secondary franchises are The Congress shall regulate or prohibit monopolies in commercial Franchise of public utilities at least 60%
mass media when the public interest so requires. No combinations in owned, proportional management
vested in the corporation and may ordinarily be conveyed or
mortgaged under a general power granted to a corporation to restraint of trade or unfair competition therein shall be allowed. Mass Media 100% owned and managed

dispose of its property, except such special or secondary Advertising 70% owned, proportional
franchises as are charged with a public use. J.R.S. Business Corp. 2. The advertising industry is impressed with public interest, and shall management
v. Imperial Insurance, 11 SCRA 634 (1964). be regulated by law for the protection of consumers and the
The Constitution requires a franchise for the operation of a promotion of the general welfare.
public utility; however, it does not require a franchise before
one can own the facilities needed to operate a public utility so Only Filipino citizens or corporations or associations at least seventy
per centum of the capital of which is owned by such citizens shall be
1
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. allowed to engage in the advertising industry.


standards, ideals and aims of the masses.4 The term has
The participation of foreign investors in the governing body of entities also been opined to include cable television.5
in such industry shall be limited to their proportionate share in the Although the constitutional provision governing mass media
capital thereof, and all the executive and managing officers of such does not expressly include the place of incorporation test, the
entities must be citizens of the Philippines. same shall be deemed included under the same principle
governing exploitation of natural resources. In fact, the ancillary
The term "mass media" shall mean the gathering, transmission control test for mass medium under the Constitution is actually
of news, information, messages, signals, and forms of written, more stringent than in other defined areas, since it requires not
oral and all visual communication and shall embrace the print only 100% Filipino ownership of the capital stock of the
medium, radio, television, films, movies, advertising in all its corporation, but also 100%-Filipino management of the entity.6
phases, and their business managerial.1 Cable Industry: Cable TV operations shall be governed by E.O.
The distinctive features of any mass media undertaking is the No. 205 (s.1987). If CATV operators offer public
dissemination of information and ideas to the public, or a telecommunications services, they shall be treated just like a
portion thereof.2 public telecommunications entity. (NTC Memo Circular No. 8-9-
It is divided into the print media and the broadcast media; 95)
o The broadcast media includes radio and television
broadcasting in all their aspects and all other
cinematographic or radio promotion and advertising.3 4
DOJ Opinion 163, s. 1973; SEC Opinion dated 15 July 1991, XXV SEC QUARTERLY
o The term covers any medium of communication, a BULLETIN, 31 (No. 4, Dec. 1991).
5
The National Telecommunications Commission (NTC), which regulates and
newspaper, radio, motion pictures, or television,
supervises the cable television industry in the Philippines under Section 2 of
designed to reach the masses and that tends to set the Executive Order No. 436, s. 1997, has provided under NTC Memorandum
Circular No. 8-9-95, under item 920(a) thereof provides that Cable TV
operations shall be governed by E.O. No. 205, s. 1987. If CATV operators offer
public telecommunications services, they shall be treated just like a public
telecommunications entity. Under DOJ Opinion No. 95, series of 1999, the
Secretary of Justice, taking its cue from Allied Broadcasting, Inc. v. Federal
Communications Commission, 435 F. 2d 70, considered CATV as a form of
mass media which must, therefore, be owned and managed by Filipino citizens,
1
Pres. Decree 36, as amended by Pres. Decrees 191 and 197. or corporations, cooperatives or associations, wholly-owned and managed by
2
DOJ Opinion No. 120, series of 1982. Filipino citizens pursuant to the mandate of the Constitution.
3 6
Section 2, Pres. Decree 576; SEC Opinion, 24 March 1983, addressed to Justice Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.
Manuel Lazaro. (2013 ed.). Manila, Philippines: Rex Book Store.


o Cable TV is a form of mass media which must, citizens of the Philippines, is considered a Philippine National
therefore, be owned and managed by Filipino citizens, entirely. Unchuan v. Lozada, 585 SCRA 421 (2009).
or corporations, cooperatives or associations, wholly- o This espouses the Control Test
owned and managed by Filipino citizens pursuant to the
mandate of the Constitution. (DOJ Opinion No. 95, s. G. Grandfather Rule:
1999, citing Allied Broadcasting, Inc. v. Federal The "grandfather rule" is the method by which the percentage
Communications Commission, 435 F.2d 70). of Filipino equity in a corporation engaged in nationalized
Atty. Hofilea What about foreign mass media bodies that and/or partly nationalized areas of activities, provided for under
broadcast to the Philippines? Would it constitute a violation of the Constitution and other nationalization laws, is computed, in
the Constitution? Point is, its hard to determine the boundaries cases where corporate shareholders are present in the
because of technology. situation, by attributing the nationality of the second or even
subsequent tier of ownership to determine the nationality of
E. Advertising Business (Section 11(2), Article XVI, 1987 Constitution)1 the corporate shareholder.
Only Filipino citizens or corporations or associations at least In recognizing and applying the grandfather rule, the SEC has
70% of the capital of which is owned by such citizens shall be adopted the formula of the Secretary of Justice2 to the effect
allowed to engage in the advertising industry. that:
It also provides that the participation of foreign investors in the o Shares belonging to corporations or partnerships at
governing body of the entities in such industry shall be limited least 60% of the capital of which is owned by Filipino
to their proportionate share in the capital thereof, and all the citizens shall be considered as of Philippine nationality,
executive and managing officers of such entities must be but if the percentage of Filipino ownership in the
citizens of the Philippines. corporation or partnership is less than 60% only the
number of shares corresponding to such percentage
F. Investment Test as to Philippine Nationals (Section 3[a] & [b], R.A. shall be counted as of Philippine nationality. . .3
7042, Foreign Investments Act of 1992)
2
Under Section 3 of the FIA 91, a corporation organized under DOJ Opinion No. 18, s. 1989.
3
SEC Opinion, 23 November 1993, XXVIII SEC QUARTERLY BULLETIN 39 (No. 1,
the laws of the Philippines of which at least 60% of the capital
March 1994); SEC Opinion, 14 April 1993, XXVII SEC QUARTERLY BULLETIN 29 (No. 3,
stock outstanding and entitled to vote is owned and held by Sept. 1993); SEC Opinion, 23 March 1993, XXVII SEC QUARTERLY BULLETIN 15 (No.
3, Sept. 1993); SEC Opinion, 6 August 1991, SEC QUARTERLY BULLETIN 44 (No. 4,
1
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. Dec. 1991); SEC Opinion, 30 May 1990, XXIV SEC QUARTERLY BULLETIN 52 (No. 3,
(2013 ed.). Manila, Philippines: Rex Book Store. Sept. 1990); SEC Opinion, 14 December 1989, XXIV SEC QUARTERLY BULLETIN 7 (No.


BUT SEE: SEC-OGC Opinion No. 10-31, dated 09 December 2010,
addressed to Mr. Leonardo A. Civil, Chairman of the Board of
Co-O Small Scale Miners Association, Inc., penned by General
Counsel Vernette G. Umali-Paco.
The grandfather rule can only extend to such limited as to those
who have actual control of the affairs of the corporation.
Palting v. San Jose Petroleum Inc., 18 SCRA 924 (1966).
o You look at the individual shareholders. Its seeks a
purity-centric view.
CURRENT RULE: At least 60% of voting shares AND 60% of the
whole corporation shares (voting + non-voting) must be Filipino.
o Atty. Hofilea This current rule is being questioned
for its effect on economic viability of the company.

H. Special Classifications of Corporations (Section 140)

Section 140. Stock ownership in certain corporations.
Pursuant to the duties specified by Article XIV of the Constitution, the
National Economic and Development Authority shall, from time to
time, make a determination of whether the corporate vehicle has
been used by any corporation or by business or industry to frustrate
the provisions thereof or of applicable laws, and shall submit to the
Batasang Pambansa, whenever deemed necessary, a report of its
findings, including recommendations for their prevention or
correction.

2, June 1990); SEC Opinion, 6 November 1989, XXIV SEC QUARTERLY BULLETIN 56
(No. 1, March 1990.


CLASSIFICATIONS OF CORPORATIONS o These usually cover school districts, water districts, and
the like.1

I. In Relation to the State: Water districts organized under Presidential Decree No. 198,
although considered as quasi-public corporations and
A. Public Corporation (Section 3, Act No. 1459). authorized to exercise the powers, rights and privileges given to
private corporations under existing laws, are entirely distinct
from corporations organized under the Corporation Code, and
ACT No. 1459
not within the jurisdiction of the SEC. Marilao Water
Section 3. Corporations may be public or private.
Consumers Asso. v. IAC, 201 SCRA 437 (1991).
Public corporations are those formed or organized for the government

of a portion of the state. Private corporations are those formed for
C. Private Corporation (Section 3, Act 1459).
some private purpose, benefit, aim, or end, as distinguished from
public corporations, which have for their purpose the general good Private corporations may be classified according to their
and welfare. Private corporations are divided into stock corporations purposes:
and nonstock corporations. Corporations which have a capital stock o The business corporation, or the profit-seeking
divided into shares and are authorized to distribute to the holders of corporations
such shares dividends or allotments of the surplus profits on the basis o Religious corporations,
of the shares held are stock corporations. All other private o Eleemosynary corporations or those organized for
corporations are nonstock corporations. charitable, scientific or vocational corporations

D. Distinction between Public and Private Corporations
Public corporations are those created for political purposes

connected with the public good in the administration of the civil
PUBLIC CORPORATION PRIVATE CORPORATION
government.
Government usually holds the Government MAY hold
B Quasi-public Corporation. controlling interest controlling interest
There is a group of corporations that seem to be a cross Created by its charter Created under the general
corporation law
between private corporations and public corporations, and they
are classified as quasi-public corporations.

1


Created for a public purpose Created for profit-generation controlled corporations, is may still be considered as
Exists primarily for the government of a such, or under the 1987 Administrative Code as an
portion of the state instrumentality of the Government, and it employees
Subject to control and supervision by are subject to the Civil Service Law. Boy Scouts of the
the State or its agency. Philippines v. NLRC, 196 SCRA 176 (1991).
The doctrine that employees of GOCCs, whether created by
Governments majority shares does not make an entity a public special law or formed as subsidiaries under the general
corporation. National Coal Co., v. Collector of Internal Revenue, corporation law are governed by the Civil Service Law and not
46 Phil. 583 (1924). by the Labor Code, has been supplanted by the 1987
BUT: being a GOCC makes it liable for laws and provisions Constitution. The present doctrine in determining whether a
applicable to the Government or its entities and subject to the GOCC is subject to the Civil Service Law is the manner of its
control of the Government. Cervantes v. Auditor General, 91 creation, such that government corporations created by special
Phil. 359 (1952). charter are subject the Civil Service Law, while those
o Although Boy Scouts of the Philippines does not receive incorporated under the general corporation law are governed
any monetary or financial subsidy from the by the Labor Code. PNOC-Energy Dev. Corp. v. NLRC, 201 SCRA
Government, and its funds and assets are not 487 (1991); Davao City Water District v. Civil Service
considered government in nature and not subject to Commission, 201 SCRA 593 (1991).
audit by the COA, the fact that it received a special o Section 31 of Corporation Code (Liability of Directors
charter from the government, that its governing board and Officers) is applicable to corporations which have
are appointed by the Government, and that its purpose been organized by special charters since Section 4 of
are of public character, for they pertain to the Corporation Code renders the provisions supplementary
educational, civic and social development of the youth applicable to all corporations, including those with
which constitute a very substantial and important part special or individual charters, such as cooperatives
of the nation, it is not a public corporation in the same organized under P.D. 269, so long as those provisions
sense that municipal corporation or local governments are not inconsistent with such charters. Benguet
are public corporation since its does not govern a Electric Cooperative, Inc. v. NLRC, 209 SCRA 55 (1992).
portion of the state, but it also does not have A corporation is created by operation of law under the
proprietary functions in the same sense that the Corporation Code while a government corporation is normally
functions or activities of government-owned or


created by special law referred to often as a charter. Bliss Dev. category as ordinary persons. Shipside Inc. v. Court of
Corp. Employees Union v. Calleja, 237 SCRA 271 (1994). Appeals, 352 SCRA 334 (2001).
o The test to determine whether a corporation is o Water districts can validly exists as corporate entities
government owned or controlled, or private in nature is under PD 198, and provided they are government-
simple. Is it created by its own charter for the exercise owned or controlled, and their board of directors and
of a public function, or by incorporation under the other personnel are government employees subject to
general corporation law? Those with special charters civil service laws and anti-graft laws. Feliciano v. COA,
are government corporations subject to its provisions, 419 SCRA 363 (2004).
and its employees are under the jurisdiction of the Civil When the law vests in a government instrumentality corporate
Service Commission, and are compulsory members of powers, the instrumentality does not become necessarily a
the GSIS. Camparedondo v. NLRC, 312 SCRA 47 (1999) corporation. A government-owned or controlled corporation
Beyond cavil, a GOCC has a personality of its own, distinct and must be organized as a stock or non-stock corporation. The
separate from that of the government, and the intervention in a MIAA is not a government-owned or controlled corporation
transaction of the Office of the President through the Executive because it is not constituted of capital divided into shares of
Secretary does not change the independent existence of a stock, and neither is it a nonstock corporation because it has no
government entity as it deals with another government entity. members. MIAA is a government instrumentality vested with
PUP v. Court of Appeals, 368 SCRA 691 (2001). corporate powers to perform efficiently its government
o While public benefit and public welfare may be functions. Manila International Airport Authority v. Court of
attributable to the operation of the Bases Conversion Appeals, 495 SCRA 591 (2006).
and Development Authority (BCDA), yet it is certain that Although PNRC has its special charter, the Chairman of PNRC is
the functions it performs are basically proprietary in not appointed by the President or any member of the Executive
naturethe promotion of economic and social Branch. Although Camporendodo v. NLRC had ruled that PNRC
development of Central Luzon, particularly, and the is GOCC because it is constituted under a special charter, it
countrys goal for enhancement. Therefore, the rule failed to consider the definition of a GOCC as provided under
that prescription does not run against the State will not Section 2(13) of the Administrative Code of 1987, which
apply to BCDA, it being said that when title of the requires that a GOCC to be such must be owned by the
Republic has been divested, its grantees, although government, and in the case of a stock corporation, at least a
artificial bodies of its own creation, are in the same majority of its capital stock must be owned by the government.
Liban v. Gordon, 593 SCRA 68 (2009).


The state, in extending to foreign corporations the privilege of
II. As to Place of Incorporation: doing business, may impose such privilege with whatever
conditions and restrictions it deems fit to impose. 1
A. Domestic Corporation
A domestic corporation is one incorporated under laws of the III. As to Purpose of Incorporation:
Philippines.
A. Municipal Corporation
B. Foreign Corporation (Section 123) Public corporations therefore are essentially municipal
corporation, or those formed and organized by the State for
Section 123. Definition and rights of foreign corporations. government, such as the barangay, municipality, city and the
For the purposes of this Code, a foreign corporation is one formed, province. In essence, a public corporation, being a mini-state,
organized or existing under any laws other than those of the possesses all three great powers of government: police power,
Philippines and whose laws allow Filipino citizens and corporations to power of eminent domain, and power of taxation.2
do business in its own country or state. It shall have the right to Municipal corporations, with respect to its governmental
transact business in the Philippines after it shall have obtained a functions, i.e., political subdivisions created by the legislature
license to transact business in this country in accordance with this for the convenient administration of the government, or some
Code and a certificate of authority from the appropriate government aspect of the government, of the inhabitants of a defined
agency. (n) district, remain entirely subject to the legislative control. They
are organized for the purpose of serving the communal welfare
The objectives of the statutory provisions prescribing conditions of the inhabitants of a town or a city.
under which foreign corporations are permitted to do business o Municipal corporations are incorporated to continue
in a state other than that of their creation: the existence and the legal status of the town or city
(a) To place them on an equality with domestic without regard to the coming and going people who
corporations; inhabit it.
(b) To subject them to inspection so that their condition
may be known; and

(c) To protect the residents of the state doing business with 1
them by subjecting them to the courts of the state. (2013 ed.). Manila, Philippines: Rex Book Store.
2


o They are not operated for profit, and the operating Section 109. Classes of religious corporations.
expenses are levied against the members through the Religious corporations may be incorporated by one or more persons.
process of taxation. Such corporations may be classified into corporations sole and
A municipal corporation possesses a two-fold character: religious societies.
(a) Public or governmental character, in which it acts as
agent of the state and exercises, by delegation a part of Religious corporations shall be governed by this Chapter and by the
the sovereignty of the state. general provisions on non-stock corporations insofar as they may be
In their governmental character, the municipal applicable. (n)
corporations are possessed of and can exercise
the so-called police power of the state, by Section 116. Religious societies.
delegation of the legislature. Any religious society or religious order, or any diocese, synod, or
They may levy taxes for certain purposes under district organization of any religious denomination, sect or church,
limitations imposed by the law making body. unless forbidden by the constitution, rules, regulations, or discipline of
(b) A private, corporate or proprietary character, in which it the religious denomination, sect or church of which it is a part, or by
acts as a private or business corporation, and stands for competent authority, may, upon written consent and/or by an
the community in the administration of its local affairs affirmative vote at a meeting called for the purpose of at least two-
wholly beyond the sphere of public purposes for which thirds (2/3) of its membership, incorporate for the administration of
its governmental powers are conferred. its temporalities or for the management of its affairs, properties and
In their proprietary character, municipal estate by filing with the Securities and Exchange Commission, articles
corporations are empowered to mortgage their of incorporation verified by the affidavit of the presiding elder,
property under certain limitations. secretary, or clerk or other member of such religious society or
They can sue and be sued, enter into contracts religious order, or diocese, synod, or district organization of the
and may be held liable for damages for torts religious denomination, sect or church, setting forth the following:
committed by them in the exercise of their
corporate functions as distinguished from public 1. That the religious society or religious order, or diocese, synod, or
and governmental functions. district organization is a religious organization of a religious
denomination, sect or church;
B. Religious Corporation (Sections 109 and 116)
2. That at least two-thirds (2/3) of its membership have given their


written consent or have voted to incorporate, at a duly convened deprived of his sacred office, is without remedy in the civil
meeting of the body; courts. Long v. Basa, 366 SCRA 113 (2001).

3. That the incorporation of the religious society or religious order, or C. Educational Corporations (Sections 106, 107 and 108; Section 25,
diocese, synod, or district organization desiring to incorporate is not B.P. Blg. 232)
forbidden by competent authority or by the constitution, rules,
regulations or discipline of the religious denomination, sect, or church Section 106. Incorporation.
of which it forms a part; Educational corporations shall be governed by special laws and by the
general provisions of this Code. (n)
4. That the religious society or religious order, or diocese, synod, or
district organization desires to incorporate for the administration of its Section 107. Pre-requisites to incorporation.
affairs, properties and estate; Except upon favorable recommendation of the Ministry of Education
and Culture, the Securities and Exchange Commission shall not accept
5. The place where the principal office of the corporation is to be or approve the articles of incorporation and by-laws of any
established and located, which place must be within the Philippines; educational institution. (168a)
and
Section 108. Board of trustees.
6. The names, nationalities, and residences of the trustees elected by Trustees of educational institutions organized as non-stock
the religious society or religious order, or the diocese, synod, or corporations shall not be less than five (5) nor more than fifteen (15):
district organization to serve for the first year or such other period as Provided, however, That the number of trustees shall be in multiples
may be prescribed by the laws of the religious society or religious of five (5).
order, or of the diocese, synod, or district organization, the board of
trustees to be not less than five (5) nor more than fifteen (15). (160a) Unless otherwise provided in the articles of incorporation on the by-
laws, the board of trustees of incorporated schools, colleges, or other
Since in matters purely ecclesiastical the decisions of the proper institutions of learning shall, as soon as organized, so classify
church tribunals are conclusive upon the civil tribunals, then a themselves that the term of office of one-fifth (1/5) of their number
church member who is expelled from the membership by the shall expire every year. Trustees thereafter elected to fill vacancies,
church authorities, or a priest or minister who is by them occurring before the expiration of a particular term, shall hold office
only for the unexpired period. Trustees elected thereafter to fill


vacancies caused by expiration of term shall hold office for five (5) A. Aggregate Corporation
years. A majority of the trustees shall constitute a quorum for the
transaction of business. The powers and authority of trustees shall be B. Corporation Sole (Sections 110 to 115)
defined in the by-laws.
Section 110. Corporation sole.
For institutions organized as stock corporations, the number and term For the purpose of administering and managing, as trustee, the affairs,
of directors shall be governed by the provisions on stock corporations. property and temporalities of any religious denomination, sect or
(169a) church, a corporation sole may be formed by the chief archbishop,
bishop, priest, minister, rabbi or other presiding elder of such religious
BATASANG PAMBANSA BILANG 232 denomination, sect or church. (154a)
Section 25. Establishment of Schools
All schools shall be established in accordance with law. The Section 111. Articles of incorporation.
establishment of new national schools and the conversion of existing In order to become a corporation sole, the chief archbishop, bishop,
schools from elementary to national secondary or tertiary schools shall priest, minister, rabbi or presiding elder of any religious denomination,
be by law: Provided, That any private school proposed to be sect or church must file with the Securities and Exchange Commission
established must incorporate as an non-stock educational corporation articles of incorporation setting forth the following:
in accordance with the provisions of the Corporation Code of the
Philippines. This requirement to incorporate may be waived in the 1. That he is the chief archbishop, bishop, priest, minister, rabbi or
case of family-administered pre-school institutions. presiding elder of his religious denomination, sect or church and that
he desires to become a corporation sole;
Government assistance to such schools for educational programs shall
be used exclusively for that purpose. 2. That the rules, regulations and discipline of his religious
denomination, sect or church are not inconsistent with his becoming a
D. Charitable, Scientific or Vocational Corporations corporation sole and do not forbid it;

E. Business Corporation 3. That as such chief archbishop, bishop, priest, minister, rabbi or
presiding elder, he is charged with the administration of the
IV. As to Number of Members: temporalities and the management of the affairs, estate and
properties of his religious denomination, sect or church within his


territorial jurisdiction, describing such territorial jurisdiction; benefit of his religious denomination, sect or church, including
hospitals, schools, colleges, orphan asylums, parsonages and
4. The manner in which any vacancy occurring in the office of chief cemeteries thereof. (n)
archbishop, bishop, priest, minister, rabbi of presiding elder is
required to be filled, according to the rules, regulations or discipline of Section 113. Acquisition and alienation of property.
the religious denomination, sect or church to which he belongs; and Any corporation sole may purchase and hold real estate and personal
property for its church, charitable, benevolent or educational
5. The place where the principal office of the corporation sole is to be purposes, and may receive bequests or gifts for such purposes. Such
established and located, which place must be within the Philippines. corporation may sell or mortgage real property held by it by obtaining
The articles of incorporation may include any other provision not an order for that purpose from the Court of First Instance of the
contrary to law for the regulation of the affairs of the corporation. (n) province where the property is situated upon proof made to the
satisfaction of the court that notice of the application for leave to sell
Section 112. Submission of the articles of incorporation. or mortgage has been given by publication or otherwise in such
The articles of incorporation must be verified, before filing, by affidavit manner and for such time as said court may have directed, and that it
or affirmation of the chief archbishop, bishop, priest, minister, rabbi or is to the interest of the corporation that leave to sell or mortgage
presiding elder, as the case may be, and accompanied by a copy of the should be granted. The application for leave to sell or mortgage must
commission, certificate of election or letter of appointment of such be made by petition, duly verified, by the chief archbishop, bishop,
chief archbishop, bishop, priest, minister, rabbi or presiding elder, duly priest, minister, rabbi or presiding elder acting as corporation sole, and
certified to be correct by any notary public. may be opposed by any member of the religious denomination, sect or
church represented by the corporation sole: Provided, That in cases
From and after the filing with the Securities and Exchange Commission where the rules, regulations and discipline of the religious
of the said articles of incorporation, verified by affidavit or affirmation, denomination, sect or church, religious society or order concerned
and accompanied by the documents mentioned in the preceding represented by such corporation sole regulate the method of
paragraph, such chief archbishop, bishop, priest, minister, rabbi or acquiring, holding, selling and mortgaging real estate and personal
presiding elder shall become a corporation sole and all temporalities, property, such rules, regulations and discipline shall control, and the
estate and properties of the religious denomination, sect or church intervention of the courts shall not be necessary. (159a)
theretofore administered or managed by him as such chief archbishop,
bishop, priest, minister, rabbi or presiding elder shall be held in trust Section 114. Filling of vacancies.
by him as a corporation sole, for the use, purpose, behalf and sole The successors in office of any chief archbishop, bishop, priest,


minister, rabbi or presiding elder in a corporation sole shall become 4. The names and addresses of the persons who are to supervise the
the corporation sole on their accession to office and shall be permitted winding up of the affairs of the corporation.
to transact business as such on the filing with the Securities and
Exchange Commission of a copy of their commission, certificate of Upon approval of such declaration of dissolution by the Securities and
election, or letters of appointment, duly certified by any notary public. Exchange Commission, the corporation shall cease to carry on its
During any vacancy in the office of chief archbishop, bishop, priest, operations except for the purpose of winding up its affairs. (n)
minister, rabbi or presiding elder of any religious denomination, sect
or church incorporated as a corporation sole, the person or persons A corporation sole has no nationality being an institution that
authorized and empowered by the rules, regulations or discipline of existed prior to the Republic. But if any nationality is to be
the religious denomination, sect or church represented by the accorded to a corporation sole it is to be judged from the
corporation sole to administer the temporalities and manage the nationality of the majority of the faithfuls thereof. Roman
affairs, estate and properties of the corporation sole during the Catholic Apostolic Administrator of Davao, Inc. v. LRC and the
vacancy shall exercise all the powers and authority of the corporation Register of Deeds of Davao City, 102 Phil. 596 [1957]).
sole during such vacancy. (158a) The doctrine in Republic v. Villanueva, 114 SCRA 875 (1982) and
Republic v. Iglesia ni Cristo, 127 SCRA 687 (1984), that a
Section 115. Dissolution. corporation sole is disqualified to acquire/hold alienable lands
A corporation sole may be dissolved and its affairs settled voluntarily of the public domain, because of the constitutional prohibition
by submitting to the Securities and Exchange Commission a verified qualifying only individuals to acquire land and the provision
declaration of dissolution. under the Public Land Act which applied only to Filipino citizens
or natural persons, has been expressly overturned in Director of
The declaration of dissolution shall set forth: Land v. IAC, 146 SCRA 509 (1986).1

1. The name of the corporation; V. As to Legal Status:

2. The reason for dissolution and winding up; A. De Jure Corporation
A corporation has de jure existence if there is a full or
3. The authorization for the dissolution of the corporation by the substantial compliance with the requirements of an existing law
particular religious denomination, sect or church;
1
Overturning affirmed in Republic v. Iglesia ni Cristo, 127 SCRA 687 (1984);
Republic v. IAC, 168 SCRA 165 (1988).


permitting organization of such corporation as by proper The doctrine grew out of the necessity to promote the security
articles of incorporation duly executed and filed. Generally, its of business transactions and to eliminate quibbling over
juridical personality is not subject to attack in the courts from irregularities.
any source.1 o It would be a rare case where a third persons dealing
with a corporation is prejudiced by its recognition as a
B. De Facto Corporation (Section 20) separate entity despite some minor defects in its
incorporation. It would be unfair to allow a claimant
Section 20. De facto corporations. against the alleged corporation to insist on the
The due incorporation of any corporation claiming in good faith to be a individual liability of innocent investors merely because
corporation under this Code, and its right to exercise corporate of some minor flaws in its incorporation.2
powers, shall not be inquired into collaterally in any private suit to
which such corporation may be a party. Such inquiry may be made by C. Corporation by Estoppel (Section 21)
the Solicitor General in a quo warranto proceeding.
Section 21. Corporation by estoppel.
Elements of de facto corporation: All persons who assume to act as a corporation knowing it to be
1. Valid law under which it is incorporated without authority to do so shall be liable as general partners for all
2. Attempt in good faith to incorporate (must get certificate of debts, liabilities and damages incurred or arising as a result thereof:
incorporation) Provided, however, That when any such ostensible corporation is sued
3. Assumption of corporate powers (must at least elect Board of on any transaction entered by it as a corporation or on any tort
Directors) committed by it as such, it shall not be allowed to use as a defense its
A corporation has de facto existence where there is a bona fide lack of corporate personality.
attempt to incorporate, colorable compliance with the statute
and user of corporate powers. One who assumes an obligation to an ostensible corporation as such,
An inquiry to the de facto existence of a corporation may be cannot resist performance thereof on the ground that there was in fact
made by the Solicitor General in a quo warranto proceeding. no corporation.

1 2


Although an entity may not be a corporation de jure or de facto, into shares and are authorized to distribute to the holders of such
a particular person or party may, by estoppel or admission, be shares dividends or allotments of the surplus profits on the basis of
precluded from denying its corporate existence. A group of the shares held are stock corporations. All other corporations are non-
persons may assume to do business as a corporation without stock corporations.
having gone far enough to give a de facto existence to the
entity. Section 5. Corporators and incorporators, stockholders and members.
Under certain circumstances and for certain purposes, either Corporators are those who compose a corporation, whether as
the group or third persons contracting with the purported stockholders or as members. Incorporators are those stockholders or
corporation may be estopped to deny its corporate status. members mentioned in the articles of incorporation as originally
The corporation by estoppel doctrine is founded on procedural forming and composing the corporation and who are signatories
convenience, avoidance of inquiries into irrelevant formalities, thereof.
and fairness to all parties concerned.1
Corporators in a stock corporation are called stockholders or
D. Corporation by Prescription shareholders. Corporators in a non-stock corporation are called
The Roman Catholic Church is a corporation by prescription, members.
with acknowledged juridical personality inasmuch as it is an
institution which "antedated by almost a thousand years any A. Stock Corporation
other personality in Europe, and which existed when Grecian If not authorized by the by-laws to distribute the dividends, but
eloquence still flourished in Antioch and when idols were still it is a stock corporation, can a corporation distribute dividends
worshipped in the temple of Mecca."2 to its shareholders? The answer seems to be in the affirmative,
since one of the expressed powers granted to stock
VI. As to Existence of Shares (Sections 3 and 5): corporations under Section 43 of the Corporation Code is the
power to declared dividends.
Section 3. Classes of corporations.
Corporations formed or organized under this Code may be stock or B. Non-Stock Corporation
non-stock corporations. Corporations which have capital stock divided
Section 87. Definition.
1
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. For the purposes of this Code, a non-stock corporation is one where no
(2013 ed.). Manila, Philippines: Rex Book Store. part of its income is distributable as dividends to its members,
2
Barlin v. Ramirez, 7 Phil. 41 (1906).


trustees, or officers, subject to the provisions of this Code on
dissolution: Provided, That any profit which a non-stock corporation
may obtain as an incident to its operations shall, whenever necessary
or proper, be used for the furtherance of the purpose or purposes for
which the corporation was organized, subject to the provisions of this
Title.

The provisions governing stock corporation, when pertinent, shall be
applicable to non- stock corporations, except as may be covered by
specific provisions of this Title. (n)

Section 88. Purposes.
Non-stock corporations may be formed or organized for charitable,
religious, educational, professional, cultural, fraternal, literary,
scientific, social, civic service, or similar purposes, like trade, industry,
agricultural and like chambers, or any combination thereof, subject to
the special provisions of this Title governing particular classes of non-
stock corporations. (n)

Thus, every time there is an express authorization in either the
articles of incorporation or by-laws of a corporation to declare
dividends, it is undoubtedly a stock corporation. When there is
no express prohibition not to distribute dividends, it would
seem that the corporation is a non-stock corporation.


SEPARATE JURIDICAL PERSONALITY AND DOCTRINE composing it as well as from any other legal entity to which it
may be related, with the following consequences:
OF PIERCING THE VEIL OF CORPORATE FICTION 1. The first consequence of the doctrine of legal entity of the
separate personality of the corporation may not be made to
I. MAIN DOCTRINE: A Corporation Has A Personality Separate and answer for acts and liabilities of its stockholders or those of
Distinct from its Stockholders or Members. (Sec. 2; Article 44, Civil Code) legal entities to which it may be connected or vice versa.
General Credit Corp. v. Alsons Dev. and Investment Corp., 513
Section 2. Corporation defined. SCRA 225 (2007);1
A corporation is an artificial being created by operation of law, having 2. This separate and distinct personality is, however, merely a
the right of succession and the powers, attributes and properties fiction created by law for conveyance and to promote the ends
expressly authorized by law or incident to its existence. of justice. LBP v. Court of Appeals, 364 SCRA 375 (2001).2

CIVIL CODE B. Applications:
Article 44. 1. Majority Equity Ownership and Interlocking Directorship:
The following are juridical persons: Mere ownership by a single stockholder or by another
corporation of all or nearly all of the capital stock of a
1. The State and its political subdivisions; corporation is not of itself sufficient ground for disregarding the
separate corporate personality. Sunio v. NLRC , 127 SCRA 390
2. Other corporations, institutions and entities for public interest or (1984).3
purpose, created by law; their personality begins as soon as they have
been constituted according to law;

1
McLeod v. NLRC, 512 SCRA 222 (2007); Uy v. Villanueva, 526 SCRA 73 (2007);
3. Corporations, partnerships and associations for private interest or Pantranco Employees Association (PEA- PTGWO) v. NLRC, 581 SCRA 598 (2009);
purpose to which the law grants a juridical personality, separate and Shrimp Specialists, Inc. v. Fuji-Triumph Agri-Industrial Corp., 608 SCRA 1 (2009).
2
Martinez v. Court of Appeals, 438 SCRA 139 (2004); Prudential Bank v. Alviar,
distinct from that of each shareholder, partner or member. (35a) 464 SCRA 353 (2005); EDSA Shangri-La Hotel and Resorts, Inc. v. BF Corp., 556
SCRA 25 (2008); Siain Enterprises, Inc v. Cupertino Realty Corp., 590 SCRA 435
A. Importance of Main Doctrine: (2009).
3
Asionics Philippines, Inc. v. NLRC, 290 SCRA 164 (1998); Francisco v. Mejia, 362
A corporation, upon coming into existence, is invested by law SCRA 738 (2001); Matutina Integrated Wood Products, Inc. v. CA, 263 SCRA 490
with a personality separate and distinct from those persons (1996); Manila Hotel Corp. v. NLRC, 343 SCRA 1 (2000); Secosa v. Heirs of Erwin
Suarez Fancisco, 433 SCRA 273 (2004); EDSA Shangri-La Hotel and Resorts, Inc.


Ownership of a majority of capital stock and the fact that entities. Cruz v. Dalisay, 152 SCRA 487 (1987); Booc v. Bantuas,
majority of directors of a corporation are the directors of 354 SCRA 279 (2001).
another corporation creates no employer-employee It is hornbook law that corporate personality is a shield against
relationship with the latters employees. DBP v. NLRC, 186 SCRA personal liability of its officers a corporate officer and his
841 (1990).1 spouse cannot be made personally liable under a trust receipt
Having interlocking directors, corporate officers and where he entered into and signed the contract clearly in his
shareholders is not enough justification to pierce the veil of official capacity. Intestate Estate of Alexander T. Ty v. Court of
corporate fiction in the absence of fraud or other public policy Appeals, 356 SCRA 61 (2001).4
considerations. Velarde v. Lopez, 419 SCRA 422 (2004).2 The President of the corporation which becomes liable for the
2. Being Corporate Officer: accident caused by its truck driver cannot be held solidarily
Being an officer or stockholder of a corporation does not by liable for the judgment obligation arising from quasi-delict, since
itself make ones property also that of the corporation, and vice- the fact alone of being President is not sufficient to hold him
versa, for they are separate entities, and that shareholders who solidarily liable for the liabilities adjudged against the
are officers are in no legal sense the owners of corporate corporation and its employee. Secosa v. Heirs of Erwin Suarez
property which is owned by the corporation as a distinct legal Fancisco, 433 SCRA 273 (2004).
person. Good Earth Emporium, Inc. v. CA, 194 SCRA 544 When the compulsory counterclaim filed against corporate
(1991).3 officers for their alleged fraudulent act indicate that such
The mere fact that one is President does not render the corporate officers are indispensable parties in the litigation, the
property he owns the property of the corporation, since the original inclusion of the corporation in the suit does not thereby
president, as an individual, and the corporation are separate allow the denial of a specific counter-claim being filed to make
the corporate officers personally liable. A corporation has a
v. BF Corp., 556 SCRA 25 (2008); Pantranco Employees Association (PEA- legal personality entirely separate and distinct from that of its
PTGWO) v. NLRC, 581 SCRA 598 (2009).
1 officers and cannot act for and on their behalf, without being so
Also Suldao v. Cimech System Construction, Inc., 506 SCRA 256 (2006); Union
Bank of the Philippines v. Ong, 491 SCRA 581 (2006); Shrimp Specialists, Inc. v. authorized. Lafarge Cement Phils., Inc. v. Continental Cement
Fuji-Triumph Agri-Industrial Corp., 608 SCRA 1 (2009); Hacienda Luisita, Inc. v. Corp., 443 SCRA 522 (2004).
Presidential Agrarian Reform Council, 660 SCRA 525 (2011). 3. Dealings Between Corporation and Stockholders:
2
Also Sesbreno v. Court of Appeals, 222 SCRA 466 (1993); G Holdings, Inc. v.
National Mines and Allied Workers Union Local, 103 (NAMAWU), 604 SCRA 73
(2010).
3
Bautista v. Auto Plus Traders, Inc. 561 SCRA 223 (2008); Prisma Construction &
4
Dev. Corp. v. Menchavez, 614 SCRA 590 (2010). Consolidated Bank and Trust Corp. v. Court of Appeals, 356 SCRA 671 (2001).


The fact that the majority stockholder had used his own money Debts incurred by directors, officers, and employees acting as
to pay part of the loan of the corporation cannot be used as the corporate agents are not their direct liability but of the
basis to pierce: It is understandable that a shareholder would corporation they represent. Crisologo v. People, 686 SCRA 782
want to help his corporation and in the process, assure that his (2012); Heirs of Fe Tan Uy v. International Exchange Bank, 690
stakes in the said corporation are secured. LBP v. Court of SCRA 519 (2013).
Appeals, 364 SCRA 375 (2001). o Corporate debt or credit is not the debt or credit of the
Use of a controlling stockholders initials in the corporate name stockholder nor is the stockholder's debt or credit that
is not sufficient reason to pierce, since by that practice alone of the corporation. Traders Royal Bank v. CA, 177 SCRA
does it mean that the said corporation is merely a dummy of the 789 (1989).
individual stockholder, provided such act is lawful. LBP v. Court o A corporation has no legal standing to file a suit for
of Appeals, 364 SCRA 375 (2001). recovery of certain parcels of land owned by its
Just because two foreign companies came from the same members in their individual capacity, even when the
country and closely worked together on certain projects would corporation is organized for the benefit of the
the conclusion arise that one was the conduit of the other, thus members. Sulo ng Bayan v. Araneta, Inc., 72 SCRA 347
piercing the veil of corporate fiction. Marubeni Corp. v. Lirag, (1976).
362 SCRA 620 (2001). o Stockholders have no personality to intervene in a
4. On the Properties of the Corporation: collection case covering the loans of the corporation
The creation by DBP as the mother company of the three mining since the interest of shareholders in corporate property
corporations to manage and operate the assets acquired in the is purely inchoate. Saw v. CA, 195 SCRA 740 (1991); and
foreclosure sale lest they deteriorate from non-use and lose vice-versa Francisco Motors Corp. v. Court of Appeals,
their value, does not indicate fraud or wrongdoing and will not 309 SCRA 72 (1999).
constitute application of the piercing doctrine. DBP v. Court of The majority stockholder cannot be held personality liable for
Appeals, 363 SCRA 307 (2001). the attorneys fees charged by a lawyer for representing the
5. On Privileges Enjoyed: corporation. Laperal Dev. Corp. v. CA, 223 SCRA 261 (1993).
The tax exemption clause in the charter of a corporation cannot The obligations of a stockholder in one corporation cannot be
be extended to nor enjoyed even by the controlling offset from the obligation of the stockholder in a second
stockholders. Manila Gas Corp. v. Collector of Internal corporation, since the corporation has a separate juridical
Revenue, 62 Phil. 895 (1936). personality. CKH Industrial and Dev. Corp v. Court of Appeals,
6. Obligations and Debts: 272 SCRA 333 (1997).


A corporate defendant against whom a writ of possession has corporation.
been issued, cannot use the fact that it has obtained controlling
equities in the corporate plaintiffs to suspend enforcement of Held: NO. The transit company was created with intent to evade the law
the writ, for they are separate juridical persons, and thus their making the transit company as a mere alter ego of the brewing
separate business and proprietary interests remain. Silverio, Jr. corporation, both being substantially identical in interest and control,
v. Filipino Business Consultants, Inc., 466 SCRA 584 (2005). and the brewing company the ultimate beneficiary. It clearly appears
that the shipper practically controls the transit company, and this shows
II. PIERCING THE VEIL OF CORPORATE FICTION: a sufficient identity of interest among the shareholders of both.

A. Source of Incantation: U.S. v. Milwaukee Refrigerator Transit Co., Doctrine: As a general rule, a corporation will be looked upon as a legal
142 Fed. 247 (1905). entity, until sufficient reason to the contrary appears. An exception to
this is when the notion of legal entity is used to defeat public
U.S. v. Milwaukee Refrigerator Transit Co. convenience, justify wrong, protect fraud, defend crime, the law will
regard the corporation as an association of persons; and, where one
Facts: The Elkins Act was enacted to prohibit railroads from giving and corporation was organized and is owned by the officers and
receiving of unlawful rebates. After the enactment of the said Act, stockholders of another, making their interests identical, they may be
officers of a brewing company, who were also its controlling treated as identical when the interests of justice require it.
stockholders, organized a transit company named Milwaukee
Refrigerator Transit, et al and became its officers and the owners of all As a general rule, a corporation will be looked upon as a legal
of its stock. On behalf of the brewing company, the officers contracted entity, unless and until sufficient reason to the contrary
with the transit company to make all the shipments for the brewing appears. When the notion of legal entity is used to defeat public
company. The transit company contracted for shipments with interstate convenience, justify wrong, protect fraud, or defend crime, the
carriers, where they would only pay it from 1/10 to 1/8 of the published law will regard the corporation as an association of persons.
rate, for the transportation, supposedly as a commission for obtaining Also, the corporate entity may be disregarded in the interest of
the business, but was known really a rebate for the benefit of the justice in such cases as fraud that may work inequities among
brewing company. members of the corporation internally, involving no rights of the
public or third persons. In both instances, there must have been
Issue: Whether or not a corporation organized and owned by the fraud and proof of it. For the separate juridical personality of a
officers and stockholders of another is in fact an independent corporation to be disregarded, the wrong-doing must be clearly


and convincingly established. It cannot be presumed. Suldao v. corporation unifying the group. Traders Royal Bank v. Court of
Cimech System Construction, Inc., 506 SCRA 256 (2006). Appeals, 269 SCRA 15 (1997).2
The legal fiction of separate corporate existence is not at all
times invincible and the same may be pierced when employed Traders Royal Bank v. Court of Appeals
as a means to perpetrate a fraud, confuse legitimate issues, or
used as a vehicle to promote unfair objectives or to shield an Facts: Central Bank Certificates of Indebtedness (CBCIs) under the name
otherwise blatant violation of the prohibition against forum- of Filriters were transferred by the Filriters Senior Vice President for
shopping. While it is settled that the piercing of the corporate Treasury Alfredo Banaria to PhilFinance (a company which also owns
veil has to be done with caution, this corporate fiction may be 90% of Filriters). PhilFinace then entered into a repurchase agreement
disregarded when necessary in the interest of justice. Rovels with the petitioner Traders Royal Bank (TRB) wherein PhilFinace sold the
Enterprises, Inc. v. Ocampo, 391 SCRA 176 (2002). CBCIs to TRB then pay installments to buy back the same. PhilFinance
o The notion of corporate entity will be pierced or defaulted in its payments and hence, forfeited the CBCIs in favor of TRB.
disregarded and the individuals composing it will be TRB sought to transfer the CBCIs (still under the name of Filriters) under
treated as identical if the corporate entity is being used its name but was refused by the Central Bank. Filriters interposed the
as a cloak or cover for fraud or illegality; as a defense of invalidity of the initial transfer to Philfinance. The initial
justification for a wrong; or as an alter ego, an adjunct, transfer was done by Banaria without any board resolution knowledge
or a business conduit for the sole benefit of the or consent of the Board of Directors, and without authority from the
stockholders. Gochan v. Young, 354 SCRA 207 (2001).1 Insurance Commissioner.

B. Objectives and Effect of the Application of the Doctrine Filriters Philfinance Traders Royal Bank
Under the doctrine of piercing the veil of corporate fiction,
the courts look at the corporation as a mere collection of Issue: Whether or not the veil of corporate entity must be pierce on the
individuals or an aggregation of persons undertaking business as basis of the allegation that Filriters was 90% owned by PhilFinace and
a group, disregarding the separate juridical personality of the that although they are separate entities on paper, they have used their
corporate fiction to defraud TRB.
1
DBP v. Court of Appeals, 357 SCRA 626, 358 SCRA 501, 363 SCRA 307 (2001);
Velarde v. Lopez, 419 SCRA 422 (2004); R & E Transport, Inc. v. Latag, 422 SCRA
698 (2004);.Secosa v. Heirs of Erwin Suarez Fancisco, 433 SCRA 273 (2004);
Held: NO. The corporate separateness between Filriters and Philfinance
Martinez v. Court of Appeals, 438 SCRA 139 (2004); McLeod v. NLRC, 512 SCRA
222 (2007); Siain Enterprises, Inc v. Cupertino Realty Corp., 590 SCRA 435
2
(2009). Pantranco Employees Association (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009)


remains, despite the petitioners insistence on the contrary. For one, which the law aims to protect by this doctrine. (Victim Standing)
other than the allegation that Filriters is 90% owned by Philfinance, and
the identity of one shall be maintained as to the other, there is nothing The rationale behind piercing a corporations identity in a given
else which could lead the court under circumstance to disregard their case is to remove the barrier between the corporation from the
corporate personalities. The fact that Filfinance owns majority shares in persons comprising it to thwart the fraudulent and illegal
Filriters is not by itself a ground to disregard the independent corporate schemes of those who use the corporate personality as a shield
status of Filriters. for undertaking certain proscribed activities. However, in the
case at bar, instead of holding certain individuals or person
In the case at bar, there is sufficient showing that the petitioner was not responsible for an alleged corporate act, the situation has been
defrauded at all when it acquired the subject certificate of indebtedness reversed. It is the petitioner as a corporation which is being
from Philfinance. On its face the subject certificates states that it is ordered to answer for the personal liability of certain individual
registered in the name of Filriters. This should have put the petitioner directors, officers and incorporators concerned. Hence, it
on notice, and prompted it to inquire from Filriters as to Philfinance's appears to us that the doctrine has been turned upside down
title over the same or its authority to assign the certificate. As it is, there because of its erroneous invocation. Francisco Motors Corp. v.
is no showing to the effect that petitioner had any dealings whatsoever CA, 309 SCRA 72 (1999).
with Filriters, nor did it make inquiries as to the ownership of the
certificate. Because the transfer of the CBCIs from Filriters to Francisco Motors Corp. v. CA
PhilFinance was fictitious, PhilFinance had no title to convey to TRB.
Consequently, the title of Filriters over the CBCIs must be upheld over Facts: Francisco Motors Corporation (FMC) filed a complaint against
the interest claimed by TRB. Spouses Gregorio and Librada Manuel to recover a sum of money
representing the balance of the jeep body purchased, and an additional
Doctrine: This doctrine may not be employed by a corporation to be sum representing the unpaid balance on the cost of repair of the
able to complete its claims against another corporation, and cannot vehicle. Spouses Manuel interposed a counterclaim for unpaid legal
therefore be employed by the claimant who does not interpose to be services by Gregorio Manuel, which was not paid by the incorporators,
the victim of any wrong or fraud. In order to pierce the veil of corporate directors and officers of the FMC. Manuel alleges that he represented
entity, the court must be sure that the corporate fiction was misused to members of the Francisco family in the intestate estate proceedings of
such an extent that injustice, fraud or crime was committed upon the late Benita Trinidad. However, after the termination of the
another, disregarding, thus, his, her, or its rights. It is the protection of proceedings, his services were not paid. Said family members, he said,
the interests of innocent third persons dealing with the corporate entity were also incorporators, directors and officers of petitioner.


individual hid his assets in a corporation. See Emilio Cano
Issue: Whether or not the doctrine of piercing the veil of corporate Enterprises v. CIR, 13 SCRA 291 (1965).
fiction can be applied to hold the company liable for unpaid legal Another formulation of this doctrine is that when two (2)
services rendered to its incorporators in an intestate proceeding. business enterprises are owned, conducted and controlled by
the same parties, both law and equity will, when necessary to
Held: NO. Gregorio Manuel his services were solicited as counsel for protect the rights of third parties, disregard the legal fiction that
members of the Francisco family to represent them in the intestate two corporations are distinct entitled and treat them as
proceedings over Benita Trinidads estate. These estate proceedings did identical or one and the same. General Credit Corp. v. Alsons
not involve any business of FMC. His move to recover unpaid legal fees Dev. and Investment Corp., 513 SCRA 225 (2007).1
through a counterclaim against Francisco Motors Corporation, to offset o The attempt to make the security agencies appear as
the unpaid balance of the purchase and repair of a jeep body could only two separate entities, when in reality they were but
result from an obvious misapprehension that FMCs corporate assets one, was a devise to defeat the law [i.e., in this case to
could be used to answer for the liabilities of its individual directors, avoid liabilities under labor laws] and should not be
officers, and incorporators. Such result if permitted could easily permitted. Enriquez Security Services, Inc. v. Cabotaje,
prejudice the corporation. Whatever obligation said incorporators, 496 SCRA 169 (2006).
directors and officers of the corporation had incurred, it was incurred in 1. Recent Attempts to Narrow the Objectives for Availing of
their personal capacity. In conclusion, FMC cannot be held responsible. Piercing:
Piercing is not allowed unless the remedy sought is to make the
Doctrine: The rationale behind piercing a corporations identity in a officer or another corporation pecuniarily liable for corporate
given case is to remove the barrier between the corporation from the debts. Indophil Textile Mill Workers Union-PTGWO v. Calica,
persons comprising it to thwart the fraudulent and illegal schemes of 205 SCRA 697 (1992).
those who use the corporate personality as a shield for undertaking
certain proscribed activities. Indophil Textile Mill Workers Union-PTGWO v. Calica

Atty. Hofilea Can there be a situation whereby the Court Facts: Indophil Textile and the petitioner executed a Collective
will allow a case against an individual to be a basis for reaching Bargaining Agreement (CBA) whereby the petitioner is the exclusive
the corporations assets? YES. But not on the sole basis that you
1
personally dont have properties to satisfy your personal Marques v. Far East Bank and Trust Co., 639 SCRA 312 (2011); Sarona v. NLRC,
obligations. There may conceivably be situations wherein the 663 SCRA 394 (2012); PNB v. Hydro Resources Contractors Corp., 693 SCRA 294
(2013).


bargaining agent of all the rank-and-file employees of Indophil Textile BUT SEE: La Campana Coffee Factory v. Kaisahan ng
Mills, Incorporated. Later, Indophil Acrylic Manufacturing Corporation Manggagawa, 93 Phil. 160 (1953).
was formed, and its employees also unionized and executed a CBA with
the said corporation. In 1990 or a year after the workers of Acrylic have La Campana Coffee Factory v. Kaisahan ng Manggagawa
been unionized and a CBA executed, the petitioner union claimed that
the plant facilities built and set up by Acrylic should be considered as an Facts: Tan Tong and his family own two corporations, namely: La
extension or expansion of the facilities of respondent Company. Campana Gaugau Packing (The Gaugau Corporation) and La Campana
Coffee Factory, Inc. (The Coffee Corporation). Both are located in the
Issue: Whether or not Indophil Acrylic is but an extension of Indophil same office in Espana. In 1951, the laborers of the two corporations of
Textile, and as such the workers of Indophil Acrylic may be considered Tan Tong formed a labor union named as Kaisahan ng Manggagawa sa
as part of the bargaining unit of Indophil Textile. La Compana (The Kaisahan). The 66 members of which are under one
payroll of the two corporations. A dispute arose between Tan Tong and
Held: NO. The fact that the businesses of private respondent and Acrylic Kaisahan when they could not agree concerning increased wages under
are related, that some of the employees of the private respondent are the corporate bargaining agreement, and this was given to the Court of
the same persons manning and providing for auxiliary services to the Industrial Relations.
units of Acrylic, and that the physical plants, offices and facilities are
situated in the same compound, it is our considered opinion that these Tan Tong now pushes for the dismissal of the case in the Court of
facts are not sufficient to justify the piercing of the corporate veil of Industrial Relations for lack of jurisdiction. The claim that the number of
Acrylic. Hence, Indophil Acrylic not being an extension or expansion of workers in the La Campana Coffee Factory is only 14 and the Court of
private respondent, Indophil Textile, the rank- and-file employees of Industrial Relations requires that to have jurisdiction over a dispute, an
Acrylic should not be recognized as the bargaining representative of organization must have at least 31 members.
private respondent.
Issue: Whether or not La Campana Gaugau Packing (The Gaugau
Doctrine: We already emphasized that "the legal corporate entity is Corporation) and La Campana Coffee Factory, Inc. (The Coffee
disregarded only if it is sought to hold the officers and stockholders Corporation) are one and the same, and therefore the dispute would be
directly liable for a corporate debt or obligation." In the instant case, within the jurisdiction of the Court of Industrial Relations.
petitioner does not seek to impose a claim against the members of the
Acrylic. Held: YES. It has been proven that the corporations owned by Tan Tong
are merely one and the same. This is for the fact that they are based in


only one office, its goods (gaugau and coffee) are stored in one place Facts: Felix Gochan and Sons Realty Corporation (FGSRC) was registered
and in one warehouse, delivery trucks indicate deliveries of both gaugau under the SEC on June, 1951 with Felix Gochan, Sr. as one of the
and coffee. It is also stated that the employees receive their salaries incorporators. Felixs daughter, Alice, is the mother of the respondents.
from only one payroll and from one Natividad Garcia, Tan Tongs Upon the death of Alice and later her husband, the certificates were still
secretary. In this case, the court treats the two companies as one. under the name of John Young Sr., not their children. Four years later,
Therefore, the count of employees should be taken as a whole, which is the Uys and the Youngs filed a complaint against the directors of FGSRC
66, very well above the minimum number required for the Court of with the SEC alleging that the directors were using the corporation for
Industrial Relations to acquire jurisdiction. fraudulent purposes. FGSRC apparently sold some of its real properties
to 2 other corporations, with these corporations having the same
Doctrine: The law treats two corporations as one, in a case filed against directors as FGSRC.
them, when they have only one management, set of shareholders,
office, and payroll. Issue: Whether or not a derivative may be brought by the Uys in behalf
of the corporation against the FGSRC directors.
2. Applicable to Third-Parties:
That respondents are not stockholders of the sister corporations Held: YES. As the complaint already avers that the corporation suffered
does not make them non-parties to this case, since it is alleged damage as a result of the action of the directors, the derivative suit
that the sister corporations are mere alter egos of the directors- could prosper. The complainants need not be stockholders of the two
petitioners, and that the sister corporations acquired the other corporations in order to make them parties to the case. On the
properties sought to be reconveyed to FGSRC in violation of complaint, it was stated that the directors were using those 2 other
directors-petitioners fiduciary duty to FGSRC. The notion of corporations as alter-egos, and the Uys and Youngs wanted the lands
corporate entity will be pierced and the individuals composing it sold to these two corporations reconveyed in the name of FGSRC. The
will be treated as identical if the corporate entity is being used other two corporations to whom the properties were being transferred
as a cloak or cover for fraud or illegality; as a justification for a have the same stockholders, and the fact that they were not
wrong; or as an alter ego, an adjunct, or a business conduit for stockholders in those companies cannot prevent Uy and Young from
the sole benefit of the stockholders. Gochan v. Young, 354 suing them since FGSRC and those two companies would be one the
SCRA 207 (2001). same. There was an intent to defraud Uy and Young by hiding the
properties in the other corporations.
Gochan v. Young
Doctrine: The notion of corporate entity will be pierced or disregarded


and the individuals composing it will be treated as identical if, as alleged
here, the corporate entity is being used as a cloak or cover for fraud or In any case, the parent-subsidiary relationship between PNB and PNB-
illegality; as a justification for a wrong; or as an alter-ego, an adjunct, or IFL is not the significant legal relationship involved in this case since the
a business conduit for the sole benefit of the stockholders. petitioner was not sued as the parent company of PNB-IFL. Rather, the
petitioner was sued because it acted as an attorney-in-fact of PNB-IFL in
C. Nature of the Piercing Doctrine as an Equitable Remedy: The initiating the foreclosure proceedings. A suit against an agent cannot
doctrine of piercing the corporate veil is an equitable doctrine without compelling reasons be considered a suit against the principal.
developed to address situations where the separate corporate
personality of a corporation is abused or used for wrongful purposes. Doctrine: The Circumstance rendering the subsidiary an instrumentality.
PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001). CONSEQUENTLY: It is manifestly impossible to catalogue the infinite variations of fact that
can arise but there are certain common circumstances which are
PNB v. Ritratto Group, Inc. important and which, if present in the proper combination, are
controlling. These are as follows:
Facts: PNB International Finance Ltd. (PNB-IFL), a subsidiary company of 1. The parent corporation owns all or most of the capital stock of
PNB, extended credit to Ritratto and secured by the real estate the subsidiary.
mortgages on four parcels of land. Since there was default, PNB-IFL 2. The parent and subsidiary corporations have common directors
(thru PNB as its attorney-in-fact) foreclosed the properties and were or officers.
subject to public auction. Ritratto Group filed a complaint for injunction 3. The parent corporation finances the subsidiary.
against PNB claiming that that PNB is merely an alter ego or a business 4. The parent corporation subscribes to all the capital stock of the
conduit of PNB-IFL that is why it is being impleaded in the case. subsidiary or otherwise causes its incorporation.
5. The subsidiary has grossly inadequate capital.
Issue: Whether or not PNB is a mere alter-ego of PNB-IFL. 6. The parent corporation pays the salaries and other expenses or
losses of the subsidiary.
Held: NO. The contract questioned is one entered into between 7. The subsidiary has substantially no business except with the
respondent and PNB-IFL. PNB is a mere attorney-in- fact for the PNB-IFL parent corporation or no assets except those conveyed to or by
with full power and authority to foreclose on the properties mortgaged the parent corporation.
to secure their loan obligations with PNB-IFL. In other words, PNB is an 8. In the papers of the parent corporation or in the statements of
agent with limited authority and specific duties. It is not privy to the its officers, the subsidiary is described as a department or
loan contracts entered into by respondents and PNB-IFL. division of the parent corporation, or its business or financial


responsibility is referred to as the parent corporations own.
9. The parent corporation uses the property of the subsidiary as its Rivera then approached Modesto Cervantes, president of Bormaheco,
own. and bought a Caterpillar Tractor, which was also the chattel mortgage in
10. The directors or executives of the subsidiary do not act favor of Bormaheco. This sale was secured by Insurance Corporation of
independently in the interest of the subsidiary but take their the Philippines, and re-insured by an Agreement of Counter Guaranty
orders from the parent corporation. whereby as security for the bond given by ICP, the Castillos mortgaged
11. The formal legal requirements of the subsidiary are not to ICP the 4 parcels of land.
observed.
The 4 parcels of land were foreclosed by ICP for violation of the terms
NOTE: and conditions of the Counter Guaranty. These were then sold by ICP to
Atty. Hofilea What level of control is necessary for a subsidiary Phil. Machinery Parts Manufacturing Co. (also owned by Modesto
company to be considered as a mere alter-ego of the parent company? Cervantes) who then sent a letter to Mauricia Castillo asking her to
Domination. The parent corporation must dominate the subsidiary, and vacate the property. The heirs of the late Felipe Castillo filed an action
it must be the reason behind the latters incorporation. for annulment of title before the CFI of Quezon contending that all the
aforementioned transactions are void for being entered into in fraud
1. It is a Remedy of Last Resort: Piercing the corporate veil is and without the consent and approval of the CFI of Quezon before
remedy of last resort and is not available when other remedies whom the administration proceedings was proceeding.
are still available. Umali v. Court of Appeals, 189 SCRA 529
(1990). Issue: Whether or not the doctrine of piercing the veil of corporate
entity should be applied against the respondent-Corporations.
Umali v. Court of Appeals
Held: NO. In the case at bar, petitioners seek to pierce the veil of
Facts: The Castillo family owns a parcel of land in Lucena City which was corporate entity of Bormaheco, ICP and PM Parts, alleging that these
mortgaged to the Development Bank of the Philippines. For failing to corporations employed fraud in causing the foreclosure and subsequent
pay, the property was about to be foreclosed. Santiago Rivera, nephew sale of the real properties belonging to petitioners. While we do not
of Mauricia Castillo, proposed that the 4 lots adjacent to the mortgaged discount the possibility of the existence of fraud in the foreclosure
property be converted into a subdivision to raise funds to redeem the proceeding, neither are we inclined to apply the doctrine invoked by
mortgaged lot. Thus, Castillo and Rivera executed an agreement petitioners in granting the relief sought. Petitioners are merely seeking
whereby Rivera would pay the Castillos for the development project. the declaration of the nullity of the foreclosure sale, which relief may be


obtained without having to disregard the aforesaid corporate fiction 3. Piercing Doctrine Not Applicable to Theorizing or to
attaching to respondent corporations. Secondly, petitioners failed to Advance/Create New Rights or Interest: Piercing of the veil of
establish by clear and convincing evidence that private respondents corporate fiction is not allowed when it is resorted under a
were purposely formed and operated, and thereafter transacted with theory of co-ownership to justify continued use and possession
petitioners, with the sole intention of defrauding the latter. by stockholders of corporate properties. Boyer-Roxas v. Court
of Appeals, 211 SCRA 470 (1992).
It must be noted that Modesto N. Cervantes served as Vice-President of
Bormaheco and, later, as President of PM Parts. On this fact alone, it Boyer-Roxas v. Court of Appeals
cannot be said that PM Parts had no knowledge of the aforesaid several
transactions executed between Bormaheco and petitioners. Facts: Two separate ejectment cases were filed against Guillermo Roxas
and Rebecca Boyer-Roxas, respectively by the Heirs of Eugenia V. Roxas,
Doctrine: The mere fact that the businesses of two or more Incorporated. The corporation alleges that both Guillermo and Rebecca
corporations are interrelated is not a justification for disregarding their are occupying houses within a resort owned by the corporation, and this
separate personalities, absent sufficient showing that the corporate was only tolerated.
entity was purposely used as a shield to defraud creditors and third
persons of their rights. In their answers, Guillermo and Rebecca alleged that they were also
heirs of Eugenia Roxas and as such they have a share in the resort, and
It is essential that the corporate fiction is the very means by that they have the right to stay in the property. According to them, the
which to defeat public convenience, justify wrong, protect fraud veil of corporate fiction must be pierced insofar as it does not allow
and defend crime. Jardine Davies, Inc. v. JRB Realty, Inc., 463 them to possess the properties owned by the corporation even though
SCRA 555, 565 (2005). they are co-owners of the corporation and its properties along with
2. Can Be Availed-of Only to Prevent Fraud: Piercing doctrine is other stockholders.
meant to prevent fraud, and cannot be employed when the net
result would be to perpetrate fraud or a wrong. Gregorio Issue: Whether or not the corporate veil must be pierced.
Araneta, Inc. v. Tuason de Paterno and Vidal, 91 Phil. 786
(1952). Held: NO. The fact that the corporation was incorporated with the
The theory of corporate entity was not meant to promote unfair estate left by Eugenia Roxas as capital, and that Rebecca/Guillermo, as
objectives or otherwise, nor to shield them. Villanueva v. Adre, heirs of Roxas, were stockholders of the company, do not justify the
172 SCRA 876 (1989). piercing of the corporate veil. Even if the former manager of the


Corporation granted permission to Rebecca/Guillermo to possess the amended real estate mortgage.
property, the Corporation is not forever bound by this permission. In the
absence of any contract between the Corporation and Issue: Whether or not the doctrine of piercing the veil of corporate
Rebecca/Guillermo regarding the length of their possession, the Board fiction was properly applied.
may at any time revoke the permission through a board resolution, as
what they did in the case at bar. Held: YES. Cupertino presented overwhelming evidence that Siain
Enterprises Inc., and its affiliate corporations (Yuyek and Siain
Doctrine: Properties registered in the name of the corporation are Transport) had received the proceeds of the loan which was the
owned by it as an entity separate and distinct from its members. While consideration of the amended real estate mortgage. Moreover, it was
shares of stock constitute personal property, they do not represent established in the lower courts that Siain Enterprises and Yuyek had a
property of the corporation. A stockholder is not entitled to possess any common set of incorporators, stockholders and board of directors, the
definite property of the corporation. same bookkeeper and accountant, the same office address and the
same majority stockholder which is Cua Le Leng. Cua Le Leng had the
BUT SEE: Siain Enterprises, Inc v. Cupertino Realty Corp., 590 unlimited liability to use Siain Transports funds to pay the obligations
SCRA 435 (2009). incurred by Siain Enterprises. Thus, it is clear that Siain Enterprises, Siain
Transport and Yuyek are characterized by oneness of operations vested
Siain Enterprises, Inc v. Cupertino Realty Corp. in Cua Le Leng alone. Consequently, these corporations were proven to
be mere alter-egos of Cua Le Leng.
Facts: Siain Enterprises obtained a loan (and executed a promissory
note) from Cupertino Realty Corporation secured by a mortgage over Doctrine: Where clear evidence presented support the fact that a
two parcels of land and other machineries and equipment. Another corporations affiliates have received large amounts which became the
promissory note in favor of Cupertino was executed by Cua Le Leng consideration for the company execution of a real estate mortgage over
(President of Siain Enterprises) where the latter was bound in her its properties, then the piercing doctrine shall be applied to support the
personal capacity. Later, Cupertino instituted foreclosure proceedings, fact that the real estate mortgage was valid and supported by proper
but Siain Enterprises claim that the amended real estate mortgage was consideration.
null and void because it never received the P160M loan. The lower
courts ruled in favor of Cupertino and applied the doctrine of piercing The piercing cannot be availed of in order to dislodge from SECs
the veil of corporate fiction to preclude Siain Enterprises from jurisdiction a petition for suspension of payments filed under
disavowing the receipt of the loan and paying its obligation under the P.D. 902-A, on the ground that the petitioning individuals should


be treated as the real petitioners to the exclusion of the unintended may result from an erroneous application. PNB v.
petitioning corporate debtor: doctrine only applies when such Andrada Electric & Engineering Co., 381 SCRA 244 (2002). 1
corporate fiction is used to defeat public convenience, justify Thus:
wrong, protect fraud or defend crime. Union Bank v. Court of o The organization of the corporation at the time when
Appeals, 290 SCRA 198 (1998). the relationship between the landowner and the
Application of the piercing of the subsidiary company to merge developer were still cordial cannot be used as a basis to
it with the holding company cannot be allowed to support a hold the corporation liable later on for the obligations
theory of set-off or compensation, there being no allegation of the landowner to the developer under the mere
much less any proof of fraud. Nisce v. Equitable PCI Bank, Inc., allegation that the corporation is being used to evade
516 SCRA 231 (2007). the performance of obligation by one of its major
An employee who has officially retired from the company and stockholders. Luxuria Homes, Inc. v. Court of Appeals,
availed of her retirement benefit, but who continued to be 302 SCRA 315 (1999).
employed as a consultant with affiliate companies, cannot o In this case, the Court finds that the Remington failed to
employ piercing in order to treat her stint with the affiliate discharge its burden of proving bad faith on the part of
companies as part of her employment with the main company Marinduque Mining and its transferees in the mortgage
she retired from there is no fraud or employment of unfair and foreclosure of the subject properties to justify the
shielding. Rivera v. United Laboratories, Inc., 586 SCRA 269 piercing of the corporate veil. DBP v. Court of Appeals,
(2009). 363 SCRA 307 (2001).2
4. Basis Must Be Clear Evidence o Neither has it been alleged or proven that Merryland is
To disregard the separate juridical personality of a corporation, so organized and controlled and its affairs are so
it is elementary that the wrongdoing cannot be presumed and conducted as to make it merely an instrumentality,
must be clearly and convincingly established. Application of the agency conduit or adjunct of Cardale. Even assuming
doctrine of piercing the corporate veil should be done with that the businesses of Cardale and Merryland are
caution. A court should be mindful of the milieu where it is to be interrelated, this alone is not justification for
applied. It must be certain that the corporate fiction was
misused to such an extent that injustice, fraud, or crime was
1
General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225
committed against another, in disregard of its rights. The (2007); Pantranco Employees Association (PEA- PTGWO) v. NLRC, 581 SCRA 598
wrongdoing must be clearly and convincingly established; it (2009); Halley v. Printwell, Inc. 649 SCRA 116 (2011).
2
cannot be presumed. Otherwise, an injustice that was never Also McLeod v. NLRC, 512 SCRA 222 (2007); Uy v. Villanueva, 526 SCRA 73
(2007).


disregarding their separate personalities, absent any for which the doctrine was applied. Koppel (Phil.) Inc. v. Yatco,
showing that Merryland was purposely used as a shield 77 Phil. 496 (1946).3
to defraud creditors and third persons of their rights. The application of the piercing doctrine does not attach to the
Francisco v. Mejia, 362 SCRA 738 (2001).1 person of the corporation, but merely an equity remedy that
o The mere assertion by a Filipino litigant against the pertains to the transactions in controversy.4
existence of a tandem between two Japanese When the doctrine is applied, the consequences would be that
corporations cannot be the basis for piercing, which can the members or stockholders of the corporation will be
only be applied by showing wrongdoing by clear and considered as the corporation, that is, liability will attach
convincing evidence. Marubeni Corp. v. Lirag, 362 SCRA directly to the officers and stockholders. Umali v. Court of
620 (2001). Appeals, 189 SCRA 529 (1990).
The party seeking to pierce has the burden of presenting clear
and convincing evidence to justify the setting aside of the D. CLASSIFICATION OF PIERCING CASES:
separate corporate personality rule. The question of whether a DEFEAT OF PUBLIC CONVENIENCE (EQUITY PIERCING): When
corporation is a mere alter ego is a purely one of fact, and the the application of the separate corporate personality would be
burden is on the party who alleges it. PNB v. Andrada Electric & inconsistent with the business purpose of the legal fiction, or
Engineering Co., 381 SCRA 244 (2002).2 when piercing the corporate fiction is necessary to achieve
5. Piercing is a power belonging to the court and cannot be justice or equity for those who deal in good faith with the
assumed improvidently by a sheriff. Cruz v. Dalisay, 152 SCRA corporation, or when the use of the separate juridical
482 (1987); D.R. CATC Services v. Ramos, 477 SCRA 18 (2005). personality is used to confuse legitimate issues.
6. Piercing Has Only Res Judicata Effect: Application of the FRAUD PIERCING: When corporate entity used to commit a
doctrine to a particular case does not deny the corporation of crime, to undertake fraud or do a wrong, or that the corporate
legal personality for any and all purposes, but only for the veil is used as a means to evade the consequences of ones
particular transaction or instance, or the particular obligation criminal or fraudulent acts.

1
Also Ramoso v. Court of Appeals, 347 SCRA 463 (2000); Guatson Intl Travel
3
and Tours, Inc. v. NLRC, 230 SCRA 815 (1990). Tantoco v. Kaisahan ng Mga Manggagawa sa La Campana, 106 Phil. 198
2
Also Concept Builders, Inc. v. NLRC, 257 SCRA 149 (1996); Heirs of Ramon (1959); Francisco v. Mejia, 362 SCRA 738 (2001).
4
Durano, Sr. v. Uy, 344 SCRA 238 (2000); MR Holdings, Ltd. V. Bajar, 380 SCRA Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.
617 (2002); Ramirez v. Mar Fishing Co., Inc., 672 SCRA 137 (2012). (2013 ed.). Manila, Philippines: Rex Book Store.


ALTER-EGO PIERCING: When corporate entity merely a farce (ALSONS) and the Alcantara Family each owned shares in the aforesaid
since the corporation is merely the alter ego, business conduit, GCC franchise companies, e.g., CCC Davao and CCC Cebu.
or instrumentality of a person or another entity.
Authorities are agreed on at least three (3) basic areas where In December 1980, ALSONS and the Alcantara Family sold their
piercing the veil, with which the law covers and isolates the shareholdings (101,953shares) in the CCC franchise companies to
corporation from any other legal entity to which it may be EQUITY for P2M, for which EQUITY issued a bearer promissory note
related, is allowed. These are: 1) defeat of public convenience, for P2M with a one-year maturity date and 18% interest per annum.
as when the corporation is used as vehicle for the evasion of
existing obligation; 2) fraud cases or when the corporate entity Some four years later, the Alcantara Family assigned its rights and
is used to justify wrong, protect fraud, or defend a crime; or 3) interests over the bearer note to ALSONS. Even before the execution of
alter ego cases, where the corporation is merely a farce since it the assignment deal, letters for demand for interest payment were
is a mere alter ego or business conduit of a person, or where the already sent to EQUITY through its President, Wilfredo Labayen, who
corporation is so organized and controlled and its affairs are so pleaded inability to pay the stipulated interest, EQUITY no longer having
conducted as to make it merely an instrumentality, agency, assets or property neither to settle its obligation nor being extended
conduit or adjunct of another corporation. General Credit Corp. financial support by GCC.
v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007)1
citing VILLANUEVA, COMMERCIAL LAW REVIEW (2004 ed), at On January 14, 1986, ALSONS filed a complaint for a sum of money
p. 576. against EQUITY and GCC. GCC was impleaded as party-defendant since
EQUITY has been organized as a tool and mere conduit of GCC.
General Credit Corp. v. Alsons Dev. and Investment Corp.
Issue: Whether or not the doctrine of Piercing the Veil of Corporate
Facts: General Credit Corp (GCC), then known as Commercial Credit Fiction should be applied
Corp (CCC), established CCC franchise companies in different urban
centers in the country. CCC Equity Corporation (EQUITY) was organized Held: YES. The relationship of GCC and EQUITY have been that of
by GCC for the purpose of taking over the operations and management parent-subsidiary corporations, the doctrine is applicable in the case
of the various franchise companies. Alsons Devt & Investment Corp at bar. There are at least 20 documented circumstances and
transactions which, taken together, strongly support the conclusion that
1
Also Pantranco Employees Association (PEA-PTGWO) v. NLRC, 581 SCRA 598 EQUITY was an adjunct / instrumentality / business conduit of GCC
(2009); Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590 (2010); i.e. commonality of directors, officers and stockholders, sharing of office
Sarona v. NLRC, 663 SCRA 394 (2012).


between GCC and EQUITY, financing and management arrangements
allowing GCC to handle the funds of EQUITY, virtual control of GCC over Concept Builders, Inc. v. NLRC
finances, business policies and practices of EQUITY, and the
establishment of EQUITY by GCC to circumvent CB rules. Facts: Concept Builders Inc. was engaged in the construction business
and lost in a case before the NLRC concerning the termination of private
Doctrine: Another formulation of this doctrine is that when 2 business respondents whom it had employed as laborers, carpenters and riggers
enterprises are owned, conducted and controlled by the same parties, in a project which Concept claims was finished, but upon inspection was
both law and equity will disregard the legal fiction that 2 corporations found to be the contrary. The Labor Arbiter rendered judgment against
are distinct entities and treat them as one and the same, when Concept requiring it to pay private respondents back wages. The Sheriff
necessary to protect third parties rights. then tried to execute the writ of execution but found that the office
previously occupied by Concept is now occupied by Hydro Phils. Inc. a
1. Rundown on Piercing Application: manufacturing company allegedly owned by the same stockholders.
This Court pierced the corporate veil to ward off a judgment
credit, to avoid inclusion of corporate assets as part of the Issue: Whether or not the doctrine of piercing the corporate veil is
estate of the decedent, to escape liability arising for a debt, or applicable to this case.
to perpetuate fraud and/or confuse legitimate issues either to
promote or to shield unfair objectives to cover up an otherwise Held: YES. While petitioners claimed it ceased operations in 1986, it
blatant violation of the prohibition against forum shopping. filed an Information Sheet with the SEC in 1987 stating that its office
Only is these and similar instances may the veil be pierced and address is their old address. Both information sheets were filed by
disregarded. PNB v. Andrada Electric & Engineering Co., 381 Virgilio Casino, the same corporate secretary. They had the same
SCRA 244 (2002). President, Board of Directors and substantially the same subscribers.
2. Summary of Probative Factors: Concept Builders, Inc. v. NLRC, Clearly, petitioner ceased its business operations in order to evade the
257 SCRA 149 (1996).1 payment to private respondents of back wages and to bar their
The absence of these elements prevents piercing the corporate reinstatement to their former positions. HPPI is obviously a business
veil. Lim v. Court of Appeals, 323 SCRA 102 (200).2 conduit of Concept Builders and its emergence was skillfully
orchestrated to avoid the latters financial liability.

1 2
PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001); Velarde v. Lopez, 419 SCRA Child Learning Center, Inc. v. Tagorio, 475 SCRA 236 (2005); General Credit
422 (2004); Jardine Davies, Inc. v. JRB Realty, Inc., 463 SCRA 555 (2005); Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007); Nisce v.
Pantranco Employees Association (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009). Equitable PCI Bank, Inc., 516 SCRA 231 (2007).


BEC defaulted, and the bank foreclosed on the real mortgage. The
Doctrine: Probative factors of identity that will justify the application of spouses Lipat claim that the loan obtained by Teresita were ultra vires
the doctrine: acts because they were executed without the requisite board resolution
1. Stock membership by one or common ownership of both of the Board of Directors of BEC.
2. Identity of directors and officers (management)
3. Manner of keeping corporate books and records (management) Issue: Whether or not the doctrine of piercing the veil of corporate
4. Methods of conducting business (management). fiction applies in this case.

3. Distinction Between Fraud Piercing and Alter-ego Piercing: Held: YES. In finding the Lipats mortgaged property liable for the
Lipat v. Pacific Banking Corp., 402 SCRA 339 (2003). obligations of BEC, both courts below relied upon the alter ego doctrine
or instrumentality rule.
Lipat v. Pacific Banking Corp.
Evidence suggests an alter ego case in the sense that: (1) the spouses
Facts: Spouses Lipat (Alfredo and Estelita) owns Belas Export Trading are the owners and majority shareholders of BET and BEC; (2) both firms
(BET), a single proprietorship engaged in garment manufacturing in were managed by their daughter, Teresita; (3) both firms were engaged
Quezon City. The Lipats also owned the Mystical Fashions in the United in the garment business, supplying products to Mystical Fashion, a US
States, which sells goods imported from the Philippines through BET. firm established by Estelita; (4) both firms held office in the same
Estelita designated her daughter, Teresita, to manage BET in the building owned by the Lipats; (5) BEC is a family corporation with the
Philippines while she was managing Mystical Fashions in the United Lipats as its majority stockholders; (6) the business operations of the
States. BEC were so merged with those of Mrs. Lipat such that they were
practically indistinguishable; (7) the corporate funds were held by
In order to facilitate the convenient operation of BET, Estelita executed Estelita Lipat and the corporation itself had no visible assets; (8) the
a special power of attorney appointing Teresita as her attorney-in-fact board of directors of BEC was composed of the Burgos and Lipat family
to obtain loans. By virtue of this SPA, Teresita obtained a sizeable loan members; (9) Estelita had full control over the activities of and decided
from Pacific Bank. Three months after the loan, BET was incorporated business matters of the corporation; and that (10) Estelita Lipat had
into a family corporation named Belas Export Corporation (BEC), benefited from the loans secured from Pacific Bank to finance her
engaged in the same business and utilized the same properties. The loan business abroad and from the export bills secured by BEC for the
was restructured in the name of BEC and secured with Lipats property. account of Mystical Fashion. It could not have been coincidental that
BET and BEC are so intertwined with each other in terms of ownership,


business purpose, and management. TESCON contested the judgment claiming that the admission made in
the "Employer's Report of Accident or Sickness" was due to honest
Doctrine: When the corporation is the mere alter ego or business mistake and/or excusable negligence on its part, and that the illness for
conduit of a person, the separate personality of the corporation may be which compensation is sought is not an occupational disease, hence, not
disregarded. compensable under the law.

E. DEFEAT OF PUBLIC CONVENIENCE (EQUITY PIERCING): Juridical Issue: Whether or not TESCO may be held liable for the death.
Personality Cannot Be Employed:
1. To Confuse Legitimate Issues: Telephone Engineering and Held: YES. TESCO'S denial at this stage that it is the employer of the
Service Co., Inc. V. WCC, 104 SCRA 354 (1981). deceased is obviously an afterthought, a devise to defeat the law and
evade its obligations. This denial also constitutes a change of theory on
Telephone Engineering and Service Co., Inc. V. WCC appeal which is not allowed in this jurisdiction. The Court pierced the
veil between TESCO and UMARCO in the interest of justice and equity.
Facts: Petitioner engaged in the business of manufacturing telephone
equipment. Its sister company, the Utilities Management Corporation Doctrine: Although respect for the corporate personality as such, is the
(UMACOR), with offices in the same location. UMACOR is also under the general rule, there are exceptions. In appropriate cases, the veil of
management of Jose Luis Santiago. UMACOR employed the late Pacifica corporate fiction may be pierced as when the same is made as a shield
L. Gatus as Purchasing Agent. Then was detailed with petitioner to confuse the legitimate issues.
company. He reported back to UMACOR and after 2 years he contracted
illness and died of "liver cirrhosis with malignant degeneration." 2. To Raise Legal Technicalities: Emilio Cano Enterprises v. CIR, 13
SCRA 291 (1965).
Respondent Leonila S. Gatus, filed a "Notice and Claim for
Compensation" with Workmen's Compensation Commission sub-office, Emilio Cano Enterprises v. CIR
alleging that her husband was an employee of TESCO, and that he died
of liver cirrhosis. UMACOR submitted an Employer's Report of Accident Facts: A complaint for unfair labor practice was filed By Honorata Cruz
or Sickness which indicated that the employee contracted illness in against Emilio, Ariston and Rodolfo Cano as president and proprietor,
regular occupation. On this basis, the Acting Referee awarded death field supervisor and manager, respectively, of Emilio Cano Enterprises,
benefits plus burial expenses in favor of the heirs of Gatus. Inc. An order of execution was issued to reinstate Honorata and to
deposit with the court the amount P7,222.58 within 10 days from


receipt of the order, failing which the court will order either a levy on One cannot evade civil liability by incorporating properties or
respondents properties or the filing of an action for contempt of court. the business. Palacio v. Fely Transportation Co., 5 SCRA 1011
(The order of execution was directed against the properties of Emilio (1962).1
Cano Enterprises, Inc.) Where a debtor registers his residence to a family corporation
in exchange of shares of stock and continues to live therein,
Issue: Whether or not the judgment against Emilio and Rodolfo in their then the separate juridical personality may be disregarded.
capacity as officials of the corporation can be made effective against the PBCom v. CA, 195 SCRA 567 (1991).
property of the latter which was not a party to the case. Where corporate fiction was used to perpetrate social injustice
or as a vehicle to evade obligations or confuse the legitimate
Held: YES. While it is an undisputed rule that a corporation has a issues (as in this case where the actions of management of the
personality separate and distinct from its members or stockholders two corporations created confusion as to the proper employer
because of a fiction of the law, here we should not lose sight of the fact of claimants), the two corporations would be merged as one.
that the Emilio Cano Enterprises, Inc. is a closed family corporation Azcor Manufacturing, Inc. v. NLRC, 303 SCRA 26 (1999).
where the incorporators and directors belong to one single family. Here The corporate veil cannot be used to blatantly violate the
is an instance where the corporation and its members can be prohibition against forum-shopping. Where the corporation
considered as one. And to hold such entity liable for the acts of its itself has not been remiss in vigorously prosecuting or defending
members is not to ignore the legal fiction but merely to give meaning to corporate causes and in using and applying remedies available
the principle that such fiction cannot be invoked if its purpose is to use to it, then shareholders, whether suing as the majority in direct
it as a shield to further an end subversive of justice. actions or as the minority in a derivative suit, cannot be allowed
to pursue the same claims. First Philippine International Bank
Doctrine: And so it has been held that while a corporation is a legal v. Court of Appeals, 252 SCRA 259 (1996).
entity existing separate and apart from the persons composing it, that 3. The Case for Thinly-Capitalized Corporations: McConnel v. CA,
concept cannot be extended to a point beyond its reason and policy, 1 SCRA 722 (1961).
and when invoked in support of an end subversive of this policy it
should be disregarded by the courts. McConnel v. CA

Facts: Park Rite Co. (PRC) leased from Rafael Samanillo a vacant lot

1
Also Mendoza and Yotoko v. Banco Real Dev. Bank, 470 SCRA 86 (2005).


which was used for parking motor vehicles for consideration. It turned the corporate obligations.
out that in operating its parking business, the corporation occupied and
used not only the Samanillo lot it had leased but also an adjacent lot Doctrine: While the mere ownership of all or nearly all of the capital
belonging to Padilla (respondent) without the owners knowledge and stock of a corporation is a mere business conduit of the stockholder,
consent. Padilla wanted payment for the use and occupation of the lot. that conclusion is amply justified where it is shown that the operations
of the corporation were so merged with those of the stockholders as to
Judgment was rendered against Park Rite, but it was found to be be practically indistinguishable from them.
without any assets apart from the money deposited with the Court. The
judgment creditors then filed suit in the CFI Manila against the The DOJ Resolution explicitly identified the false pretense,
corporation and its past and present stockholders, to recover from fraudulent act or fraudulent means perpetrated upon the
them, jointly and severally, the unsatisfied balance of the judgment, investing public who were made to believe that ASBHI had the
plus legal interest and costs. financial capacity to repay the loans it enticed petitioners to
extend, despite the fact that it had an authorized capital stock
Issue: Whether or not there was justification for disregarding the of only P500,000.00 and paid up capital of only P125,000.00),
corporate entity of Park Rite Co., Inc. and holding its controlling with the deficient capitalization evidenced by its articles of
stockholders personally responsible for a judgment against the corp. incorporation, the treasurers affidavit, the audited financial
statements. Moreover, respondents argument assumes that
Held: YES. The evidence clearly shows that these persons completely there is legal obligation on the part of petitioners to undertake
dominated and controlled the corporation and that the functions of the an investigation of ASBHI before agreeing to provide the loans.
corporation were solely for their benefits. It is obvious from the sharing There is no such obligation. It is unfair to expect a person to
that only 1 or 2 people possess the majority shares. Other incorporators procure every available public record concerning an applicant
had about 1 or 2 each which were merely qualifying shares. That the for credit to satisfy himself of the latters financial standing. At
corporation was a mere extension of their personality is shown by the least, that is not the way an average person takes care of his
fact that the office of Cirilo Paredes and that of Park Rite Co., Inc. were concerns. Gabionza v. Court of Appeals, 565 SCRA 38 (2008).
located in the same building, in the same floor and in the same room Where the corporation was under the control of its stockholders
at 507 Wilson Building. This is further shown by the fact that the funds who ran-up quite a high obligation with the printing company
of the corporation were kept by Cirilo Paredes in his own name. The knowing fully well that their corporation was not in a position to
facts show that the corporation is a mere instrumentality of the pay for the accounts, and where in fact they personally
individual stockholders; hence the latter must individually answer for benefited from the operations of the company to which they


never paid their subscription in full, would constitute piercing of
the veil to allow the creditor to be able to collect what Doctrine: TRUST FUND DOCTRINE. Under which corporate debtors
otherwise were debts owed by the company which has no might look to the unpaid subscriptions for the satisfaction of unpaid
visible assets and has ceased all operations. Halley v. Printwell, corporate debts. Subscriptions to the capital of a corporation
Inc. 649 SCRA 116 (2011). constitutes a trust fund for the payment of the creditors (by mere
analogy) In reality, corporation is a simple debtor. The creditor is
Halley v. Printwell, Inc. allowed to maintain an action upon any unpaid subscriptions and
thereby steps into the shoes of the corporation for the satisfaction of its
Facts: BMPI (Business Media Philippines Inc.) is a corporation under the debt. The trust fund doctrine is not limited to reaching the stockholders
control of its stockholders, including Donnina Halley. In the course of its unpaid subscriptions. The scope of the doctrine when the corporation is
business, BMPI commissioned PRINTWELL to print Philippines, Inc. (a insolvent encompasses not only the capital stock but also other
magazine published and distributed by BMPI). BMPI placed several property and assets generally regarded in equity as a trust fund for the
orders amounting to P3160,000 but was only able to pay P25,000. payment of corporate debts.
PRINTWELL sued BMPI for collection of the unpaid balance and later on
impleaded BMPIs original stockholders and incorporators to recover on 4. Avoidance or Minimization of Taxes: Yutivo Sons Hardware v.
their unpaid subscriptions. Court of Tax Appeals 1 SCRA 160 (1961); Liddell & Co. v.
Collector of Internal Revenue, 2 SCRA 632 (1961).
Issue: Whether or not a stockholder (Halley in this case) who was in
active management of the business of the corporation and still has Yutivo Sons Hardware v. Court of Tax Appeals
unpaid subscriptions should be made liable for the debts of the
corporation by piercing the veil of corporate fiction Facts: Yutivo Sons Hardware Co. is a company engaged in the
importation and sale of hardware supplies and equipment. The former
Held: YES. Such stockholder should be made liable up to the extent of bought a number of cars from General Motors Overseas Corporation. As
her unpaid subscription. It was found that at the time the obligation was importer, GM paid sales tax prescribed by sections 184, 185 and 186 of
incurred, BMPI was under the control of its stockholders who know fully the Tax Code on the basis of its selling price to Yutivo. Said tax being
well that the corporation was not in a position to pay its account (thinly collected only once on original sales, Yutivo paid no further sales tax on
capitalized). And, that the stockholders personally benefited from the its sales to the public. Eventually, Yutivo sold exclusively to Southern
operations of the corporation even though they never paid their Motors, which was organized to engage in the business of selling cars,
subscriptions in full. trucks, and spare parts to the public.


to arrive at the true tax liability of Yutivo.
When GM decided to withdraw from the Philippines, it appointed Yutivo
as importer for the Visayas and Mindanao, and Yutivo continued its Doctrine:
previous arrangement of selling exclusively to SM. In the same way that
GM used to pay sales taxes based on its sales to Yutivo, the latter, as Use of nominees to constitute the corporation for the benefit of
importer, paid sales tax prescribed on the basis of its selling price to SM, the controlling stockholder who sought to avoid payment of
and since such sales tax, as already stated, is collected only once on taxes. Marvel Building v. David, 9 Phil. 376 (1951).
original sales, SM paid no sales tax on its sales to the public. The plea to pierce the veil of corporate fiction on the allegation
that the corporations true purpose is to avoid payment by the
After some time, the CIR made an assessment on Yutivo and demanded incorporating spouses of the estate taxes on the properties
from the latter P1,804,769.85 as deficiency sales tax, claiming that the transferred to the corporations: With regard to their claim that
taxable sales were the retail sales by SM to the public and not the sales [the companies] Ellice and Margo were meant to be used as
at wholesale made by Yutivo to the latter inasmuch as SM and Yutivo mere tools for the avoidance of estate taxes, suffice it to say
were one and the same corporation, the former being the subsidiary of that the legal right of a taxpayer to reduce the amount of what
the latter. otherwise could be his taxes or altogether avoid them, by
means which the law permits, cannot be doubted. Gala v.
Issue: Whether or not Southern Motors was a mere adjunct of Yutivo. Ellice Agro-Industrial Corp., 418 SCRA 431 (2003).
HOWEVER: The mere existence of parent-subsidiary relations,
Held: YES. Briefly stated, Yutivo financed principally, if not wholly, the or the fact that one corporation is affiliated with another
business of SM and actually extended all the credit to the latter not only corporation does not justify piercing based on serving public
in the form of starting capital but also in the form of credits extended convenience. Comm. of Internal Revenue v. Norton and
for the cars and vehicles allegedly sold by Yutivo to SM as well as Harrison, 11 SCRA 704 (1954).1
advances or loans for the expenses of the latter when the capital had
been exhausted. The funds of SM were all merged in the cash fund of F. FRAUD CASES:
Yutivo. At all times, Yutivo, through officers and directors common to it When the legal fiction of the separate corporate personality is
and SM, exercised full control over the cash funds, policies, abused, such as when the same is used for fraudulent or
expenditures and obligations of the latter. Southern Motors being but a
mere instrumentality, or adjunct of Yutivo, the Court CTA correctly
1
disregarded the technical defense of separate corporate entity in order Tomas Lao Construction v. NLRC, 278 SCRA 716 (1997). Marques v. Far East
Bank and Trust Co., 639 SCRA 312 (2011).


wrongful ends, the courts have not hesitated to pierce the payment of taxes so that the properties may be levied upon and be the
corporate veil. Francisco v. Mejia, 362 SCRA 738 (2001). subject of an auction where Merryland could bid, which was exactly
what happened.
Francisco v. Mejia
Doctrines: With specific regard to corporate officers, the general rule is
Facts: Andrea Gutierrez was the owner of a parcel of land in Caloocan. that the officer cannot be held personally liable with the corporation,
This property was subdivided into five lots, four of which are the subject whether civilly or otherwise, for the consequences of his acts, if he
of this controversy. The four lots were sold to Cardale Financing and acted for and in behalf of the corporation, within the scope of his
Realty Corporation which made an initial payment, and the balance was authority and in good faith. In such cases, the officers acts are properly
secured by 3 of 4 lots mortgaged to Gutierrez herself. When Cardale attributed to the corporation. However, if it is proven that the officer
failed to pay, Gutierrez filed a suit for rescission. Cardale was has used the corporate fiction to defraud a third party, or that he has
represented by its VP and Treasurer, herein petitioner Adalia Francisco. acted negligently, maliciously or in bad faith, then the corporate veil
shall be lifted and he shall be held personally liable for the particular
The case dragged on for 14 years, during which the taxes for the corporate obligation involved.
mortgaged properties were not paid. As a result, the government levied
upon them. They became subject of an auction sale. The highest bidder The general rule is that obligations incurred by a corporation,
was Merryland Development Corporation, whose President was also acting through its directors, officers or employees, are its sole
Adalia Francisco. Because of these, Rita Mejia, the administrator of liabilities. However, there would be piercing of the veil when
Gutierrezs estate, filed a complaint for damages against Francisco for the corporation is used by any of them as a cloak or cover for
fraud. fraud or illegality or injustice. Here, the fraud was committed by
petitioners to the prejudice of respondent bank. Mendoza v.
Issue: Whether or not Francisco may be held liable. Banco Real Dev. Bank, 470 SCRA 86 (2005).
Fraud and bad faith on the part of certain corporate officers or
Held: YES, it was evident that Francisco was in bad faith, not informing stockholders may warrant the piercing of the veil of corporate
Gutierrezs estate of the tax delinquencies. Apparently, Francisco made fiction so that the said individual may not seek refuge therein,
use of her involvement in Cardale and Merryland to secure an but may be held individually and personally liable for his or her
advantage for the latter. Cardale as the mortgagor had the duty of actions. Lafarge Cement Phils., Inc. v. Continental Cement
paying the taxes for the properties. Evidence showed that Francisco as Corp., 443 SCRA 522 (2004).
Cardales Treasurer, intended to conceal the delinquency in the


However, mere allegation of fraud or bad faith, without or when they practice fraud on internal revenue laws, the fiction
evidence supporting such claims cannot warrant the piercing of of their separate and distinct corporate identities shall be
the corporate veil. DBP v. Court of Appeals, 357 SCRA 626, 358 disregarded, and both entities treated as one taxable person,
SCRA 501, 363 SCRA 307 (2001). subject to assessment for the same taxable transaction.
1. Acts by Controlling Shareholder: Commissioner of Internal Revenue v. Menguito, 565 SCRA 461
The fact that a corporation owns all of the stocks of another (2008).
corporation, taken alone, is not sufficient to justify their being 3. Guiding Principles in Fraud Cases:
treated as one entity. If used to perform legitimate functions, a
subsidiarys separate existence shall be respected, and the Why is there inordinate showing of alter-ego elements?
liability of the parent corporation, as well as the subsidiary shall 1. There must have been fraud or an evil motive in the affected
be confined to those arising in their respective business. Nisce v. transaction, and the mere proof of control of the corporation by
Equitable PCI Bank, Inc., 516 SCRA 231 (2007).1 itself would not authorize piercing;
Where a stockholder, who has absolute control over the 2. The corporate fiction is used as a means to commit the fraud or
business and affairs of the corporation, entered into a contract avoid the consequences thereof; and
with another corporation through fraud and false 3. The main action should seek for the enforcement of pecuniary
representations, such stockholder shall be liable solidarily with claims pertaining to the corporation against corporate officers
co-defendant corporation even when the contract sued upon or stockholders.
was entered into on behalf of the corporation. Namarco v.
Associated Finance Co., 19 SCRA 962 (1967). Respondent corporations may be engaged in the same business
Where the corporation is used as a means to appropriate a or even share the same address, or have interlocking
property by fraud which property was later resold to the incorporators, directors or officers, in the absence of fraud or
controlling stockholders, then piercing should be allowed. Heirs other public policy consideration, does not warrant piercing the
of Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000). veil of corporate fiction. McLeod v. NLRC, 512 SCRA 222 (2007),
2. Tax Evasion or Fraud: quoting from Indophil Textile Mill Workers Union v. Calica, 205
In a number of cases, the Court has shredded the veil of SCRA 697 (1992), and Del Rosario v. NLRC, 187 SCRA 777
corporate identity and ruled that where a corporation is merely (1990); Heirs of Fe Tan Uy v. International Exchange Bank, 690
an adjunct, business conduit or alter ego of another corporation SCRA 519 (2013).
Mere substantial identity of incorporators of two corporations
does not necessarily imply fraud, nor warrant the piercing of the
1
Marques v. Far East Bank and Trust Co., 639 SCRA 312 (2011).


veil of corporate fiction. In the absence of clear and convincing Philippines with the same name. Again, he owned practically all the
evidence to show that the corporate personalities were used to shares (legally, the San Francisco corporation owned all the assets and
perpetuate fraud, or circumvent the law, the corporations are liabilities of the Manila corporation). Sometime in 1919, Willits and
to be rightly treated as distinct and separate from each other. Arnold entered into another contract, marked Exhibit B, which clarified
To disregard the said separate juridical personality of a Arnolds mode of compensation.
corporation, the wrongdoing must be proven clearly and
1
convincingly. Laguio v. NLRC, 262 SCRA 715 (1996). Willits corporation went through financial trouble, and its creditors
committee refused to honor Exhibit B because according to it, the
G. ALTER-EGO CASES: corporation never allowed or acceded to such a contract or
1. Using Corporation as Conduit or Alter Ego: understanding, and that Willits signed it without authority.
Where the capital stock is owned by one person and it functions
only for the benefit of such individual owner, the corporation Issue: Whether or not Exhibit B is binding upon the corporation and the
and the individual should be deemed the same. Arnold v. creditors committee despite the lack of approval from the Board
Willets and Patterson, Ltd., 44 Phil. 634 (1923).
Held: YES. The approval of the Board is not needed since it is evident
Arnold v. Willets and Patterson, Ltd. that Willis owns and controls the corporation. Willits actions were done
not just to benefit him as a shareholder but to control the whole
Facts: Willits & Patterson was a partnership organized in San Francisco, corporation and to affect the transaction of its business, in the same
California. In 1916, they engaged the services of Arnold to be their agent manner as if it had been clothed with all the formalities of a corporate
in the Philippines who will enjoy profit-sharing and a fixed salary. Arnold act. Also, Exhibit B came into effect in 1919 and since then, was used by
was to be Willits & Pattersons agent for five years, and he was tasked the corporation in determining Arnolds salary and dues. There was no
to operate a certain oil mill. objection ever raised against it except two years later, in 1921, by the
creditors committee. Its a well-settled doctrine that acts of officers,
Sometime later, Patterson retired, and Willits then created a new though unauthorized, may be ratified by the corporation where the
corporation under the same name. Under this corporation, Willits latter acquiesces to the act. Here, the creditors committee cannot
owned practically all the shares except those nominal shares needed to object to Exhibit B because the corporation has in effect ratified its
qualify directors. Willits also created another corporation in the validity by applying it for two years.

Doctrine: When the stock of a corporation owned by one individual and
1
Martinez v. Court of Appeals, 438 SCRA 130 (2004).


the corporation functions for his benefit, the corporation and individual subsidiarys separate existence shall be respected, and the
should be deemed the same. liability of the parent corporation, as well as the subsidiary shall
be confined to those arising in their respective business. A
A corporation has a personality separate and distinct from the corporation has a separate personality distinct from its
persons composing it, as well as from any other legal entity to stockholders and from other corporations to which it may be
which it may be related. Equally well-settled is the principle that conducted a legal fiction created by law for convenience and
the corporate mask may be removed or the corporate veil to prevent injustice. Nisce v. Equitable PCI Bank, Inc., 516 SCRA
pierced when the corporation is just an alter ego of a person or 231 (2007).
of another corporation. Sarona v. NLRC, 663 SCRA 394 (2012). 2. Mixing-up Operations; Disrespect to the Corporate Entity:
o When corporation is merely an adjunct, business Mixing of personal accounts with corporate bank deposit
conduit or alter ego of another corporation, the fiction accounts. Ramirez Telephone Corp. v. Bank of America, 29
of separate and distinct corporation entities should be SCRA 191 (1969).
disregarded. Tan Boon Bee & Co. v. Jarencio, 163 SCRA Where two business enterprises are owned, conducted, and
205 (1988).1 controlled by the same parties, both law and equity will, when
The fictive veil of corporate personality holds lesser sway for necessary to protect the rights of third persons, disregard the
subsidiary corporations whose shares are wholly if not almost legal fiction that two corporations are distinct entities and treat
wholly owned by its parent company. The structural and them as identical. Sibagat Timber Corp. v. Garcia, 216 SCRA 70
systems overlap inherent in parent and subsidiary relations (1992).
often render the subsidiary as mere local branch, agency or Employment of same workers; single place of business, etc.,
adjunct of the foreign parent. Thus, when the foreign parent may indicate alter ego situation. Shoemart v. NLRC, 225 SCRA
company leased a large parcel of land purposely for the benefit 311 (1993).
of its subsidiary, which took over possession of the leased
premises, the subsidiary was a mere alter ego of ESSO Eastern. Shoemart v. NLRC
Mariano v. Petron Corp., 610 SCRA 487 (2010).
The fact that a corporation owns all of the stocks of another Facts: Moris Industries was engaged in manufacture of leather goods. In
corporation, taken alone, is not sufficient to justify their being 1985, 56 out of 74 workers decided to form the Moris Industries Union.
treated as one entity. If used to perform legitimate functions, a When the Union contacted Moris in order to fix a collective bargaining
agreement, Moris suddenly shut down and ceased operations two days
1
General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 later. Because of this, the Union filed a case with the NLRC against Moris
(2007).


for unfair labor practice, recovery of wage differentials and other 4. Both are housed in one building and Moris for many years has
monetary benefits. Shoemart, and its president, Henry Sy, was also been using the payrolls of SM Shoe Mart. SM glibly excuses this
impleaded because according to the Union, Shoemart and Moris had fact by alleging that this was done without its knowledge. We,
only one juridical personality. however, considering the close relationship of parties, find this
incredible.
Issue: Whether or not the NLRC correctly applied the piercing doctrine
by holding SM liable together with Moris Doctrine: See above.

Held: YES. The facts show that Moris was the mere alter ego of SM. The facts that two corporations may be sister companies, and
Thus, in order to protect the rights of the workers, the NLRC properly that they may be sharing personnel and resources, without
applied the piercing of the corporate veil doctrine. And since Moris more, is insufficient to prove that their separate corporate
doesnt exist anymore to rehire the workers, who also cant work for SM personalities are being used to defeat public convenience,
because of a difference in expertise of labor, then the SC deemed it justify wrong, protect fraud, or defend crime. Padilla v. Court of
proper to hold SM solidarily liable with Moris for separation pay. Appeals, 370 SCRA 208 (2001).

1. The Union presented one Cresencio Edic as a witness. Edic Padilla v. Court of Appeals
testified that he was first hired by the persons who owned SM
to make samples to be displayed on the store windows. When Facts: Susana Realty Inc. (SRI) sold to Light Rail Transit Authority (LRTA)
he was promoted as over-all supervisor, the factory was several parcels of land along Taft Avenue whereby SRI had a right of first
transferred, the production division was separately refusal in case LRTA decided to develop the land. LRTA contracted with
incorporated and underwent many name changes. However, Phoenix-Omega Development and Management Corporation (Phoenix-
the owners remained the same. Omega) to develop the land to which SRI later agreed on the condition
2. An examination of the Incorporation papers of SM Shoe Mart that all plans must be approved by it. Phoenix-Omega then assigned its
and Moris Manufacturing show (sic) that except for Elizabeth Sy rights to PKA Development and Management Corporation (PKA) whose
all other five (5) incorporators and directors of Morris President and General Manager is Padilla (who is at the same time
Industries are major stockholders of SM Shoe Mart as of July 20, Chairman of the Board of Phoenix-Omega).
1985;
3. The SM Shoe Mart is the exclusive buyer of all of Moris' So now, PKA was in charge of developing the properties. However, it
products; continuously failed to and eventually its building permit was revoked for


defects in construction. PKA then filed for rescission of the contract, Doctrine: For the separate juridical personality of a corporation to be
alleging that SRI maliciously withheld approval of the plans, which in disregarded, the wrongdoing must be clearly and convincingly
turn led to PKA being unable to comply with its obligations. However, established. It cannot be presumed. In this case, there was no reason to
the judgment went in favor of SRI. justify piercing the corporate veil.

The contract was rescinded, and PKA was ordered to indemnify SRI for 3. Guiding Principles in Alter-Ego Cases:
damages. The properties were returned to SRI, but PKA failed to pay the Doctrine applies even in the absence of evil intent, because of
monetary awards. Thus, SRI filed a motion for the issuance of an alias the direct violation of a central corporate law principle of
writ against Padilla and Phoenix-Omega, saying that they were one and separating ownership from management;
the same entity with PKA. Padilla and Phoenix-Omega claimed they Doctrine in such cased is based on estoppel: if stockholders do
were denied due process because Phoenix was not given its days in not respect the separate entity, others cannot also be expected
Court. to be bound by the separate juridical entity;
Piercing in alter ego cases may prevail even when no monetary
Issue: Whether or not Padillas participation in the proceedings as PKAs claims are sought to be enforced against the stockholders or
President and General Manager could be construed as the opportunity officers of the corporation.
to be heard in court of Padilla and Phoenix-Omega HOWEVER: The mere existence of a parent-subsidiary
relationship between two corporation, or that one corporation
Held: NO. Padilla and Phoenix-Omega were not given their day in court. is affiliated with another company does not by itself allow the
It is clear that Padilla participated in the proceedings as General application of the alter-ego piercing doctrine. Koppel (Phil.), Inc.
Manager of PKA and not in any other capacity. The fact that he was the v. Yatco, 77 Phil. 97 (1946); PHIVIDEC v. Court of Appeals, 181
Chairman of the Board of Phoenix-Omega cannot equate to SCRA 669 (1990).
participation by Phoenix-Omega in the same proceedings. Phoenix- A subsidiary corporation has an independent and separate
Omega was never a party to the case and so could not have participated juridical personality, distinct from that of its parent company,
therein. PKA and Phoenix-Omega are admittedly sister companies, and hence, any claim or suit against the latter does not bind the
may be sharing personnel and resources, but there was no allegation, former and vice- versa. Jardine Davies, Inc. v. JRB Realty, Inc.,
much less positive proof, that their separate corporate personalities 463 SCRA 555 (2005).1
were being used to defeat public convenience, justify wrong, protect
fraud, or defend crime.

1
Fortune v. Quinsayas, 690 SCRA 336 (2013).


o If used to perform legitimate functions, a subsidiarys judgment rendered by the court. Padilla v. Court of Appeals,
separate existence shall be respected, and the liability 370 SCRA 208 (2001).
of the parent corporation as well as the subsidiary will 2. When corporate officers are sued in their official capacity, the
be confined to those arising in their respective corporation which was not made a party, is not denied due
businesses. Even when the parent corporation agreed process. Emilio Cano Enterprises v. CIR, 13 SCRA 291 (1965).
to the terms to support a standby credit agreement in We suggest as much in Arcilla v. Court of Appeals, (215 SCRA
favor of the subsidiary, does not mean that its 120 [1992]), an appellate proceedings involving petitioner
personality has merged with that of the subsidiary. MR. Arcillas bid to avoid the adverse CA decision on argument that
Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002). he is not personally liable for the amount adjudged since the
same constitutes a corporate liability which nevertheless cannot
H. PIERCING DOCTRINE AND THE DUE PROCESS CLAUSE be enforced against the corporation which has not been
1. Need to Bring a New Case Against the Officer. McConnel v. CA, impleaded as a party below. Violago v. BA Finance Corp., 559
1 SCRA 723 (1961). SCRA 69 (2008).
A suit against individual shareholders is not a suit against the 3. Provided that evidential basis has been adduced during trial to
corporation. Failure to implead the corporations as defendants apply the piercing doctrine. Jacinto v. Court of Appeals, 198
and merely annexing a list of such corporations to the SCRA 211 (1991).1
complaints is a violation of due process for it would in effect be
disregarding their distinct and separate personality without a Jacinto v. Court of Appeals
hearing. PCGG v. Sandiganbayan, 365 SCRA 538 (2001).
Although both lower courts found sufficient basis for the Facts: The case is an appeal concerning the decision of the Regional Trial
conclusion that PKA and Phoenix Omega were one and the Court ordering Inland Industries Inc. and Roberto Jacinto to pay jointly
same, and the former is merely a conduit of the other the and severally Metropolitan Bank and Trust Co. The Bank claims that
Supreme Court held void the application of a writ of execution Roberto Jacinto can be held personally liable because he is the President
on a judgment held only against PKA, since the RTC obtained no and General Manager of Inland Industries Inc. and his wife owns a
jurisdiction over the person of Phoenix Omega which was never majority of its shares. While on the face of the complaint there is no
summoned as formal party to the case. The general principle is specific allegation that the corporation is a mere alter ego of petitioner,
that no person shall be affected by any proceedings to which he subsequent developments, from the stipulation of facts up to the
is a stranger, and strangers to a case are not bound by the

1
Arcilla v. Court of Appeals, 215 SCRA 120 (1992).


presentation of evidence and the examination of witnesses, Court may deny your right to claim a separate personality.
unequivocally show that respondent Metropolitan Bank and Trust 1. Commit a fraud Bogus NGOs; so long as the fraud is proved,
Company sought to prove that petitioner and the corporation are one or the Court will deny separate personality, provided that it was
that he is the corporation. No serious objection was heard from committed/concealed thru the use of separate personality.
petitioner. 2. Alter-ego/Instrumentalities The Court has pierced the veil in
occasions where the act committed is short of fraud on the
Issue: Whether or not the application of piercing the veil was supported ground of interlinking which indicates that the subsidiary
with evidence. company is but an alter-ego.
3. Defeating public convenience, equity and justice As such,
Held: YES. Roberto A. Jacinto, it would appear that he is in fact, the piercing of the corporate veil should be a last resort. If there is
corporation itself known as Inland Industries, Inc. Aside from the fact another way, the Courts should take that path in order to
that he is admittedly the President and General Manager of the preserve such an important feature of the corporate.
corporation and a substantial stockholder thereof, it was defendant 4. There is no hard and fast rule regarding piercing. It is subject to
Roberto A. Jacinto who dealt entirely with the plaintiff in those the circumstances of the case, and (unfortunately?) dependent
transactions. In the Trust Receipts that he signed supposedly in behalf of on who the Justices are.
Inland Industries, Inc., it is not even mentioned that he did so in this 5. These cases of piercing the corporate veil, when the Court says
official capacity. that the stockholder shares the same personality as the
corporation, that is good for purposes of the issue that is being
Doctrine: When evidence is presented by one party, with the express or rule upon. But it does not result in a complete denial of the
implied consent of the adverse party, as to issues not alleged in the separate personality of the corporate entity for matters
pleadings, judgment may be rendered validly as regards those issues, unrelated to the issue.
which shall be considered as if they have been raised in the pleadings.
There is implied consent to the evidence thus presented when the
adverse party fails to object thereto.

NOTE: Atty. Hofilea
GENERAL RULE: The Corporation has a personality separate from
officers, stockholders and related companies.
EXCEPTION: When it is necessary to advance the cause of justice, the


CORPORATE CONTRACT LAW shall be irrevocable for a period of at least six (6) months from the
date of subscription, unless all of the other subscribers consent to the
I. Pre-Incorporation Contracts revocation, or unless the incorporation of said corporation fails to
materialize within said period or within a longer period as may be

stipulated in the contract of subscription: Provided, That no pre-
A. Who Are Promoters?
incorporation subscription may be revoked after the submission of the
Promoter is a person who, acting alone or with others, takes
articles of incorporation to the Securities and Exchange Commission.
initiative in founding and organizing the business or enterprise
(n)
of the issuer and receives consideration therefor. (Section 3.10,

Securities Regulation Code [R.A. 8799])
C. Theories on Liabilities for Promoter's Contracts:
It is necessary to identify the promoters because it fills the gap
Cagayan Fishing Dev. Co., Inc. v. Teodoro Sandiko, 65 Phil. 223
between the intention to create the corporation, and its actual
(1937).
birth.
o In the normal scheme of things, should the promoter be Rizal Light & Ice Co., Inc. v. Public Service Comm., 25 SCRA 285
liable for contracts? NO. Because when the corporation (1968).
is born, all contracts are transferred to it. Caram, Jr. v. CA, 151 SCRA 372 (1987).
o However, where the company was not formed, then the
liability of the promoters become significant. Cagayan Fishing Dev. Co., Inc. v. Teodoro Sandiko

B. Nature of Pre-incorporation Agreements (Sections 60 and 61) Facts: Manuel Tabora owns 4 parcels of land covered by three
mortgages which it sold to Cagayan Fisheries Dev. Co. Inc. at a time
Section 60. Subscription contract. when it was still in the process of incorporation for a consideration of P1
Any contract for the acquisition of unissued stock in an existing and under the condition that the company would pay Taboras
corporation or a corporation still to be formed shall be deemed a indebtedness to PNB. 5 months later, Cagayan was incorporated, but
subscription within the meaning of this Title, notwithstanding the fact the mortgage loan was not paid. Subsequently the land was sold to
that the parties refer to it as a purchase or some other contract. (n) Sandiko under the name of the corporation with the same conditions.
Sandiko failed to comply with his obligation so Cagayan filed an action
Section 61. Pre-incorporation subscription. praying that the judgment be rendered.
A subscription for shares of stock of a corporation still to be formed
Issue: Whether or not Sandiko is liable to Cagayan.


Securities and Exchange Commission just before the Certificate of Public
Held: NO. The transfer to Cagayan was null because at the time it was Convenience was granted to it. Rizal Light contended that Morong
effected, Cagayan was non-existent. If Cagayan could not and did not Electric did not have a corporate personality at the time it was granted a
acquire the 4 parcels of land, it follows that it had no right to sell them franchise by the Municipality and as such was not even a de facto
to Sandiko. A corporation, until organized, has no being, franchise or corporation.
faculties. Nor do those engaged in bringing it into being have any power
to bind it by contract, unless so authorized by the charter. Manuel Issue: Whether or not Morong Electric could validly be granted a
Tabora, his wife and others, as mere promoters of a corporation on the franchise and apply for a Certificate of Public Convenience even when it
other hand. The lands remain inscribed in Taboras name. Sandiko did not yet have a separate corporate legal personality at those times
always regarded Tabora as the owner of the lands. He dealt with the
latter directly. The President of Cagayan only intervened to sign the Held: YES. Morong Electric might not yet have a corporate personality at
contract in behalf of Cagayan. Even PNB always treated Tabora as the those times but ultimately, it was granted its certificate of incorporation
owner of the lands. by the SEC and it accepted its franchise according to the terms and
conditions. In effect, the doctrine of ratification was applied in favor of
Doctrine: These promoters could not have acted as agent for a Morong Electric.
projected corporation since that which had no legal existence could
have no agent. A corporation, until organized, has no life and therefore Doctrine: The fact that a company is not completely incorporated at
no faculties. However, this does not mean that acts of promoters can the time the grant is made to it does not affect the validity of the grant.
never be ratified by the corporation when it is subsequently organized. But such grant cannot take effect until the corporation is organized.
There are exceptions American courts generally hold that contracts made by the promoters of
a corporation on its behalf may be adopted, accepted, or ratified by the
Rizal Light & Ice Co., Inc. v. Public Service Comm. corporation when organized.

Facts: Rizal Light and Ice has been distributing electricity in the Morong, General Rule: For corporations that are not yet incorporated, they dont
Rizal Area since 1949 when it was awarded a Certificate of Public have capacity to act yet.
Convenience by the Public Service Commission. In 1962, Morong Electric
Company was granted a franchise to operate an electric service in the Caram, Jr. v. CA
Municipality of Morong, and it applied for a Certificate of Public
Convenience. Its Certificate of Incorporation was granted by the Facts: The Carams are challenging the validity of the Court of Appeals


decision ordering them to pay jointly and severally with Filipinas Orient powers, shall not be inquired into collaterally in any private suit to
Airways and with Barretto and Garcia plaintiff Arellano for his services which such corporation may be a party. Such inquiry may be made by
which helped in the incorporation of Filipinas Orient Airways. The the Solicitor General in a quo warranto proceeding.
Carams claim that they were not the ones who requested the services of
Arellano, and were merely financiers of the airways. As such they A de facto corporation is one that has not yet been certified as
cannot be held personally liable. existing by the SEC, but who believes in good faith that it has
authority and power to operate as a corporation.
Issue: Whether or not the Carams are also and personally liable for such o You cant claim to be in good faith if there is no
expenses and, if so, to what extent. certificate of incorporation since you know that it is only
upon the issuance of the certificate by the SEC that the
Held: NO. After a perusal of the decision of the CA, the SC found that corporation is given juridical personality.
the Carams were not really involved in the initial steps that finally led to
the incorporation of the Filipinas Orient Airways. It was Barretto and A. Elements: Arnold Hall v. Piccio, 86 Phil. 634 (1950).
Garcia who handled the preparation of the project study. The said study
being then subsequently presented to the Carams to induce the latter in Arnold Hall v. Piccio
investing to the proposed airlines. The Carams were merely among the
financiers who were persuaded by the strength of the project study to Facts: Arnold and Bradley Hall (petitioners) and Fred and Emma Brown,
invest in the proposed airline. Furthermore, there was no showing that Chapman, and Abella (respondents) signed and acknowledged the
the Filipinas Orient Airways was a fictitious corporation and did not have articles of incorporation of the Far Eastern Lumber and Commercial Co.,
a separate juridical personality, to be able to justify making the Carams, Inc. Attached to the articles of incorporation was an affidavit of the
as principal stockholders thereof, responsible for its obligations. treasurer stating that about 23k of the stocks were subscribed and fully
paid with properties transferred to the corporation.
Doctrine:
Pending action of the SEC concerning the articles, the respondents filed
II. De Facto Corporation (Section 20) a case against petitioners where they claimed that FELC was an
unregistered partnership and now they wished to dissolve it due to
Section 20. De facto corporations. dissension among members. The Halls filed a case, claiming that the
The due incorporation of any corporation claiming in good faith to be a court had no jurisdiction to decree the dissolution of the company,
corporation under this Code, and its right to exercise corporate because it being a de facto corporation, dissolution may only be ordered


in a quo warranto proceeding before the Solicitor General and that the III. Corporation by Estoppel Doctrine (Section 21; Salvatierra v.
respondents, having signed the articles of incorporation, are estopped Garlitos, 103 Phil. 757 [1958]; Albert v. University Publishing Co., 13
from denying that it is a corporation. SCRA 84 [1965]; Asia Banking Corp. v. Standard Products, 46 Phil. 145
[1924]; Madrigal Shipping Co., v. Ogilvie, 55 O.G. No. 35, p. 7331)
Issue: Whether or not the court had jurisdiction to decree the
dissolution Section 21. Corporation by estoppel.
All persons who assume to act as a corporation knowing it to be
Held: YES. The parties very well know that the SEC has not issued the without authority to do so shall be liable as general partners for all
certificate of corporation. Thus, they couldnt claim in good faith to be a debts, liabilities and damages incurred or arising as a result thereof:
corporation. In this case, there is no de facto corporation immune from Provided, however, That when any such ostensible corporation is sued
collateral attack. Besides, this corporation is not a party to this case. The on any transaction entered by it as a corporation or on any tort
case is a litigation between stockholders, for the purpose of obtaining committed by it as such, it shall not be allowed to use as a defense its
dissolution. Even the existence of a de jure corporation may be lack of corporate personality.
terminated in a private suit for its dissolution between stockholders,
without the intervention of the state. One who assumes an obligation to an ostensible corporation as such,
cannot resist performance thereof on the ground that there was in fact
Doctrine: Personality of a corporation begins to exist only from the no corporation.
moment such certificate is issued. Immunity from collateral attack is
granted to corporations claiming in good faith to be a corporation A. Elements of the Doctrine Corporation by Estoppel
under the Corporation Law. When both parties are aware that a 1. One who assumes an obligation to an ostensible corporation as
corporation has not been duly organized, then the corporation by such, cannot resist performance thereof on the ground that
estoppel doctrine does not apply. there was in fact no corporation. Section 21(2)
2. Both parties must recognize the corporate party even when one
By its failure to submit its by-laws on time, the AIIBP may be does not exist. At least one party to the contract was under the
considered a de facto corporation whose right to exercise impression that the other corporate party was a duly
corporate powers may not be inquired into collaterally in any incorporated entity. It can only apply when a certificate is issued
private suit to which such corporations may be a party. but where, for lack of the other criteria, the de facto
Sawadjaan v. Court of Appeals, 459 SCRA 516 (2005). corporation doctrine cannot apply. Arnold Hall v. Piccio, 86 Phil.
634 (1950).


out of such transaction.
Salvatierra v. Garlitos
Doctrine 1: A registered corporation has a juridical personality separate
Facts: Manuela Salvatierra entered into a contract of lease with and distinct from its component members or stockholders and officers
Philippine Fibers Producers Corp. (represented by its President and conversely, a stockholder or member cannot be held personally
Refuerzo) over a parcel of land in Leyte owned by the former. Barely a liable for any financial obligation of the corporation in excess of his
year after the lease, Salvatierra filed for damages, accounting and unpaid subscription. But this rule is understood to refer merely to
rescission; she averred that the corporation violated the provisions in registered corporations and cannot be made applicable to the liability of
the contract. The Court rendered a judgment in favour of Salvatierra, members of an unincorporated association.
and moved to subject parcels of land owned by Refuerzo to attachment
because the corporation had no properties in its name. Refuerzo filed a
motion claiming that the decision rendered was null and void with Issue 2: Whether or not the doctrine of corporation by estoppel is
respect to him, there being no allegation in the complaint pointing to his applicable in this case.
personal liability. His defense was that for while it was stated in the
complaint that he was a signatory to the lease contract, he did so in his Held 2: NO. The doctrine of corporation by estoppel does not apply in
capacity as president of the corporation. this case because fraud was part of the transaction. In the instant case,
on plaintiff's charge that she was unaware of the fact that the Philippine
Issue 1: Whether or not Refuerzo, in his personal capacity, can be held Fibers Producers Co., Inc., had no juridical personality, defendant
liable for corporate debts. Refuerzo gave no confirmation or denial and the circumstances
surrounding the execution of the contract lead to the inescapable
Held 1: YES. A person who acts as an agent without authority or without conclusion that plaintiff Manuela T. Vda. de Salvatierra was really made
a principal is himself regarded as the principal; a person acting or to believe that such corporation was duly organized in accordance with
purporting to act on behalf of a corporation which has no valid law.
existence assumes such obligations and comes personally liable for
contracts entered into. Refuerzo, as president of the unregistered Doctrine 2: While as a general rule a person who has contracted or dealt
corporation Phil. Fibers, was the agent of a non-existent principal, his with an association in such a way as to recognize its existence as a
liability cannot be limited or restricted to that imposed upon corporate corporate body is estopped from denying the same in an action arising
shareholders. In acting on behalf of a corporation which he knew to be out of such transaction or dealing, yet this doctrine may not be held to
unregistered, he assumed the risk of reaping the consequential arising be applicable where fraud takes a part in the said transaction.


there is no such entity as University Publishing Co., Inc. The SEC records
Agency Doctrine: Making the agent of an inexistent principal show that UP Co. was never registered either as a corporation or
liable on the contract entered upon.1 partnership. Aruego claimed he is not a party to the case.
o This agency doctrine applies only where there is fraud
or misrepresentation on the part of one of the contract Issue: Whether or not the judgment may be executed against Jose M.
parties. The doctrine of corporation by estoppel has not Aruego, supposed President of University Publishing Co., Inc., as the real
application to a situation where both parties to the defendant.
contract acted in the honest belief that a contracting
corporate entity did exist. Held: YES. On account of the non-registration UP Co. cannot be
o It is in such no-fraud or no-misrepresentation cases that considered a corporation, not even a corporation de facto. It has
Salvatierra v. Garlitos is clearly inadequate. This is therefore no personality separate from Jose M. Aruego; it cannot be
where the present statutory version of the corporation sued independently. It is patently clear that Jose M. Aruego, acting as
by estoppel doctrine applies, since its applicability does representative of a non-existent principal, was the real party to the
not require fault or conscious misrepresentation. contract sued upon, reaping the benefits resulting from it. Responsibility
under the judgment falls on him since partial payments of the
Albert v. University Publishing Co. consideration were made by him, he violated its terms, which
precipitated the previous suit in question.
Facts: UP Co. through Jose Aruego, its President, entered into a contract NOTE: Doctrine of corporation by estoppel did not apply to this case.
with Mariano Albert for the exclusive right to publish his revised
Commentaries on the Revised Penal Code. Because of UP Co.s failure to Doctrine: In a suit against a corporation with no valid existence, the
pay its installments to Albert, the latter sued UP Co. alleging that it was person who had and exercised the rights to control the proceedings, to
a corporation duly organized and existing under the laws of the make defense, to adduce and to cross-examine witnesses, and to appeal
Philippines. UP Co. also admitted to Alberts allegation of its corporate from a decision, is the real defendant, and the enforcement of a
existence as well as to the execution and terms of the contract. Albert judgment against the corporation upon him is substantial observance of
won the case, and thereafter petitioned for a writ of execution against due process of law.
Aruego as the real defendant because it was recently discovered that
Albert therefore offers us the "philosophical bridge" between
the two doctrines:
1


o First. That a corporation can be deemed to exist when in corporate existence. Under these circumstances it was unnecessary for
fact none may exist, in order to validate a contract; and the plaintiff to present other evidence of the corporate existence of
o Second. That although the veil of corporate fiction is set either of the parties.
up, it will be pierced to enforce the contract, to hold the
actors behind such misrepresentation liable for the Doctrine: The general rule is that in the absence of fraud a person who
obligations arising from such contract.1 has contracted or otherwise dealt with an association in such a way as
to recognize and in effect admit its legal existence as a corporate body is
Asia Banking Corp. v. Standard Products thereby estopped to deny its corporate existence in any action leading
out of or involving such contract or dealing, unless its existence is
Facts: Standard Products, Co., Inc. was indebted to Asia Banking attacked for cause which have arisen since making the contract or other
Corporation and secured its indebtedness through a promissory note. dealing relied on as an estoppel and this applies to foreign as well as to
Upon demand for the balance due, Standard failed to pay. Hence an domestic corporations.
action was brought by Asia Banking Corporation, which it won. But,
Standard Products, Inc. contended that Asia Banking Corp failed to NOTE: Atty. Hofilea The doctrines in three cases were laid down
prove affirmatively the corporate existence of the parties, and the before the Corporate Code. As such, these doctrines were embodied in
appellant insists that under these circumstances the court erred in the Section 21 of the Corporation Code.
finding that the parties were corporations with juridical personality and
assigns same as reversible error. B. Nature of Doctrine
Founded on principles of equity and designed to prevent
Issue: Whether or not respondent Standard Products is estopped from injustice and unfairness, the doctrine applies when persons
denying the corporate existence of the plaintiff Asia Banking Corp. assume to form a corporation and exercise corporate functions
and enter into business relations with third persons. Where no
Held: YES. The defendant having recognized the corporate existence of third person is involved in the conflict, there is no corporation
the plaintiff by making a promissory note in its favor and making partial by estoppel. A failed consolidation therefore cannot result in a
payments on the same is therefore estopped to deny said plaintiff's consolidated corporation by estoppel. Lozano v. De Los Santos,
corporate existence. It is, of course, also estopped from denying its own 274 SCRA 452 (1997)
The doctrine is meant to hold contractual parties to their
representations or expectations at the time the contract was
1
perfected; and it does not allow parties to draw on a basic


defect lack of one contracting party to avoid the Under the law on estoppel including that under Section 21 of
enforcement of the contract.1 Corporation Code, those acting on behalf of an ostensible
o A party cannot challenge the personality of the plaintiff corporation and those benefited by it, knowing it to be without
as a duly organized corporation after having valid existence, are held liable as general partners. Lim Tong Lim
acknowledged same when entering into the contract v. Philippine Fishing Gear Industries, Inc., 317 SCRA 728 (1999).
with the plaintiff as such corporation for the
transportation of its merchandise. Ohta Dev. Co. v. Lim Tong Lim v. Philippine Fishing Gear Industries, Inc.
Steamship Pompey, 49 Phil. 117 (1926).2
o A person who accepts employment in an Facts: Chua and Yao, on behalf of Ocean Quest Fishing Corp., entered
unincorporated charitable association is estopped from into a contract for the purchase of fishing nets from respondent-PFGI.
alleging its lack of juridical personality. Christian They claimed that they were engaged in a business with petitioner-Lim
Childrens Fund v. NLRC, 174 SCRA 681 (1989). who was not a signatory of the agreement. However, the buyers failed
The doctrine has evolved in Corporate Law primarily as a rule to to pay for their purchases; hence, PFGI filed a collection suit against
promote the integrity of commercial contracts; the basic role of Chua, Yao and Lim with a prayer for a writ of preliminary attachment.
the doctrine of corporation by estoppel is to promote the The trial court ruled that a partnership existed among the Lim, Chua and
public's underlying faith in contracts drawn with corporate Yao and held them jointly liable to pay PFGI based on the testimonies of
entities, rather than to promote corporate principles.3 witnesses presented and the Compromise Agreement executed by the
o One who deals with an unincorporated association three. Lim claims that he should not be held liable for the purchase price
which is not duly incorporated is not estopped to deny since he was not part of the negotiations with respondent-PFGI.
its corporate existence when his purpose is not to avoid
liability, but precisely to enforce the contract against Issue: Whether or not under the doctrine of corporation by estoppel,
the action for the purported corporation. Intl Express liability can be imputed only to Chua and Yao and not to Lim.
Travel v. Court of Appeals, 343 SCRA 674 (2000).
Held: NO. Unquestionably, petitioner benefited from the use of the nets
1
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. found inside F/B Lourdes, the boat that has earlier been proven to be an
(2013 ed.). Manila, Philippines: Rex Book Store. asset of the partnership. Although it was never legally formed for
2
The same principle applied in Compania Agricole de Ultramar v. Reyes, 4 Phil.
1 (1911), but that case pertained to a commercial partnership which required unknown reasons, this fact alone does not preclude the liabilities of the
registration in the registry under the terms of the Code of Commerce). three as contracting parties in representation of it. Technically, it is true
3
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. that petitioner did not directly act on behalf of the corporation.


However, having reaped the benefits of the contract entered into by thereof. People v. Garcia, 271 SCRA 621 (1997); People
persons with whom he previously had an existing relationship, he is v. Pineda, G.R. No. 117010, 18 April 1997 (unpub).
deemed to be part of said association and is covered by the scope of the 2. On the other hand, when no fraud or misrepresentation occurs,
doctrine of corporation by estoppel. although it does not make persons acting for the purported
corporation liable personally, it would prevent both sides from
Doctrine: Clearly, under the law on estoppel, those acting on behalf of a raising the non-existence of the corporation as a means to avoid
corporation and those benefited by it, knowing it to be without valid enforcement of the contract.2
existence, are held liable as general partners. o In no-fraud or no-misrepresentation cases, the estoppel
doctrine under Section 21 would create a corporation
C. Two Levels: (i) With Fraud; and (ii) Without Fraud when none exists to uphold the validity and
1. When fraud or misrepresentation occurs with the perfection of enforceability of the contract
the contract with a purported corporation, then section makes o Limited Partner liability One who acts for a purported
the actor personally liable on the contract as a general partner.1 corporation not knowing that it had no authority to do
o General Partners liable not only with what he so would be liable, by way of distinction, only as a
purported to invest in the venture, but he could be held limited partner; that is, he would be liable only to the
liable to all his properties, even those not actually extent of his investment or promised investment in the
invested or promised to be invested in the venture. purported corporate venture. In a no-fraud or no-
o When the incorporators represent themselves to be misrepresentation case, the persons acting in good faith
officers of the corporation which was never duly for the purported corporation would still be personally
registered with SEC, and engage in the name of the liable, but only to the extent of their actual or promised
purported corporation in illegal recruitment, they are investment in the corporate venture. This logically ties
estopped from claiming that they are not liable as in with the limited liability feature of a purported
corporate officers under Section 25 of Corporation Code corporation given legal recognition in the estoppel
which provides that all persons who assume to act as a doctrine.
corporation knowing it to be without authority to do so 3. When there was clear intention to form a partnership venture
shall be liable as general partners for all the debts, through a corporate vehicle, which essentially means that the
liabilities and damages incurred or arising as a result partners had intended to be active participants in the business

1 2


of the corporation, then even those who did not directly capital stock, property and other assets of a corporation are
participate in the contract or transaction being sued upon, but regarded as equity in trust for the payment of corporate
benefited therefrom may be held liable as general partners creditors. The reason is that creditors of a corporation are
under the corporation by estoppel doctrine. On the other hand, preferred over the stockholders in the distribution of corporate
when the investors intended only to invest in a corporate assets. There can be no distribution of assets among the
venture with no intention of participating in its corporate stockholders without first paying corporate creditors. Hence,
affairs, and the corporation was not formed, no partnership any disposition of corporate funds to the prejudice of creditors
relation is deemed established by the failure to incorporate, and is null and void. Boman Environmental Dev. Corp. v. CA, 167
such investors cannot even be held liable for the contracts and SCRA 540 (1988).
transaction sued upon even when such contracts and Under the trust fund doctrine, the capital stock, property and
transactions were entered into by the corporate actors in the other assets of the corporation are regarded as equity in trust
name of an ostensible corporation.1 Lim Tong Lim v. Philippine for the payment of the corporate creditors. Comm. of Internal
Fishing Gear Industries, Inc., 317 SCRA 728 (1999). Revenue v. Court of Appeals, 301 SCRA 152 (1999).

IV. TRUST FUND DOCTRINE B. Nature and Coverage of the Trust Fund Doctrine:
The subscriptions to the capital stock of a corporation constitute
A. Commercial/Common Law Premise: Equity versus Debts; Preference a fund to which the creditors have a right to look for satisfaction
of Creditors over Equity Holders (Art. 2236, Civil Code) of their claims and that the assignee in insolvency can maintain
an action upon any unpaid stock subscription in order to realize
CIVIL CODE assets for the payment of its debts. Phil. Trust Co. v. Rivera, 44
Article 2236. Phil. 469 (1923).
The debtor is liable with all his property, present and future, for the o Atty. Hofilea a shareholder cannot be compelled to
fulfillment of his obligations, subject to the exemptions provided by pay more than what they subscribed to in order to
law. (1911a) address the debts of the corporation.
Even when the foreclosure on the corporate assets was
The requirement of unrestricted retained earnings to cover the wrongfully done, stockholders have no standing to recover for
shares is based on the trust fund doctrine which means that the themselves moral damages; otherwise, it would amount to the
appropriation by, and the distribution to, such stockholders of
1
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. part of the corporations assets before the dissolution of the


corporation and the liquidation of its debts and liabilities. APT v. Halley v. Printwell, Inc.
Court of Appeals, 300 SCRA 579 (1998).
The trust fund doctrine considers the subscribed capital stock Facts: BMPI (Business Media Philippines Inc.) is a corporation under the
as a trust fund for the payment of the debts of the corporation, control of its stockholders, including Donnina Halley. In the course of its
to which the creditors may look for satisfaction. Until the business, BMPI commissioned PRINTWELL to print Philippines, Inc. (a
liquidation of the corporation, no part of the subscribed capital magazine published and distributed by BMPI). BMPI placed several
stock may be turned over or released to the stockholder (except orders amounting to P316,000 but was only able to pay P25,000.
in the redemption of the redeemable shares) without violating PRINTWELL sued BMPI for collection of the unpaid balance and later on
this principle. Thus dividends must never impair the subscribed impleaded BMPIs original stockholders and incorporators to recover on
capital stock; subscription commitments cannot be condoned or their unpaid subscriptions.
remitted; nor can the corporation buy its own shares using the
subscribed capital as the consideration therefore. NTC v. Court Issue: Whether or not a stockholder (Halley in this case) who was in
of Appeals, 311 SCRA 508 (1999). active management of the business of the corporation and still has
o Atty. Hofilea the creditors have no right to compel unpaid subscriptions should be made liable for the debts of the
the company to sell the unsubscribed shares it has left corporation by piercing the veil of corporate fiction
of the authorized capital stock.
We clarify that the trust fund doctrine is not limited to reaching Held: YES. Such stockholder should be made liable up to the extent of
the stockholders unpaid subscriptions. The scope of the her unpaid subscription. It was found that at the time the obligation was
doctrine when the corporation is insolvent encompasses not incurred, BMPI was under the control of its stockholders who know fully
only the capital stock, but also other property and assets well that the corporation was not in a position to pay its account (thinly
generally regarded in equity as a trust fund for the payment of capitalized). And, that the stockholders personally benefited from the
corporate debts. All assets and property belonging to the operations of the corporation even though they never paid their
corporation held in trust for the benefit of creditors that were subscriptions in full.
distributed or in the possession of the stockholders, regardless
of full payment of their subscriptions may be reached by the Doctrine: TRUST FUND DOCTRINE. Under which corporate debtors
creditors in satisfaction of its claim. Halley v. Printwell, Inc. 649 might look to the unpaid subscriptions for the satisfaction of unpaid
SCRA 116 (2011), citing VILLANUEVA, PHILIPPINE CORPORATE corporate debts. Subscriptions to the capital of a corporation
LAW (2001), p. 558. constitutes a trust fund for the payment of the creditors (by mere
analogy) In reality, corporation is a simple debtor. The creditor is


allowed to maintain an action upon any unpaid subscriptions and Decision to issue stock dividends is made by 2/3
thereby steps into the shoes of the corporation for the satisfaction of its of the stockholders and majority of the Board.
debt. The trust fund doctrine is not limited to reaching the stockholders o Cash Dividend liquidated cash
unpaid subscriptions. The scope of the doctrine when the corporation is Distribution is decided upon by the Board of
insolvent encompasses not only the capital stock but also other Directors.
property and assets generally regarded in equity as a trust fund for the Redeemable shares need to be classified from the beginning
payment of corporate debts. that they are redeemable.
o This is the exception to the general rule that you need
C. To Purchase Own Shares (Sections 8, 41, 43 and 122, last paragraph) URE in order to buy-back shares.

Section 8. Redeemable shares. Section 41. Power to acquire own shares.
Redeemable shares may be issued by the corporation when expressly A stock corporation shall have the power to purchase or acquire its
so provided in the articles of incorporation. They may be purchased or own shares for a legitimate corporate purpose or purposes, including
taken up by the corporation upon the expiration of a fixed period, but not limited to the following cases: Provided, That the corporation
regardless of the existence of unrestricted retained earnings in the has unrestricted retained earnings in its books to cover the shares to
books of the corporation, and upon such other terms and conditions as be purchased or acquired:
may be stated in the articles of incorporation, which terms and
conditions must also be stated in the certificate of stock representing 1. To eliminate fractional shares arising out of stock dividends;
said shares.
2. To collect or compromise an indebtedness to the corporation,
Unrestricted Retained Earnings These are earnings which is arising out of unpaid subscription, in a delinquency sale, and to
not earmarked for any particular purpose. purchase delinquent shares sold during said sale; and
Dividends come from the unrestricted retained earnings.
Otherwise, you will impair the capital of the corporation. 3. To pay dissenting or withdrawing stockholders entitled to payment
o Stock Dividend instead of giving you cash dividend to for their shares under the provisions of this Code. (n)
which you are entitled to, you will be given a stock as
equivalent. Its like reinvesting your dividends to the The URE is also what the corporation can use to buy-back its
corporation. shares from its stockholders.


Section 43. Power to declare dividends. be continued as a body corporate for three (3) years after the time
The board of directors of a stock corporation may declare dividends when it would have been so dissolved, for the purpose of prosecuting
out of the unrestricted retained earnings which shall be payable in and defending suits by or against it and enabling it to settle and close
cash, in property, or in stock to all stockholders on the basis of its affairs, to dispose of and convey its property and to distribute its
outstanding stock held by them: Provided, That any cash dividends assets, but not for the purpose of continuing the business for which it
due on delinquent stock shall first be applied to the unpaid balance on was established.
the subscription plus costs and expenses, while stock dividends shall
be withheld from the delinquent stockholder until his unpaid At any time during said three (3) years, the corporation is authorized
subscription is fully paid: Provided, further, That no stock dividend and empowered to convey all of its property to trustees for the benefit
shall be issued without the approval of stockholders representing not of stockholders, members, creditors, and other persons in interest.
less than two-thirds (2/3) of the outstanding capital stock at a regular From and after any such conveyance by the corporation of its property
or special meeting duly called for the purpose. (16a) in trust for the benefit of its stockholders, members, creditors and
others in interest, all interest which the corporation had in the
Stock corporations are prohibited from retaining surplus profits in property terminates, the legal interest vests in the trustees, and the
excess of one hundred (100%) percent of their paid-in capital stock, beneficial interest in the stockholders, members, creditors or other
except: (1) when justified by definite corporate expansion projects or persons in interest.
programs approved by the board of directors; or (2) when the
corporation is prohibited under any loan agreement with any financial Upon the winding up of the corporate affairs, any asset distributable
institution or creditor, whether local or foreign, from declaring to any creditor or stockholder or member who is unknown or cannot
dividends without its/his consent, and such consent has not yet been be found shall be escheated to the city or municipality where such
secured; or (3) when it can be clearly shown that such retention is assets are located.
necessary under special circumstances obtaining in the corporation,
such as when there is need for special reserve for probable Except by decrease of capital stock and as otherwise allowed by this
contingencies. (n) Code, no corporation shall distribute any of its assets or property
except upon lawful dissolution and after payment of all its debts and
Section 122. Corporate liquidation. liabilities. (77a, 89a, 16a)
Every corporation whose charter expires by its own limitation or is
annulled by forfeiture or otherwise, or whose corporate existence for Under common law, there were originally conflicting views on
other purposes is terminated in any other manner, shall nevertheless whether a corporation had the power to purchase its own


stocks. Only a few American jurisdictions adopted the strict
English rule forbidding a corporation from purchasing its own Ong Yong v. Tiu
shares. In some American states where the English rule used to
be adopted, statutes granting authority to purchase out of Facts: The Tiu family members are the owners of First Landlink Asia
surplus funds were enacted, while in others, shares might be Development Corporation (FLADC). One of the corporations projects is
purchased even out of capital provided the rights of creditors the construction of Masagana Citimall in Pasay City. However, due to
were not prejudiced. The reason underlying the limitation of financial difficulties (they were indebted to PNB for P190 million), the
share purchases sprang from the necessity of imposing Tius feared that the construction would not be finished. So to prevent
safeguards against the depletion by a corporation of its assets the foreclosure of the mortgage on the two lots where the mall was
and against the impairment of its capital needed for the being built, they invited the Ongs to invest in FLADC. The two parties
protection of creditors. Turner v. Lorenzo Shipping Corp., 636 entered into a Presubscription Agreement whereby each of them would
SCRA 13 (2010). hold 1,000,000 shares each and be entitled to nominate certain officers.
The Tius contributed a building and two lots, while the Ongs
D. Rescission of Subscription Agreement contributed P100M.
The violation of terms embodied in a subscription agreement,
with are personal commitments, do not constitute legal ground Two years later, the Tuis filed for rescission of the Presubscription
to rescind the subscription agreement since such would violate Agremement because the Ongs refused to issue them their shares of
the Trust Fund Doctrine and the procedures for the valid stock and from assuming positions of VP and Treasurer to which they
distribution of assets and property under the Corporation Code. were entitled to nominate. The Ongs contended that they could not
In the instant case, the rescission of the Pre-Subscription issue the new shares to the Tius because the latter did not pay the
Agreement will effectively result in the unauthorized capital gains tax and the documentary stamp tax of the lots. And
distribution of the capital assets and property of the because of this, the SEC would not approve the valuation of the
corporation, thereby violating the Trust Fund Doctrine and the property contribution of the Tius. The Court of Appeals ordered
Corporation Code, since the rescission of a subscription liquidation of FLADC to enforce rescission of the contract.
agreement is not one of the instances when distribution of
capital assets and property of the corporation is allowed. Issue: Whether or not the liquidation of FLADC violated the Trust Fund
Distribution of corporate assets among the stockholders cannot Doctrine
even be resorted to achieve corporate peace. Ong Yong v.
Tiu, 401 SCRA 1 (2003). Held: YES. In this case, the rescission would certainly be a violation of


the doctrine and also of the Corporation Code because the rescission
would result in the unauthorized distribution of the assets of the
corporation. Rescission based on a breach in the terms of a subscription
agreement is not one of the instances when distribution of a
corporations assets and property is allowed (Section 122). It would not
only be unlawful but it would also be prejudicial to the corporate
creditors who enjoy absolute priority of payment over any individual
stockholder.

Doctrine: This doctrine enunciates that subscriptions to the capital stock
of a corporation constitute a fund to which the creditors have a right to
look for the satisfaction of their claims. This doctrine is the underlying
principle in the procedure for the distribution of capital assets,
embodied in the Corporation Code, which allows the distribution of
corporate capital only in three instances: (1) amendment of the Articles
of Incorporation to reduce the authorized capital stock, (2) purchase of
redeemable shares by the corporation, regardless of the existence of
unrestricted retained earnings, and (3) dissolution and eventual
liquidation of the corporation.

NOTE:
Atty. Hofilea To release a person from his obligation to pay his
subscribed shares is offensive to the Trust Fund Doctrine.
Trust Fund Doctrine applies to all properties of the company,
and not limited to simply the unpaid subscriptions.
A company may do what it wills with its properties, but
creditors are protected.


ARTICLES OF INCORPORATION located, which must be within the Philippines;
4. The term for which the corporation is to exist;
I. Nature of Charter: The charter is in the nature of a contract between 5. The names, nationalities and residences of the incorporators;
6. The number of directors or trustees, which shall not be less
the corporation and the government. Government of P.I. v. Manila
than five (5) nor more than fifteen (15);
Railroad Co., 52 Phil. 699 (1929).
7. The names, nationalities and residences of persons who shall
The articles of incorporation has been described as one that
act as directors or trustees until the first regular directors or
defines the charter of the corporation and the contractual
trustees are duly elected and qualified in accordance with this
relationships between the state and the corporation, the
Code;
stockholders and the State, and between the corporation and its
8. If it be a stock corporation, the amount of its authorized
stockholders. Lanuza v. Court of Appeals, 454 SCRA 54 (2005).
capital stock in lawful money of the Philippines, the number of

shares into which it is divided, and in case the share are par
II. Procedure and Documentary Requirements (Section 14 and 15)
value shares, the par value of each, the names, nationalities

and residences of the original subscribers, and the amount
Section 14. Contents of the articles of incorporation.
subscribed and paid by each on his subscription, and if some or
All corporations organized under this code shall file with the Securities
all of the shares are without par value, such fact must be
and Exchange Commission articles of incorporation in any of the
stated;
official languages duly signed and acknowledged by all of the
9. If it be a non-stock corporation, the amount of its capital, the
incorporators, containing substantially the following matters, except
names, nationalities and residences of the contributors and
as otherwise prescribed by this Code or by special law:
the amount contributed by each; and
1. The name of the corporation;
10. Such other matters as are not inconsistent with law and which
2. The specific purpose or purposes for which the corporation is
the incorporators may deem necessary and convenient.
being incorporated. Where a corporation has more than one

stated purpose, the articles of incorporation shall state which
The Securities and Exchange Commission shall not accept the articles
is the primary purpose and which is/are he secondary purpose
of incorporation of any stock corporation unless accompanied by a
or purposes: Provided, That a non-stock corporation may not
sworn statement of the Treasurer elected by the subscribers showing
include a purpose which would change or contradict its nature
that at least twenty-five (25%) percent of the authorized capital stock
as such;
of the corporation has been subscribed, and at least twenty-five (25%)
3. The place where the principal office of the corporation is to be
of the total subscription has been fully paid to him in actual cash


and/or in property the fair valuation of which is equal to at least Only natural persons can be incorporators. However, the law
twenty-five (25%) percent of the said subscription, such paid-up does not preclude corporations and partnership from becoming
capital being not less than five thousand (P5,000.00) pesos. stockholders or members as long as they are not incorporators.1
In practice, the SEC would allow the incorporation of a
A. As to Number and Residency of Incorporators (Section 10) corporation which would have as original stockholder in the
articles of incorporation, as long as the minimum number of
Section 10. Number and qualifications of incorporators. individual incorporators appear.
Any number of natural persons not less than five (5) but not more than o In one opinion, the SEC has posited that both domestic
fifteen (15), all of legal age and a majority of whom are residents of and foreign corporations, if allowed by their charters,
the Philippines, may form a private corporation for any lawful purpose may be initial subscribers to the capital stock of a
or purposes. Each of the incorporators of s stock corporation must corporation, but their subscription will not be
own or be a subscriber to at least one (1) share of the capital stock of considered in the computation of the 25% requirement
the corporation. for incorporation.2
o The SEC also requires that the subscription of
It is possible for a business to be wholly owned by one corporations to the capital stock of a corporation in the
individual, and the validity of its incorporation is not affected process of incorporation be fully paid due to their
when he gives nominal ownership of only one share of stock to limited liability capacity; 3 but after incorporation,
each of the other four incorporators. This arrangement is not corporations may subscribe without having to fully pay
necessarily illegal, but it is valid only between and among the their subscription under the premise that the risk of
incorporators privy to the agreement. It does not bind the insolvency no longer exist at that point.4
corporation which will consider all stockholders of record as the The Corporation Code maintains the requirement that at least
lawful owners of their registered shares. As between the five (5) individuals must be incorporators of a corporation for
corporation on the one hand, and its stockholders and third perhaps a more practical reason.
persons on the other, the corporation looks only to its books for
the purpose of determining who its shareholders are. Nautica
1
Government of the Philippine Islands v. El Hogar Filipino, 50 Phil. 399, 460-461
Canny Corp. v. Yumul, 473 SCRA 415 (2005).
(1929).
2
SEC Opinion, 23 May 1967, SEC FOLIO 1960-1976, at p. 284; Also, SEC Opinion,
14 November 1978.
3
SEC Opinion, 23 May 1967, SEC FOLIO 1960-1976, at p. 284.
4
SEC Opinion, 29 June 1976, SEC FOLIO 1960-1976, at p. 936.


o Our jurisdiction recognizes the existence of promoter's o There is no general requirement of Philippine
contracts, or contracts entered into on behalf of a citizenship only a majority of the incorporators must be
corporation still in the process of organization. Indeed, residents of the Philippines. However, there are some
transactions may already be pursued with the parties areas of business and industry wherein ownership is
aware that the corporation is still under registration reserved, wholly or partially to Filipinos.
proceedings. If anything goes wrong with the o Atty. Hofilea if there are 5 American citizens who
incorporation process, and there may have been wish to establish a foreign brand in the Philippines, they
liabilities created at the time of incorporation, then the will either reside in the Philippines or ask people to act
existence of five individual incorporators allows the as incorporators (who are usually their lawyers).
public or injured party to run after the persons who Incorporators are not at all times the promoters
cannot hide behind a corporate fiction or who can avail or majority stockholders. This is not necessarily
of limited liability features. In addition, there must still illegal, although it brings out the problem
indeed be individuals, who can be held criminally liable, whereby the incorporators are not necessarily
for acts done relating to incorporation process. Such the people who should be held responsible
remedies would be unavailing or would be meaningless since they are not the promoters.
if the incorporators are themselves juridical entities. o Atty. Hofilea in case of public utilities, the company
If only two incorporators are residents of the Philippines a must be 60% owned and controlled. As such, if the
corporation still exists a de facto corporation provided that at incorporators own only one share, then the company
least five (5) incorporators must sign the articles of cannot be a public utility.
incorporation.1 People v. Quasha at the time of the
o This however does not prevent the existence of the so- establishment of the company, it is not
called one-man corporation, where business is actually necessary that the company be Filipino.
owned by one individual, it is still possible for him to However, if they want to get a franchise to
incorporate by giving nominal ownership of only one operate as a public utility, then they must first
share of stock to each of 4 other personsthis is not meet the requirement of the 60% citizenship
necessarily illegal. requirement of the law.
An incorporator will always retain his status as the incorporator
of the corporation because such status is acquired by the mere

1
SEC Opinion, 11 October 1971, SEC FOLIO 1960-1976, at p. 495.


fact of being one of the persons who originally composed the
corporation. Section 42. Power to invest corporate funds in another corporation or
o He may cease to be a stockholder or a member, he may business or for any other purpose.
lose all his rights and interest in the corporation, but he Subject to the provisions of this Code, a private corporation may invest
will always be known as the incorporator. The articles of its funds in any other corporation or business or for any purpose other
incorporation cannot therefore be amended to delete than the primary purpose for which it was organized when approved
the name of an incorporator and substitute it with that by a majority of the board of directors or trustees and ratified by the
of another, the latter not being an incorporator.1 stockholders representing at least two-thirds (2/3) of the outstanding
You cannot remove an original incorporator capital stock, or by at least two thirds (2/3) of the members in the case
from the charter. of non-stock corporations, at a stockholder's or member's meeting
o Atty. Hofilea can a person sue an incorporator who duly called for the purpose. Written notice of the proposed investment
is no longer involved with the company (let go of his and the time and place of the meeting shall be addressed to each
share)? NO. stockholder or member at his place of residence as shown on the
Where there is a change in the initial directors (indicated in the books of the corporation and deposited to the addressee in the post
articles of incorporation), there is no need to amend the articles office with postage prepaid, or served personally: Provided, That any
of incorporation. dissenting stockholder shall have appraisal right as provided in this
Code: Provided, however, That where the investment by the
B. Corporate Name (Sections 18, 14(1) and 42) corporation is reasonably necessary to accomplish its primary purpose
as stated in the articles of incorporation, the approval of the
Section 18. Corporate name. stockholders or members shall not be necessary. (17 1/2a)
No corporate name may be allowed by the Securities and Exchange
Commission if the proposed name is identical or deceptively or 1. Corporate Name Guidelines
confusingly similar to that of any existing corporation or to any other Similarity in corporate names between two corporations would
name already protected by law or is patently deceptive, confusing or cause confusion to the public especially when the purposes
contrary to existing laws. When a change in the corporate name is stated in their charter are also the same type of business.
approved, the Commission shall issue an amended certificate of Universal Mills Corp. v. Universal Textile Mills Inc., 78 SCRA 62
incorporation under the amended name. (1977).
o Atty. Hofilea NOT DECEPTIVE PER SE. Latitude is
given to someone in terms of determining whether a
1
SEC Opinion, 7 January 1974, VIII SEC QUARTERLY BULLETIN 21 ( No. I, Jan. 1974).


name is deceptive. Where a name is deceptive per se, it intent, may be prevented by the corporation having a prior
will be disallowed by the SEC. right. Ang Mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus v.
The use of Inc. in required under Section 15 Iglesia ng Dios Kay Dristo Jesus, 372 SCRA 171 (2001).
The use of a persons name in the corporation To fall within the prohibition of the law Revised Guidelines in
name is allowed only where the person is a the Approval of Corporate and Partnership Names, two
shareholder or he has a significant position in requisites must be proven, to wit: (a) That the complainant
the corporation or he is neither but has his corporation acquired a prior right over the use of such
consent. corporate name; and (b) the proposed name is either: (i)
The name of a corporation is essential not only for its existence identical, or (ii) deceptively or confusingly similar to that of any
as a juridical person, but also in manner of dealing with it, and in existing corporation or to any other name already protected by
the exercise of its juridical capacities; it cannot be changed law; or (iii) patently deceptive, confusing or contrary to existing
except in the manner provided for by law. Red Line Trans. v. laws. Philips Export B.V. v. Court of Appeals, 206 SCRA 457, 463
Rural Transit, 60 Phil. 549 (1934). (1992)
Section 18 of Corporation Code expressly prohibits the use of a A corporation has no right to intervene in a suit using a name,
corporate name which is identical or deceptively or confusingly not even its acronym, other than its registered name, as the law
similar to that of any existing corporation or to any other name requires and not another name which it had not registered.
already protected by law or is patently deceptive, confusing or Laureano Investment and Dev. Corp. v. Court of Appeals, 272
contrary to existing laws. The policy behind the foregoing SCRA 253 (1997).
prohibition is to avoid fraud upon the public that will occasion There would be no denial of due process when a corporation is
to deal with the entity concerned, the evasion of legal sued and judgment is rendered against it under its unregistered
obligations and duties, and the reduction of difficulties of trade name: A corporation may be sued under the name by
administration and supervision over corporations. Industrial which it makes itself known to its workers. Pison-Arceo Agri.
Refractories Corp. v. Court of Appeals, 390 SCRA 252 (2002).1 Dev. Corp. v. NLRC, 279 SCRA 312 (1997).
Incorporators must choose a name at their peril; and the use of 2. Change in Corporate Name
a name similar to one adopted by another corporation, whether A corporation may change its name by the amendment of its
a business or a nonprofit organization, if misleading or likely to articles of incorporation, but the same is not effective until
injure the exercise of its corporate functions, regardless of approved by the SEC. Phil. First Insurance Co. v. Hartigan, 34
SCRA 252 (1970).

1
Also Lyceum of the Philippines v. Court of Appeals, 219 SCRA 610, 615 (1993).


A change in the corporate name does not make a new (c) A third-party can know whether his dealing
corporation, and has no effect on the identity of the with the corporation are with corporate
corporation, or on its property, rights, or liabilities. Republic functions and powers.
Planters Bank v. Court of Appeals, 216 SCRA 738 (1992).1 The best proof of the purpose of a corporation is its articles of
3. SEC Jurisdiction Over Issues Involving Corporate Names incorporation and by-laws. The articles of incorporation must
SEC has quasi-judicial powers to hear and decide a controversy state the primary and secondary purposes of the corporation,
between two corporation as to who has a better right to the use while the by-laws outline the administrative organization of the
of a particular corporate name. Industrial Refractories Corp. v. corporation, which, in turn, is supposed to insure or facilitate
Court of Appeals, 390 SCRA 252 (2002). the accomplishment of said purpose. Therefore, the Court
brushed aside the contention that the corporations were
C. Purpose Clauses (Sections 14(2) and 42) organized to illegally avoid the provisions on land reform and to
The significance of the purpose clause in the articles of avoid the payment of estate taxes, as being prohibited collateral
incorporation is that it confers, as well as limits, the powers attack. Gala v. Ellice Agro-Industrial Corp., 418 SCRA 431
which a corporation may exercise.2 (2003).
o The statement of the primary purpose in the articles of The SEC has ruled that the rules governing the construction of
incorporation is means to protect shareholders so they charters of corporations are, for the most part, the same as
will know the main business of the corporation and file those which govern the construction and interpretation of
derivative suits if the corporation deviates from the statutes, contracts and other written instruments.3
primary purpose. Uy Siuliong v. Director of Commerce
and Industry, 40 Phil. 541 (1919). D. Corporate Term (Section 11)
o Some of the other reasons for indicating purpose in the
charter of the corporation are so that: Section 11. Corporate term.
(a) Prospective investors shall know the kind of A corporation shall exist for a period not exceeding fifty (50) years
business the corporation deals with; from the date of incorporation unless sooner dissolved or unless said
(b) Management shall know the limits of its period is extended. The corporate term as originally stated in the
actions; articles of incorporation may be extended for periods not exceeding

1
P.C. Javier & Sons, Inc. v. Court of Appeals, 462 SCRA 36 (2005).
2 3
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. SEC Opinion, 26 January 1994, XXVIII SEC QUARTERLY BULLETIN 46 (No. 2, June
(2013 ed.). Manila, Philippines: Rex Book Store. 1994), citing 7A FLETCHER, Section 3640, and 6 FLETCHER CYC. CORP., Section 2483.


fifty (50) years in any single instance by an amendment of the articles be held in the city or municipality where the principal office of the
of incorporation, in accordance with this Code; Provided, That no corporation is located, and if practicable in the principal office of the
extension can be made earlier than five (5) years prior to the original corporation: Provided, That Metro Manila shall, for purposes of this
or subsequent expiry date(s) unless there are justifiable reasons for an section, be considered a city or municipality.
earlier extension as may be determined by the Securities and
Exchange Commission. Notice of meetings shall be in writing, and the time and place thereof
stated therein.
No extension of term can be effected once dissolution stage has
been reached, as it constitutes new business. Alhambra Cigar v. All proceedings had and any business transacted at any meeting of the
SEC, 24 SCRA 269 (1968). stockholders or members, if within the powers or authority of the
Article 605 of Civil Code clearly limits any usufruct constituted corporation, shall be valid even if the meeting be improperly held or
in favor of a corporation or association to 50 years. A usufruct is called, provided all the stockholders or members of the corporation
meant only as a lifetime grant. Unlike a natural person, a are present or duly represented at the meeting. (24 and 25)
corporation or associations lifetime may be extended
indefinitely. The usufruct would then be perpetual. This is Although the Rules of Court do not provide that when the
especially invidious in cases where the usufruct given to a plaintiff is a corporation, the complaint should be filed in the
corporation or association covers public land. NHA v. Court of location of its principal office as indicated in its articles of
Appeals, 456 SCRA 17 (2005). incorporation, jurisprudence has, however, settled that the
Atty. Hofilea The corporation takes a loan that is payable in place where the principal office of a corporation is located, as
10 years, but it expires in 5 years. Although not illegal, it is a stated in the articles, indeed establishes its residence. This
question of wisdom on the part of the loaning entity. ruling is important in determining the venue of an action by or
o 50 years from filing the corporate life is shortened. against a corporation, as in the present case. Hyatt Elevators
o 50 years counted beginning from the issuance of and Escalators Corp. v. Goldstar Elevators, Phils., Inc., 473
the certificate of incorporation. SCRA 705 (2005), citing VILLANUEVA, PHILIPPINE CORPORATE
LAW (1998), p. 162.
E. Principal Place of Business (Section 51) o Corporate Residence for Intra-Corporate Disputes
Section 1, Rule 1 of the Interim Rules of
Section 51. Place and time of meetings of stockholders or members. Procedure for Intra-Corporate Controversies,
Stockholders' or members' meetings, whether regular or special, shall provides that when the articles of incorporation


indicate that the principal place of business is Stock corporations incorporated under this Code shall not be required
Metro Manila, then the action must be filed in to have any minimum authorized capital stock except as otherwise
the city where the head office is actually located specifically provided for by special law, and subject to the provisions
o Corporate Residence for Corporate Recovery Cases of the following section.
Action must be filed in the regional trial court
which has jurisdiction over the principal office. In normal practice, SEC will not allow a corporation to be
Place of residence of the corporation is the place of its principal organized with P5,000 minimum paid-up capital because it is
office. Clavecilla Radio System v. Antillon, 19 SCRA 379 (1967) too thinly capitalized. More likely SEC would require a higher
o The residence of its president is not the residence of the paid-up amount for incorporation. SEC can do this because as an
corporation because a corporation has a personality administrative body it can make rules.2
separate and distinct from that of its officers and
stockholders. Sy v. Tyson Enterprises, Inc., 119 SCRA G. Subscription and Paid-up Requirements (Section 13)
367 (1982).
Under Section 11, Rule 14 of the 1997 Rules of Civil Procedure Section 13. Amount of capital stock to be subscribed and paid for the
of the Philippines, if the defendant in a suit is a corporation purposes of incorporation.
organized under the laws of the Philippines, service may be At least twenty-five percent (25%) of the authorized capital stock as
made on the President, general manager, secretary, treasurer, stated in the articles of incorporation must be subscribed at the time
or in-house counsel.1 of incorporation, and at least twenty-five (25%) per cent of the total
Atty. Hofilea the principal address is necessarily just one subscription must be paid upon subscription, the balance to be
otherwise it would not be principal. It is also necessary for payable on a date or dates fixed in the contract of subscription
regulation purposes of the government. without need of call, or in the absence of a fixed date or dates, upon
call for payment by the board of directors: Provided, however, That in
F. Minimum Capitalization (Section 12): Why is maximum no case shall the paid-up capital be less than five Thousand (P5,000.00)
capitalization required to be indicated? pesos.

Section 12. Minimum capital stock required of stock corporations. The entries in the articles of incorporation of the original
issuances of shares of stock has a stronger weight that the stock

1 2


and transfer book in determining the validity and issuance of form under oath by a responsible official of the bank, must
such shares. Lanuza v. Court of Appeals, 454 SCRA 54 (2005). accompany the incorporation papers.1
o The ACS and Subscribed stocks are found in the articles 2. Letter of Authority to examine bank deposit
of incorporation. In addition, a letter of authority authorizing the SEC to examine
o For Paid-in Capital, you can look at Certificate of not only the bank deposit but also the corporations books of
Deposits, and verify via bank accounts. accounts and supporting records to determine the existence
"Capital Stock" is the amount fixed in the articles of and utilization of the paid-up capital stock must also be
corporation procured to be subscribed and paid-in. It is settled submitted. The letter of authority shall be binding upon the
that shares issued in excess of the authorized capital stocks are corporation even if there is a change of corporate officers.2
void. 3. Written Undertaking to Change Corporate Name
"Outstanding Capital Stock" is the total shares of stock issued The SEC also requires that incorporators are required to submit
to subscribers or stockholders, whether or not fully or partially a written undertaking to change their partnership or corporate
paid (as long as there is a binding subscription agreement), name in case there is another person, firm or entity with a prior
except treasury shares. right to the use of the said name or one similar to it.3
"Subscribed Capital Stock" is that portion of the capital stock
subscribed (i.e. procured to be paid) whether or not fully paid. III. Grounds for Disapproval (Section 17)
"Subscription" is the mutual agreement of the corporation
and subscriber to take and pay for the stock a corporation. Section 17. Grounds when articles of incorporation or amendment
The subscription must be paid upon demand of the Board of may be rejected or disapproved.
Directors, or on the date that you have promised to pay. The Securities and Exchange Commission may reject the articles of
incorporation or disapprove any amendment thereto if the same is not
H. Steps and Documents Required in SEC in compliance with the requirements of this Code: Provided, That the
1. Certificate of Deposit Commission shall give the incorporators a reasonable time within
SEC Guidelines require that a bank certificate covering the which to correct or modify the objectionable portions of the articles or
deposit of the paid-up capital, in accordance with a prescribed amendment. The following are grounds for such rejection or

1
Section 1, SEC GUIDELINES FOR THE VERIFICATIONS OF THE PAID-UP CAPITAL (CASH) OF
CORPORATIONS (1976).
2
Section 2, ibid.
3
SEC GUIDELINES IN THE APPROVAL OF CORPORATE AND PARTNERSHIP NAMES (1977).


disapproval: benefit of the residents, the object is unlawful and the articles
can be denied registration. Asuncion v. De Yriarte, 28 Phil. 67
1. That the articles of incorporation or any amendment thereto is not (1914).
substantially in accordance with the form prescribed herein; It is well to note that, if a corporations purpose, as stated in the
articles of incorporation, is lawful, then the SEC has no authority
2. That the purpose or purposes of the corporation are patently to inquire whether the corporation has purposes other than
unconstitutional, illegal, immoral, or contrary to government rules and those stated, and mandamus will lie to compel it to issue the
regulations; certificate of incorporation. Gala v. Ellice Agro-Industrial
Corp., 418 SCRA 431 (2003).
3. That the Treasurer's Affidavit concerning the amount of capital The SECs function is merely ministerial because they are
stock subscribed and/or paid if false; required to issue the certificate of incorporation.
o There is room for the exercise of discretion in that it
4. That the percentage of ownership of the capital stock to be owned may dismiss an application for incorporation, but
by citizens of the Philippines has not been complied with as required otherwise, it has no other right to exercise discretion.
by existing laws or the Constitution. o You can compel the SEC to approve the articles of
incorporation.
No articles of incorporation or amendment to articles of incorporation
of banks, banking and quasi-banking institutions, building and loan IV. Amendments to the Articles of Incorporation (Section 16).
associations, trust companies and other financial intermediaries,
insurance companies, public utilities, educational institutions, and Section 16. Amendment of Articles of Incorporation.
other corporations governed by special laws shall be accepted or Unless otherwise prescribed by this Code or by special law, and for
approved by the Commission unless accompanied by a favorable legitimate purposes, any provision or matter stated in the articles of
recommendation of the appropriate government agency to the effect incorporation may be amended by a majority vote of the board of
that such articles or amendment is in accordance with law. directors or trustees and the vote or written assent of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock,
When the proposed articles show that the object is to organize without prejudice to the appraisal right of dissenting stockholders in
a barrio into a separate corporation for the purpose of taking accordance with the provisions of this Code, or the vote or written
possession and having control of all municipal property within assent of at least two-thirds (2/3) of the members if it be a non-stock
the incorporated barrio and administer it exclusively for the corporation.


name stated in the articles of incorporation for the period of time
The original and amended articles together shall contain all provisions mentioned therein, unless said period is extended or the corporation
required by law to be set out in the articles of incorporation. Such is sooner dissolved in accordance with law.
articles, as amended shall be indicated by underscoring the change or
changes made, and a copy thereof duly certified under oath by the
corporate secretary and a majority of the directors or trustees stating
the fact that said amendment or amendments have been duly
approved by the required vote of the stockholders or members, shall
be submitted to the Securities and Exchange Commission.

The amendments shall take effect upon their approval by the
Securities and Exchange Commission or from the date of filing with the
said Commission if not acted upon within six (6) months from the date
of filing for a cause not attributable to the corporation.

Typically, meetings do take place to pass upon an amendment.
o Although the law does not expressly provide that a
meeting be made where the votes will be cast and the
written assents made.

V. Commencement of Corporate Existence (Section 19).

Section 19. Commencement of corporate existence.
A private corporation formed or organized under this Code
commences to have corporate existence and juridical personality and
is deemed incorporated from the date the Securities and Exchange
Commission issues a certificate of incorporation under its official seal;
and thereupon the incorporators, stockholders/members and their
successors shall constitute a body politic and corporate under the


BY-LAWS By-laws are intramural in nature and not meant to bind parties
I. Nature and Functions: outside the corporate family.
o One point of view is that since by-laws operate merely
The power to adopt by-laws is an inherent power on the part of
as internal rules among the stockholders and corporate
those forming a corporation or any other form of association.
officers, they cannot affect nor prejudice third persons
Gokongwei v. SEC, 89 SCRA 337 (1979).
who deal in good faith with the corporation, unless they
As the rules and regulations or private laws enacted by the
have knowledge of the same; and that strangers are not
corporation to regulate, govern and control its own actions,
bound to know the by-laws of a corporation which are
affairs and concerns and its stockholders or members and
merely provisions for the government of a corporation
directors and officers with relation thereto and among
and notice of them will not be presumed.
themselves in their relation to it, by-laws are indispensable to
o Under such theory, since by-law provisions are
corporations. These may not be essential to corporate birth but
intramural in nature and are not meant to bind parties
certainly, these are required by law for an orderly governance
outside the corporate family, it stands to reason that
and management of corporations. Loyola Grand Villas
the public dealing with the corporation is not supposed
Homeowners v. CA, 276 SCRA 681 (1997).
to be interested in the provisions of the corporation's
o By-laws have traditionally been defined as regulations,
by-laws, and therefore should not be bound thereby. 1
ordinances, rules or laws adopted by an association or

corporation or the like for its internal governance,
A. Common Law Limitations on By-Laws (Requisites of Valid By-Laws)
including rules for routine matters such as calling
1. By-Laws Cannot Be Contrary to Law and Charter
meetings and the like. If those key by-law provisions on
By-laws are intended merely for the protection of the
matters such as quorum requirements, meetings, or on
corporation, and prescribe regulation, not restrictions; they are
the internal governance of the local/chapter are
always subject to the charter of the corporation. Rural Bank of
themselves already provided for in the constitution,
Salinas, Inc. v. Court of Appeals, 210 SCRA 510 (1992).
then it would be feasible to overlook the requirements
for by-laws. Indeed in such an event, to insist on the Although the power of the corporation to adopt by-laws is an
submission of a separate document denominated as inherent right, and it exist even without the law expressly
By-Laws would be an undue technicality, as well as a granting such power, nevertheless, Section 36 of the
redundancy. San Miguel Corp. v. Mandaue Packing Corporation Code expressly enumerates as one of the powers of
Products Plants Union- FFW, 467 SCRA 107 (2005).

1


a corporation, the power to adopt by-laws "not contrary to law, amending its by-laws and providing that his/her position shall
morals or public policy." Jurisprudence has long before cease to exist upon the occurrence of a specified event.
established that by-law provisions cannot contravene the law.1 Salafranca v. Philamlife (Pamplona) Village Homeowners, 300
The corporation being a creature of the law, its by-law SCRA 469 (1998).
provisions cannot prevail over legal provisions and the lawful 2. By-Law Provisions Cannot Be Unreasonable or Be Contrary to
court orders and processes.2 the Nature of By-laws.
Examples: Under Section 47 of the Corporation Code, even specified
A by-law provision that empowers the Board of Directors to provisions of the by-laws are "subject to the provisions of the
cancel the shares of any member and return to the owner Constitution, this Code, other special laws, and the articles of
thereof the value thereof was declared void for being in incorporation." That would mean that any provision in the
violation of the provision in the Corporation Law that provided articles of incorporation to the contrary would supersede the
that capital can only be returned after dissolution. Government similar provision in the by-laws of a corporation. In other words,
of P.I. v. El Hogar Filipino, 50 Phil. 399 (1927) any provision in the by-laws which contravenes the provision in
A by-law provision granting to a stockholder permanent seat in the articles of incorporation must give way to the article
the Board of Directors is contrary to the provision in provision, even when the nature of the subject matter is
Corporation Code requiring all members of the Board to be something that would normally find it provided in the by-laws
elected by the stockholders. Even when the members of the rather than in the articles of incorporation.3
association may have formally adopted the provision, their Example:
action would be of no avail because no provision of the by-laws Authority granted to a corporation to regulate the transfer of its
can be adopted if it is contrary to law. Grace Christian High stock does not empower the corporation to restrict the right of
School v. Court of Appeals, 281 SCRA 133 (1997). a stockholder to transfer his shares, but merely authorizes the
The by-laws provisions cannot be such or be amended to be adoption of regulations as to the formalities and procedure to
able to go around the security of tenure clause of employees be followed in effecting transfer. Thomson v. Court of Appeals,
nor impair the obligation of existing contracts or rights 298 SCRA 280 (1998).
otherwise, it would enable an employer to remove any 3. By-Law Provisions Cannot Discriminate.
employee from his employment by the simple expediency of
B. Binding Effects on By-laws on the Dealing Public:
1
Government of the Philippine Islands v. El Hogar Filipino, 50 Phil. 399 (1927).
2 3


The rule is that by-law provisions must be reasonable and bidder. PAMBUSCO through 3 of 5 directors (the only ones present at
calculated to carry into effect the objects of the corporation that meeting) resolved to authorize Briones (one of the directors) to
comes from the theory that by-laws, as a basic contract execute a deed of assignment of their right of redemption in favor of
document, has the sole purpose of regulating the relationship Marcelino Enriquez, who thereafter sold the same to Spouses Yap. Pea
between and among the parties within the intra-corporate contends that there could be no valid sale to the spouses Yap because
relationship. Consequently, any by-law provision that does not the deed of assignment in favor of Enriquez was void for being executed
fulfill such objective is deemed to be unreasonable and void. ultra vires and against the by-laws of the corporation which provided
o General Rule: The validity or reasonableness of a by-law that a quorum requires that at least 4 directors be present at the
provision is a question of law. meeting, otherwise the meeting may be invalidated by failure or
o Exception: This rule is subject to the limitation that irregularity of notice.
"where the reasonableness of a by-law is a mere matter
of judgment, and one upon which reasonable minds Issue: Whether or not the act of the board was against the corporations
must necessarily differ, a court would not be warranted by-laws, and consequently, void.
in substituting its judgment instead of the judgment of
those who are authorized to make by-laws and who Held: YES. Section 4 of PAMBUSCOs by-laws provided that at least four
have exercised their authority."1 directors should be present to constitute a quorum. According to the
Example: Corporation Code any action resolved by the board with less than the
By-law provisions on the required quorum for special meetings number provided in the by-laws of the corporation to constitute a
of the Board have the force of law and are binding even on quorum would not bind the corporation. When a quorum is not
third-parties who deal with the properties of the corporation. reached, all the present directors could do is to adjourn. Moreover, the
Pea v. Court of Appeals, 193 SCRA 717 (1991). purported directors who attended the meeting and voted in favor of the
assignment were bogus directors as they were not listed in the SEC as
Pea v. Court of Appeals directors, nor were they stockholders of the company.

Facts: Pampanga Bus Co. (PAMBUSCO) owned several mortgaged lots. Doctrine: The by-laws of a corporation are its own private laws which
The lots were foreclosed and were sold to Rosita Pea, as highest substantially have the same effect as the laws of the corporation. In this
sense they become part of the fundamental law of the corporation with
which the corporation and its directors and officers must comply.
1
Ibid, at pp. 361-362, citing People ex rel. Wildi v. Ittner, 165 Ill. App. 360, 367
(1911).


WHAT IF: Atty. Hofilea if the other two directors showed up and Issue: Whether or not the by-laws of VGCCI can affect CBC.
agreed to what the three others had initially made, would judgment
have been different? NO. Held: NO. VGCCI only began sending notices of delinquency to Calapatia
after it was informed by CBC of its foreclosure proceedings. Also, even
Non-Binding Effects of By-Laws to Outsiders. The nature of though VGCCI acknowledged the pledge agreement between Calapatia
by-laws being intramural instruments would mean that they are and CBC, it completely disregarded CBCs rights as a pledgee by not
not binding on third- parties, except those who have actual informing it of the public auction it initiated.
knowledge of their contents. China Banking Corp. v. Court of
Appeals, 270 SCRA 503 (1997). VGCCI contended that CBC had actual knowledge of the clubs by-laws
and therefore must be bound. However, in order to be bound, the third
China Banking Corp. v. Court of Appeals party must have acquired knowledge of the by-laws at the time the
agreement was entered into between him and the shareholder. In the
Facts: Galicano Calapatia, Jr. is a stockholder of private respondent case at bar, CBC was only informed of the by-laws after it informed
Valley Golf & Country Club, Inc. (VGCCI). He pledged his Stock Certificate VGCCI of the public auction. Also, VGCCI could have easily informed
to petitioner China Banking Corp. (CBC) to secure a debt. This was petitioner of its by-laws when it sent notice formally recognizing CBC as
recorded in the corporate books with VGCCIs consent. Calapatia failed pledge of one of its shares registered in Calapatias name.
to pay his obligations, so CBC filed a petition for extrajudicial foreclosure
and informed VGCCI asking that the pledged stock be transferred to Doctrine:
CBCs name. However, VGCCI also informed CBC that it will not be able General Rule: Third persons are not bound by the by-laws of a
to do so because Calapatia has unsettled accounts with the club. corporation since they are not privy thereto.
Subsequently, because of Calapatias unsettled accounts with the club, Exception: When third persons have actual knowledge or constructive
VGCCI sold the stocks in a public auction in accordance with Section 3, knowledge of the same. However, this knowledge of the by-laws must
Article VIII of its By-Laws. Three years after, CBC informed VGCCI that it be present at the time of the perfection of the contract, and not only
was the new owner by virtue of the auction sale, however, VGCCI during the proceedings.
replied that for reason of delinquency, the same share of stock was sold
at the public auction. So of course, CBC protested and filed a case with Neither can we concede that such contract would be invalid
the RTC of Makati for the nullification of the auction sale and the just because the signatory thereon was not the Chairman of the
issuance of a new stock certificate in its name. Board which allegedly violated the corporations by-laws. Since
by-laws operate merely as internal rules among the


stockholders, they cannot affect or prejudice third persons who stockholders or members during office hours. A copy thereof, duly
deal with the corporation, unless they have knowledge of the certified to by a majority of the directors or trustees countersigned by
same. PMI Colleges v. NLRC, 277 SCRA 462 (1997). the secretary of the corporation, shall be filed with the Securities and
Exchange Commission which shall be attached to the original articles
C. Principle of Waiver of Applicable to By-Laws of incorporation.
A by-law may be waived by a stockholder or member when it is
he whose individual rights are advanced or protected by its Notwithstanding the provisions of the preceding paragraph, by-laws
provisions. If a corporation acts or contracts in disregard of a by- may be adopted and filed prior to incorporation; in such case, such by-
law with the consent or acquiescence of the stockholders or laws shall be approved and signed by all the incorporators and
members, there is a waiver of the by-laws, at least pro hac vice, submitted to the Securities and Exchange Commission, together with
whether it is afterwards sought to set up the by-laws against the articles of incorporation.
strangers or as against its stockholder or members.1
In all cases, by-laws shall be effective only upon the issuance by the
II. Adoption Procedure (Section 46) Securities and Exchange Commission of a certification that the by-laws
are not inconsistent with this Code.
Section 46. Adoption of by-laws.
Every corporation formed under this Code must, within one (1) month The Securities and Exchange Commission shall not accept for filing the
after receipt of official notice of the issuance of its certificate of by-laws or any amendment thereto of any bank, banking institution,
incorporation by the Securities and Exchange Commission, adopt a building and loan association, trust company, insurance company,
code of by-laws for its government not inconsistent with this Code. For public utility, educational institution or other special corporations
the adoption of by-laws by the corporation the affirmative vote of the governed by special laws, unless accompanied by a certificate of the
stockholders representing at least a majority of the outstanding capital appropriate government agency to the effect that such by-laws or
stock, or of at least a majority of the members in case of non-stock amendments are in accordance with law. (20a)
corporations, shall be necessary. The by-laws shall be signed by the
stockholders or members voting for them and shall be kept in the There can be no automatic dissolution simply because the
principal office of the corporation, subject to the inspection of the incorporators failed to file the required by-laws under Section
46 of Corporation Code. There is no outright demise of
1
SEC Opinion No. 22, series of 2003, addressed to Flores Ladia Bacalla Law corporate existence. Proper notice and hearing are cardinal
Firm as cited in Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine components of due process in any democratic institution,
Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.


agency or society. In other words, the incorporators must be the manner of voting therein;
given the chance to explain their neglect or omission and
remedy the same. Loyola Grand Villas Homeowners v. CA, 276 4. The form for proxies of stockholders and members and the manner
SCRA 681 (1997). of voting them;
A corporation which has failed to file its by-laws within the
prescribed period does not ipso facto lose its powers as such, 5. The qualifications, duties and compensation of directors or trustees,
and may be considered a de facto corporation whose right to officers and employees;
exercise corporate powers may not be inquired into collaterally
in any private suit to which such corporations may be a party. 6. The time for holding the annual election of directors of trustees and
[?] Sawadjaan v. Court of Appeals, 459 SCRA 516 (2005). the mode or manner of giving notice thereof;
o There is a matter of compliance with the requirements
so there is a corporation, but it is simply defective. 7. The manner of election or appointment and the term of office of all
officers other than directors or trustees;
III. Contents (Section 47)
8. The penalties for violation of the by-laws;
A. Matters Usually Found in the By-Laws
9. In the case of stock corporations, the manner of issuing stock
Section 47. Contents of by-laws. certificates; and
Subject to the provisions of the Constitution, this Code, other special
laws, and the articles of incorporation, a private corporation may 10. Such other matters as may be necessary for the proper or
provide in its by-laws for: convenient transaction of its corporate business and affairs. (21a)

1. The time, place and manner of calling and conducting regular or
special meetings of the directors or trustees; B. Other Matters that May Be Included in By-Laws
The by-laws relate to the internal affairs of the corporation.
2. The time and manner of calling and conducting regular or special o It may contain the duties and responsibilities of the
meetings of the stockholders or members; people comprising the corporation.

3. The required quorum in meetings of stockholders or members and Other matters which under the Corporation Code may be provided for


in the by-laws are as follows:
(i) Providing for interest on unpaid subscriptions;9
(a) Designation of time when voting rights may be exercised by
stockholders of record;1 (j) Entries to be made in the stock and transfer book;10 and

(b) Providing for additional officers for the corporation;2 (k) Providing for meetings of the members in a non-stock
corporation outside of the principal office of the corporation.11
(c) Provisions for the compensation of the directors;3
C. Matters That May Be Found in Articles of Incorporation and By-Laws
(d) Creation of an executive committee;4
How do you determine what goes into the articles of
(e) Date of the annual meeting or provisions of special incorporation vis--vis the by-laws?
5
meetings of the stockholders or members of the corporation; o Those expressly stated in the Corporation Code must be
placed in either document accordingly.
(f) Quorum on meetings of stockholders or members of the o However, with regard to information that is not in the
corporation;6 articles of incorporation, then it is left to the discretion
of the directors/incorporators where to place the
(g) Providing for the presiding officer at meetings of the information. Provided, that what is in the articles of
directors or trustees, as well as of the stockholders or incorporation cannot be contained in the by-laws(?)
members;7
In addition, the Corporation Code expressly allows certain matters to
(h) Procedure for issuance of certificates of shares of stock;8 be provided for either in the articles of incorporation or the by-laws of
the corporation, thus:

1
Section 24, Corporation Code.
2
Section 25. ibid. (a) Providing for cumulative voting in non-stock corporations;12
3
Section 30. ibid.
4
Section 35. ibid.
5 9
Sections 50 and 53. ibid. Section 66. ibid.
6 10
Section 52. ibid. Section 74. ibid.
7 11
8 12


as in the certificate of stock; otherwise, the restriction shall not be
(b) Providing for a higher quorum requirement for a valid binding on any purchaser thereof in good faith.8
board meeting;1
D. Matters That Cannot Be Provided for in By-Laws
(c) Limiting, broadening or denial of the right to vote, including
2
voting by proxy, for members in non-stock corporations; On the other hand, under the provisions of the Corporation Code, the
following matters must be provided for in the articles of incorporation,
(d) Transferability of membership in a non-stock corporations;3 and consequently cannot be governed by the corporation's by-laws:

(e) Termination of membership in non-stock corporations;4 (a) Classification of shares of stock and preferences granted to
preferred shares;9
(f) Manner of election and term of office of trustees and
5
officers in non-stock corporations; (b) Provisions on founder's shares;10

(g) Manner of distribution of assets in non-stock corporations (c) Providing for redeemable shares;11
upon dissolution;6 and
(d) Provisions on the purposes of the corporation;12
(h) Providing for staggered board in educational institutions;7
(e) Providing for the corporate term of existence;13
In a close corporation, restrictions on the right to transfer shares must
appear both in the articles of incorporation and in the by-laws, as well (f) Capitalization of stock corporations;14

(g) Corporate name;1 and

1 8
2 9
Section 89. ibid. Section 6, Corporation Code.
3 10
Section 90. ibid. Section 7, ibid.
4 11
Section 91. ibid. Section 8, ibid.
5 12
Section 92. ibid. Sections 14, 15, 36(11) and 45, ibid.
6 13
Section 94. ibid. Sections 11, 14 and 37, ibid.
7 14
Section 108. ibid. Sections 13 and 14, ibid..


the same to be attached to the original articles of incorporation and
(h) Denial of pre-emptive rights;2 original by-laws.

IV. Amendments and Revisions of By-Laws (Section 48) The amended or new by-laws shall only be effective upon the issuance
by the Securities and Exchange Commission of a certification that the
Section 48. Amendments to by-laws. same are not inconsistent with this Code. (22a and 23a)
The board of directors or trustees, by a majority vote thereof, and the
owners of at least a majority of the outstanding capital stock, or at SUMMATION
least a majority of the members of a non-stock corporation, at a Although the law provides a 1-month lee-way where a corporation
regular or special meeting duly called for the purpose, may amend or can submit their by-laws.
repeal any by-laws or adopt new by-laws. The owners of two-thirds However, in practice, the by-laws are submitted with the
(2/3) of the outstanding capital stock or two-thirds (2/3) of the articles of incorporation. This practice has been around so
members in a non-stock corporation may delegate to the board of much that the SEC may sometimes reject your application if the
directors or trustees the power to amend or repeal any by-laws or by-laws are not attached.
adopt new by-laws: Provided, That any power delegated to the board
of directors or trustees to amend or repeal any by-laws or adopt new Articles + By-Laws = Companys Constitutive Documents
by-laws shall be considered as revoked whenever stockholders owning Hierarchy: Law Articles of Incorporation By-Laws
or representing a majority of the outstanding capital stock or a
majority of the members in non-stock corporations, shall so vote at a
regular or special meeting.

Whenever any amendment or new by-laws are adopted, such
amendment or new by-laws shall be attached to the original by-laws in
the office of the corporation, and a copy thereof, duly certified under
oath by the corporate secretary and a majority of the directors or
trustees, shall be filed with the Securities and Exchange Commission

1
Sections 14 and 18, ibid..
2
Section 39, ibid..


CORPORATE POWERS AND AUTHORITY provisions of this Code;

I. Corporate Power and Capacity (Article 46, Civil Code; Sections 36 and 5. To adopt by-laws, not contrary to law, morals, or public policy, and
to amend or repeal the same in accordance with this Code;
45)

6. In case of stock corporations, to issue or sell stocks to subscribers
CIVIL CODE
and to sell stocks to subscribers and to sell treasury stocks in
Article 46.
accordance with the provisions of this Code; and to admit members to
Juridical persons may acquire and possess property of all kinds, as well
the corporation if it be a non-stock corporation;
as incur obligations and bring civil or criminal actions, in conformity

with the laws and regulations of their organization. (38a)
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,

mortgage and otherwise deal with such real and personal property,
This article compliments Section 36(1) of the Corporation Code.
including securities and bonds of other corporations, as the
o As such, even if the right to sue and be sued was not
transaction of the lawful business of the corporation may reasonably
granted in the Corporation Code, the corporation can
and necessarily require, subject to the limitations prescribed by law
still invoke it under the Civil Code.
and the Constitution;

Section 36. Corporate powers and capacity.
8. To enter into merger or consolidation with other corporations as
Every corporation incorporated under this Code has the power and
provided in this Code;
capacity:

9. To make reasonable donations, including those for the public
1. To sue and be sued in its corporate name;
welfare or for hospital, charitable, cultural, scientific, civic, or similar

purposes: Provided, That no corporation, domestic or foreign, shall
2. Of succession by its corporate name for the period of time stated in
give donations in aid of any political party or candidate or for purposes
the articles of incorporation and the certificate of incorporation;
of partisan political activity;

3. To adopt and use a corporate seal;
10. To establish pension, retirement, and other plans for the benefit of

its directors, trustees, officers and employees; and
4. To amend its articles of incorporation in accordance with the


11. To exercise such other powers as may be essential or necessary to capacity of corporate entities, such as the
carry out its purpose or purposes as stated in the articles of power to adopt and amend a set of by-laws.1
incorporation. o Implied Sometimes referred to as necessary; Those
powers exercised necessarily to perform the primary
Section 45. Ultra vires acts of corporations. purpose for which the company was formed.
No corporation under this Code shall possess or exercise any corporate You can use your common sense to determine
powers except those conferred by this Code or by its articles of whether your corporation has an implied power
incorporation and except such as are necessary or incidental to the to exercise or pursue certain actions.
exercise of the powers so conferred. (n) Example: you can hire accountants because the
SEC requires you to file financial statements.
A. Classification of Corporate Powers: Express; Implied, and Incidental o Incidental Those powers which the corporation can
A corporation has only such powers as are expressly granted to exercise by virtue of the purpose of the corporation.
it by law and by its articles of incorporation, those which may be o Atty. Hofilea Dont kill yourself trying to find an
incidental to such conferred powers, those reasonably objective distinction between implied or incidental
necessary to accomplish its purposes and those which may be powers. It can be fluid.
incident to its existence. Pilipinas Loan Company v. SEC, 356
SCRA 193 (2001). Express Implied Incidental
o Expressed Those stated in the law, the Code, and the Comes from the law, Flow from the nature Flow from the nature
articles of incorporation/by-laws by-laws and articles of of the underlying of the corporation as
The powers granted under the Corporation incorporation. business enterprise a juridical person.
Code need not be in the articles of These enumerated These exist as a Powers that attach to
incorporation or the by-laws to be exercised. powers constitute necessary a corporation the
Some of the powers expressly granted under part of the express consequence of the moment of its
Section 36 are considered to be inherent or powers of every grant and/or exercise creation without
incidental powers, which means that even when juridical person of the express powers regard to its express
not granted under the law expressly, such constituted within of the corporation or powers or particular
incidental powers are deemed to be within the Philippine jurisdiction. the pursuit of its primary purpose.

1
Gokongwei v. Securities and Exchange Commission, 89 SCRA 337 (1979).


purposes are provided o Function: A corporate signature that may represent
in its articles. consent or agreement. However, this is not necessary
for validity of agreemets.
B. Where Corporate Power Lodged o Atty. Hofilea this seems to be a remnant of the past
A corporation has no power except those expressly conferred where matters of solemnity were if importance.
on it by the Corporation Code and those that are implied or To issue or sell stocks to subscribers or admit members for non-
incidental to its existence. In turn, a corporation exercises said stock corporations
powers through its board of directors and/or its duly authorized o Issue v. Sell
officers and agentsIn turn, physical acts of the corporation, Issue (of new shares) Taken from the
like the signing of documents, can be performed only by natural unissued/unsubscribed shares, which no one
persons duly authorized for the purpose by corporate by-laws or owns. The company is giving or accepting a
by a specific act of the board of directors. Shipside Inc. v. Court new subscription; an act of the corporation.
of Appeals, 352 SCRA 334 (2001).1 Sell (previously issued shares) Taken from
shares which were previously owned; an act of
C. Powers of the Corporation the corporation OR the owner of shares.
The right of succession o Atty. Hofilea normally a corporation cannot sell
o This is possessed for as long as the corporation exists. shares to the subscribers. However, there are
o This power is the key by which a corporation is deemed exceptions whereby the company can sell shares which
to have a strong juridical personality, and is the it owns.
foundation of the primary doctrine that the personality A corporation can become the owners of (and
of the corporation is separate and distinct from that of eventually sell) issued shares if it buys it back
its stockholders or members. from the subscribers. These are TREASURY
To adopt and use a corporate seal SHARES. These do not become unissued shares,
o What: It is an emblem or sign that represents the but are still considered as outstanding stocks.
corporation. To merge and consolidate with other corporations
o It can be done within reasonable bounds.

1
Salenga v. Court of Appeals, 664 SCRA 635 (2012); Ellice Agro-Industrial Corp. SUMMARY
v. Young, 686 SCRA 51 (2012); Fausto C. Ignacio v. Home Bankers Savings and Corporations have inherent powers which it may exercise even if it is
Trust Co., 689 SCRA 173 (2013).


not noted in the articles of incorporation or by-laws. the long run, such investment can be beneficial
Succeeding articles deal with powers of the corporation. to the company so its a matter of argument.
o A corporation can own stocks of another corporation.
II. Express Powers
B. Extend or Shorten Corporate Term (Sections 37 and 81[1])
A. Enumerated Powers (Section 36)
To sell, lease, dispose, or encumber assets Section 37. Power to extend or shorten corporate term.
o Is there a limitation on the power of the corporation to A private corporation may extend or shorten its term as stated in the
deal with property? The Corporation Code provides that articles of incorporation when approved by a majority vote of the
it is in line with the business of the corporation. board of directors or trustees and ratified at a meeting by the
Doctrine: The property bought does not stockholders representing at least two-thirds (2/3) of the outstanding
necessarily have to be directly related to the capital stock or by at least two-thirds (2/3) of the members in case of
operations of the business, but it can be non-stock corporations. Written notice of the proposed action and of
justified by over-all good of the corporation. the time and place of the meeting shall be addressed to each
Can the company whose main business is to stockholder or member at his place of residence as shown on the
operate taxis in the Philippines acquire a books of the corporation and deposited to the addressee in the post
condominium unit in New York at a time when office with postage prepaid, or served personally: Provided, That in
it is considered a bad investment? Such case of extension of corporate term, any dissenting stockholder may
investment can be justifiable. exercise his appraisal right under the conditions provided in this code.
Atty. Hofilea This kind of situation is not so (n)
much whether the corporation has the power
or not, but whether it is wise or not. The Court Section 81. Instances of appraisal right.
will allow the board of directors to decide on Any stockholder of a corporation shall have the right to dissent and
wisdom of the matter. The Courts however, can demand payment of the fair value of his shares in the following
come in where there is an allegation that the instances:
corporation has no power to do so. This may be
initiated where someone alleges that the act is 1. In case any amendment to the articles of incorporation has the
ultra vires. In our age (2013), the world has effect of changing or restricting the rights of any stockholder or class
become smaller and so it can be argued that in of shares, or of authorizing preferences in any respect superior to


those of outstanding shares of any class, or of extending or shortening Atty. Hofilea The Corporate Term is embodied in the articles
the term of corporate existence; of incorporation. As such, to change the corporate term
amounts to an amendment of the articles of incorporation.
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other When such amendment takes place, the rules on amending
disposition of all or substantially all of the corporate property and must be complied with.
assets as provided in the Code; and 2. Appraisal Rights Issues
In case of extension of corporate term, any dissenting
3. In case of merger or consolidation. (n) stockholder may exercise his appraisal right to have his shares
bought back at fair value by the corporation. Nevertheless,
1. Nature of Power1 under Section 81 of the Code, the appraisal right is also
The power to extend corporate life is not a inherent power of a available to a dissenting stockholder even when it covers the
corporation, since the corporate term is not only a matter that shortening of the term of corporate existence.
constitutes an integral clause of the articles of incorporation,
but also the State in granting juridical personality to a C. Increase or Decrease Capital Stock (Section 38)
corporation is presumed to have granted only for the period of
time provided in the corporation's charter. Section 38. Power to increase or decrease capital stock; incur, create
The power to shorten corporate life, although an item that or increase bonded indebtedness.
would cover an amendment of the articles of incorporation, is No corporation shall increase or decrease its capital stock or incur,
for practical purposes, an inherent right on the part of the create or increase any bonded indebtedness unless approved by a
corporation, since the decision to shorten the business life of a majority vote of the board of directors and, at a stockholder's meeting
business endeavor should really be addressed to the business duly called for the purpose, two-thirds (2/3) of the outstanding capital
decision of the business venturers. Although the State would stock shall favor the increase or diminution of the capital stock, or the
have to approve formally the shortening of the original incurring, creating or increasing of any bonded indebtedness. Written
corporate term of a corporation, for all practical purposes, the notice of the proposed increase or diminution of the capital stock or of
State really compels the underlying enterprise to go on when the incurring, creating, or increasing of any bonded indebtedness and
the co-venturers have decided to cease operations of the time and place of the stockholder's meeting at which the
proposed increase or diminution of the capital stock or the incurring or
increasing of any bonded indebtedness is to be considered, must be
1
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. addressed to each stockholder at his place of residence as shown on


the books of the corporation and deposited to the addressee in the
post office with postage prepaid, or served personally. Any increase or decrease in the capital stock or the incurring, creating
or increasing of any bonded indebtedness shall require prior approval
A certificate in duplicate must be signed by a majority of the directors of the Securities and Exchange Commission.
of the corporation and countersigned by the chairman and the
secretary of the stockholders' meeting, setting forth: One of the duplicate certificates shall be kept on file in the office of
the corporation and the other shall be filed with the Securities and
1. That the requirements of this section have been complied with; Exchange Commission and attached to the original articles of
incorporation. From and after approval by the Securities and Exchange
2. The amount of the increase or diminution of the capital stock; Commission and the issuance by the Commission of its certificate of
filing, the capital stock shall stand increased or decreased and the
3. If an increase of the capital stock, the amount of capital stock or incurring, creating or increasing of any bonded indebtedness
number of shares of no-par stock thereof actually subscribed, the authorized, as the certificate of filing may declare: Provided, That the
names, nationalities and residences of the persons subscribing, the Securities and Exchange Commission shall not accept for filing any
amount of capital stock or number of no-par stock subscribed by each, certificate of increase of capital stock unless accompanied by the
and the amount paid by each on his subscription in cash or property, sworn statement of the treasurer of the corporation lawfully holding
or the amount of capital stock or number of shares of no-par stock office at the time of the filing of the certificate, showing that at least
allotted to each stock-holder if such increase is for the purpose of twenty-five (25%) percent of such increased capital stock has been
making effective stock dividend therefor authorized; subscribed and that at least twenty-five (25%) percent of the amount
subscribed has been paid either in actual cash to the corporation or
4. Any bonded indebtedness to be incurred, created or increased; that there has been transferred to the corporation property the
valuation of which is equal to twenty-five (25%) percent of the
5. The actual indebtedness of the corporation on the day of the subscription: Provided, further, That no decrease of the capital stock
meeting; shall be approved by the Commission if its effect shall prejudice the
rights of corporate creditors.
6. The amount of stock represented at the meeting; and
Non-stock corporations may incur or create bonded indebtedness, or
7. The vote authorizing the increase or diminution of the capital stock, increase the same, with the approval by a majority vote of the board
or the incurring, creating or increasing of any bonded indebtedness. of trustees and of at least two-thirds (2/3) of the members in a


meeting duly called for the purpose. corporation must not only comply with the provisions of Section
38, but also with the provisions of Section 16 of the Code
Bonds issued by a corporation shall be registered with the Securities governing the amendment of the articles of incorporation.
and Exchange Commission, which shall have the authority to o Atty. Hofilea decrease of capital stock is not allowed
determine the sufficiency of the terms thereof. (17a) when it would prejudice creditors. Creditors deal with
the corporation that there would be a specific capital to
Despite the board resolution approving the increase in capital help back the debt incurred.
stock and the receipt of payment on the future issues of the 2. Appraisal Rights Issues
shares from the increased capital stock, such funds do not The policy embodied in Section 38 of the Corporation Code
constitute part of the capital stock of the corporation until therefore, although it recognizes that an increase in authorized
approval of the increase by SEC. Central Textile Mills, Inc. v. capital stock redefines the contractual relations in the corporate
NWPC, 260 SCRA368 (1996). setting as it requires the approval of stockholders owning or
A reduction of capital to justify the mass layoff of employees, representing two-thirds (2/3) of the outstanding capital stock,
especially of union members, amounts to nothing but a does not include the appraisal right on the part of the dissenting
premature and plain distribution of corporate assets to obviate stockholders, in the sense that every stockholder should come
a just sharing to labor of the vast profits obtained by its joint into the corporate setting fully aware that the expediencies of
efforts with capital through the years, and would constitute corporate life may require that eventually the corporation may
unfair labor practice. Madrigal & Co. v. Zamora, 151 SCRA 355 need to increase capitalization to fund its operations or
(1987). expansions, and needs to look primarily into its equity investors
1. Nature of Power1 to fund the same.
The power to increase or decrease capital stock is not an 3. Effectivity of Increase in Capital Stock
inherent power of the corporation, not only because it touches Prior to SEC approval of the increase in the authorized capital
upon an item expressly required to be provided for in the stock of the corporation, and despite the board resolution
articles of incorporation, but also the capital stock of a approving the increase in capital stock, and the receipt of
corporation is governed by common law doctrines, such as the payment on the future issues of the shares from the increased
trust fund doctrine, and pre-emptive rights. Therefore, in capital stock, such funds do not constitute part of the capital
increasing or decreasing the capital stock of the corporation, the stock of the corporation until approval of the increase by the
SEC.
1


4. Special Rules on Listed Shares 1 power of the Board of Directors under the doctrine of
The SEC Rules in the case of corporations whose securities are centralized management and would not require
listed in the stock exchange or registered under the then stockholders ratification.
Revised Securities Act (now covered by the Securities Regulation o The power to incur and create indebtedness under
Code), is that no announcement of an offer of rights to acquire Section 40 of the Code provides that an encumbrance of
share or to issue stock dividends to stockholders shall be made all or substantially all of the assets of the corporation
after an increase of capital stock without a definite fixed date would require stockholders ratification.
for the exercise of such right or issuance of stock dividends. 1. Nature of a Bond 3
o The rule is meant to avoid delays in the issuance of In one opinion, the SEC has limited the term "bonded
rights or distribution of stock dividends after an increase indebtedness" to cover only indebtedness of the corporation
of capital stock. which are secured by mortgage on real or personal property, as
Atty. Hofilea regardless of the status of the ACS, you can distinguished from "debentures" which are unsecured
apply for an increase. corporate indebtedness.
o The law does not require that the unissued shares first Debentures are issued on the basis of the general credit of the
be released before the corporation can increase its corporation and are not secured by collaterals, and therefore do
authorized capital stocks. not constitute bonded indebtedness and will not require
approval of the stockholders.
D. Incur, Create or Increase Bonded Indebtedness (Section 38) 2 Atty. Hofilea Public indebtedness; not similar to debts
Differentiate between Article 38 or Article 40 secured for the ordinary course of business.
o The power to incur, create and increase bonded 2. Nature of Power
indebtedness governed by Section 38 of the Civil Code Ordinarily, the incurring, creating or increasing of indebtedness
should be analyzed from the fact that it constitutes an really does not go into or amend the corporate contractual
aspect of the inherent power of every corporation to relationship between and among the members of the corporate
borrow or to incur loan obligations. Ordinarily, this family. However, when it comes to bonded indebtedness,
exercise to borrow falls within the business judgment Section 38 imposes the same procedural requisites as the
increase or decrease of capital stock, since they create special

1
Section 1, Rules Requiring Definite Dates for the Exercise of Pre-Emptive or
3
Other Rights or For the Issuance of Stock Dividends (1973). SEC Opinion, 29 April 1987, XXI SEC QUARTERLY BULLETIN 21-22 (No. 3, Sept.
2
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. 1987). See also SEC Opinion, 6 April 1990, XXIV SEC QUARTERLY BULLETIN 28-29
(2013 ed.). Manila, Philippines: Rex Book Store. (No. 3, Sept. 1990).


burdens on the corporation, such as the need to provide for a position of the stockholders or members that they would have
sinking fund to answer for the maturity value of the bonds and had if the indebtedness were not a bonded indebtedness.
the creation of first liens of important assets of the corporation.
Usually bonded indebtedness involve very large amounts and E. Sell or Dispose of Assets (Section 40)
the burdens created on the operations of the corporation
usually covers a long period of time. Section 40. Sale or other disposition of assets.
The rationale for the rather strict requirements under the Code Subject to the provisions of existing laws on illegal combinations and
for the incurring, creating or increasing of bonded indebtedness monopolies, a corporation may, by a majority vote of its board of
is to ensure that not only the board of directors alone can bind directors or trustees, sell, lease, exchange, mortgage, pledge or
the corporation to such burdensome affairs, but that the otherwise dispose of all or substantially all of its property and assets,
qualified concurrence of the stockholders or members should including its goodwill, upon such terms and conditions and for such
be obtained. consideration, which may be money, stocks, bonds or other
Atty. Hofilea even without Section 38, the 2/3 requirement instruments for the payment of money or other property or
would still be necessary because incurring bonded indebtedness consideration, as its board of directors or trustees may deem
is burdensome. expedient, when authorized by the vote of the stockholders
3. Appraisal Right representing at least two-thirds (2/3) of the outstanding capital stock,
No appraisal right is granted to dissenting stockholders when or in case of non-stock corporation, by the vote of at least to two-
the corporation either validly incurs, creates or increases thirds (2/3) of the members, in a stockholder's or member's meeting
bonded indebtedness since, the granting of such appraisal right duly called for the purpose. Written notice of the proposed action and
under such circumstances would drain the corporation of of the time and place of the meeting shall be addressed to each
financial resources contrary to the purpose for which the power stockholder or member at his place of residence as shown on the
is exercise to raise funds for corporate affairs. Also, the books of the corporation and deposited to the addressee in the post
incurring, creation or increasing of bonded indebtedness does office with postage prepaid, or served personally: Provided, That any
not really go into the original intent or corporate relationship of dissenting stockholder may exercise his appraisal right under the
the stockholders or members with the corporation. Even when conditions provided in this Code.
such indebtedness is not bonded under the principles of the
trust fund doctrine, corporate creditors have priority over the A sale or other disposition shall be deemed to cover substantially all
assets of the corporation; therefore, adding the feature of being the corporate property and assets if thereby the corporation would be
a bonded indebtedness did not really take anything from the rendered incapable of continuing the business or accomplishing the


purpose for which it was incorporated. Consequently, nowhere is the consent of the State required or
referred to under Section 40 when the corporation sells or
After such authorization or approval by the stockholders or members, disposes of all or substantially all of its assets.
the board of directors or trustees may, nevertheless, in its discretion, 2. Nature of Transactions Covered 2
abandon such sale, lease, exchange, mortgage, pledge or other Theoretically, there is no change in the basic relationship
disposition of property and assets, subject to the rights of third parties between the corporation and the stockholders, other than as if
under any contract relating thereto, without further action or approval the corporation were again at the starting point of it business
by the stockholders or members. life. The reason why a stockholders' ratification is required
when the board sells, disposes or encumbers all or substantially
Nothing in this section is intended to restrict the power of any all of the corporate assets is that it recognizes the stockholders
corporation, without the authorization by the stockholders or right to the nature and status of the corporate business, as well
members, to sell, lease, exchange, mortgage, pledge or otherwise as future developments proceeding therefrom, when they put
dispose of any of its property and assets if the same is necessary in the their investments into the corporation. When the corporation,
usual and regular course of business of said corporation or if the through its board, attempts to alter or dispose of such level,
proceeds of the sale or other disposition of such property and assets even when the corporation ends up with the same value
be appropriated for the conduct of its remaining business. covering the cash or other form of consideration received for
the sale or disposition, it must get the confirmation of the
In non-stock corporations where there are no members with voting stockholders.
rights, the vote of at least a majority of the trustees in office will be o Stockholders have a common law proprietary or
sufficient authorization for the corporation to enter into any beneficial interests on the corporate business
transaction authorized by this section. (28 1/2a) enterprise, and any sale, transfer, disposition, or
encumbrance thereof would be void if effected by the
1. Nature of Power 1 Board of Directors without the appropriate
In other words, the exercise of such a power really affects the stockholders approval.
business enterprise level of corporate set-up, an area much left The property of the corporation is not the property of the
by the State to the judgment of the managers, and does not in stockholders or members, and as such, may not be sold without
any way affect or alter the juridical entity granted by the State.

1 2


express authority from the Board of Directors. Litonjua v. remaining business, since the sale or disposition of "all" assets
Eternit Corp., 490 SCRA 204 (2006). or property means there is no remaining business to conduct.2
3. Transactions NOT Covered by Ratificatory Vote Requirements 1 The Corporation Code defines a sale or disposition of
Section 40(4): substantially all assets and property of a corporation as one by
a. If it is necessary in the usual and regular course of which the corporation would be rendered incapable of
business of such corporation; or continuing the business or accomplishing the purpose for which
b. If the proceeds of the sale or other disposition of such it was incorporated any sale or disposition short of this will
property and assets be appropriated for the conduct of not need stockholder ratification, and may be pursued by the
its remaining business. majority vote of the Board of Directors. Strategic Alliance Dev.
There is a clear distinction between the assets of a corporation Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2009).
and its business enterprise (which is also termed as the going
concern in other disciplines), which the author would equate Strategic Alliance Dev. Corp. v. Radstock Securities Ltd.,
as the capability to earn profit from the business activity.
When the law therefore says all or substantially all of the Facts: The Construction Development Corporation of the Philippines
assets, it means that what is being sold or encumbered is the (CDCP) had a 30-year franchise to construct, operate and maintain toll
business enterprise, because even if most assets remain after facilities in the North and South Luzon Tollways. Basay Mining
the transaction, the ability to earn profit may no longer be Corporation (an affiliate of CDCP) obtained loans from Marubeni
present. Corporation of Japan amounting to P10 billion, which CDCP guaranteed
4. Sale or Disposition of All Corporate Assets or Property solidarily. Thereafter, CDCP changed its corporate name to PNCC to
Such a sale, disposition or encumbrance cannot be covered by reflect the governments (90.3%) shareholding in the corporation.
the exemption provided in Section 40 where no stockholders' or
members' approval is necessary because the sale of all of the The money owed Marubeni remained unpaid and unacknowledged for
assets or property of a business can never be "in the usual and 20 years. But in October 2000, PNCC recognized this financial obligation
regular course of business of such corporation," nor can it be to Marubeni. Barely 3 months after, Marubeni assigned its entire credit
argued that the proceeds of the sale or other disposition of such to Radstock Corporation for less than P100 million, who in turn sought
property and assets be appropriated for the conduct of its to collect from PNCC. Eventually, Radstock and PNCC entered into the

1 2


compromise agreement whereby PNCC shall assign to a third party 5. Sale or Disposition of Substantially All of the Corporate Assets
assignee (designated by Radstock) all its rights and interests in specified or Property
real properties (amounting to P6Billion - reduced obligation) provided The disposition of the assets of a corporation shall be deemed
the assignee shall be duly qualified to own real properties in the to cover substantially all the corporate property and assets, if
Philippines. PNCC shall also assign to Radstock 20% of the outstanding thereby the corporation would be rendered incapable of (a)
capital stock of PNCC, and 6% share in the gross toll revenue of the continuing the business or (b) accomplishing the purposes for
Manila North Tollways Corporation from 2008-2035. which it was incorporated. Such a sale or disposition must be
understood as valid only if it does not prejudice the creditors of
Issue: Whether or not the compromise agreement is valid. the assignor, which necessarily implies that the assignee
assumes the debts of the assignor. Caltex (Phils.), Inc. v. PNOC
Held: NO. The assignment of 6% revenues and outstanding capital stock Shipping and Transport Corp., 498 SCRA 400 (2006).
is not allowed because the franchise of PNCC has already expired and all The test on whether a sale or disposition or encumbrance is
its assets turned over to the government. Therefore, the revenues and substantial is a qualitative, rather than a quantitative test.1
stock capital belong to the government. There can be no disbursement o This means that sale of one piece of machinery, if it is
of public funds without appropriation by congress. Public bidding is essential in the continuation of the business, amounts
required to dispose of governmental property. Mere assignments are to sale of substantially all assets.
prohibited. PNCC must follow preference of credit. PNCC has other Approval of qualified majority of the
creditors, among them the national government which should be paid outstanding capital stock is needed
first, and other creditors who have final and executory judgements o Sale of several parcels of land, on the other hand, if not
against PNCC. The loan from Marubeni is unsecured and should be one disruptive of the corporations business is not a
of the last to be paid. So the compromise agreement effectively substantial sale of all corporation assets.
satisfying the unsecured loan to Marubeni before the preferred A mere board resolution would be sufficient.
creditors is invalid. Sale by Board of Trustees of the only corporate property
without compliance with Section 40 of Corporation Code
Doctrine: See above. Also, see Legal Effect on Assignee Even When requiring ratification of members representing at least two-
Contracts Entered into With the Requisites Stockholders or Members thirds of the membership, would make the sale null and void.
Approval.

1


Islamic Directorate v. Court of Appeals, 272 SCRA 454 (1997); corporate creditors and the amount and nature of their claims,
Pea v. CA, 193 SCRA 717 (1991). giving of notice of the sale, and applying the proceeds of the
6. Lease or Encumbrance of All of Substantially All of the Assets1 sale proportionately to the payment of the listed obligations.
When a corporation decides to lease all or substantially all of its Under the Bulk Sales Law, failure to comply with its
assets, then it would fall within the ambit of Section 40, because requirements renders the transaction void and fraudulent,
in effect the corporation can no longer pursue whatever line of irrespective of the intentions of the parties to the transaction.3
business it has by having contracted away the use of the 8. Consequences of Contracts Entered Into Without the Requisite
business enterprise to a lessee basically they have nothing to Stockholders Approval
use for the business. Section 40(3)
When a corporation decides to encumber all or substantially all Entering into the sale, disposition or encumbrance of all or
of its assets, it continues to retain ownership and possession substantially all of the assets of the corporation should be
thereof and still be in a position to pursue the lines of business treated as being within the governing doctrine of ultra vires
for which the assets have been devoted to. The reason why contracts of the third type (i.e., those entered into by
ratification by stockholders is necessary: unauthorized officers or representatives of the corporation) and
The encumbrance of all or substantially all assets has
o should be construed and disposed under the doctrine prevailing
the potential of disrupting the pursuit of the business on such ultra vires contracts. Such contract would be void.
especially if foreclosure happens (i.e. dispossession). 9. Legal Effect on Assignee Even When Contracts Entered into
o Such encumbrance would fall within the same category With the Requisites Stockholders or Members Approval 4
of incurring or creating bonded indebtedness under General Rule: When you sell assets, you simply sell it, and the
Section 38. liability stays with you.
7. Bulk Sales Law Exception: Unless the buyer/assignee assumes your obligations
Aside from the requirements under Section 40, the sale of all or concerning the asset.
substantially all of the corporate assets or property may require Actions made pursuant to Section 40 would constitute a species
compliance with the Bulk Sales Law,2 when the transaction falls of business enterprise and the legal effect is to make the
within the classification of the Law as "sale in bulk" and would
require the seller to execute a sworn statement listing the

3
For a more substantive discussions on the applicability of the Bulk Sales Law,
1
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. see Chapter 16, VILLANUEVA, LAW ON SALES, Rex Book Store, (1998 ed.).
4
(2013 ed.). Manila, Philippines: Rex Book Store. Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.
2
Act No. 3952, as amended by Rep. Act No. 111. (2013 ed.). Manila, Philippines: Rex Book Store.


assignee liable for the obligations arising from the business duly called for the purpose. Written notice of the proposed investment
enterprise. and the time and place of the meeting shall be addressed to each
Strategic v. Radstock the Court stated that the transfer can stockholder or member at his place of residence as shown on the
only happen if the transferee assumes liability for all the books of the corporation and deposited to the addressee in the post
obligations. This is because, the transfer was essentially done in office with postage prepaid, or served personally: Provided, That any
fraud of creditors (including the government). This case is a dissenting stockholder shall have appraisal right as provided in this
different animal all together. Code: Provided, however, That where the investment by the
10. Appraisal Right 1 corporation is reasonably necessary to accomplish its primary purpose
The appraisal right is accorded to dissenting stockholders as a as stated in the articles of incorporation, the approval of the
matter of equity and fairness since they should be allowed to stockholders or members shall not be necessary. (17 1/2a)
plough their investments into ventures they feel they could get
a better return rather than with a corporation that is no longer 1. Rational of Rule
capable of pursuing the business. Whenever the corporation seeks to engage into a secondary
purpose allowed under its articles of incorporation, although
F. Invest Corporate Funds for Non-Primary Purpose Endeavor (Section intra vires, it must seek the approval of the stockholders or
42) members of the corporation.
o The law therefore presumes rather strongly that when
Section 42. Power to invest corporate funds in another corporation or stockholders invest, or members join, a corporation, it is
business or for any other purpose. with the primary expectation that the corporation,
Subject to the provisions of this Code, a private corporation may invest through its board, will only pursue the primary purpose
its funds in any other corporation or business or for any purpose other indicated in the articles of incorporation, and if the
than the primary purpose for which it was organized when approved board feels that it is propitious to pursue a secondary
by a majority of the board of directors or trustees and ratified by the purpose, then it would do so only if the stockholders or
stockholders representing at least two-thirds (2/3) of the outstanding members have had a chance to evaluate and decide
capital stock, or by at least two thirds (2/3) of the members in the case upon such diversion of corporate funds from the
of non-stock corporations, at a stockholder's or member's meeting primary business of the corporation.
2. Coverage of Funds
The SEC has ruled that the term funds under Section 42
1
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. includes any corporate property to be used in the furtherance of


the business, and consequently when property is devoted in any without need of obtaining stockholders' approval; much less
business other that pursuit of the primary purpose for which the should such investments trigger any appraisal right on the part
corporation was incorporated, it would need the ratificatory of dissenting stockholders.
vote of two-thirds (2/3) of the outstanding capital stock of the Investment by a sugar central in the equity of a corporation that
corporation.1 manufactures the jute bags used in packing sugar falls within
3. Investments That Should Be Considered Within Primary the implied powers of the sugar central as part of its primary
Purpose 2 purpose and does not need ratification by the stockholders. De
Section 42 expressly provides that where the investment by the la Rama v. Ma-ao Sugar Central Co., 27 SCRA 247 (1969).
corporation is reasonably necessary to accomplish its primary
purpose as stated in the articles of incorporation, the approval De la Rama v. Ma-ao Sugar Central Co.
of the stockholders or members shall not be necessary, since
the matter lies clearly within the business discretion or Facts: De La Rama and 3 other minority stockholders of Ma-Ao Sugar
judgment of the board of directors of the corporation. Central filed a derivative suit against the Ma-Ao Sugar Central Co., Inc.,
o There are certain investments of the corporation that and Amado Araneta and 3 other directors. De La Rama claims that the
would be deemed consistent with the primary purpose directors made an illegal investment in Phil. Fibers Processing Co., Inc.
by virtue of the essence of the corporation as a business He contends that since the investment was made NOT in pursuance of
enterprise. the corporate purpose and without the requisite authority of 2/3 of the
All corporations, whatever may be their primary purposes, are stockholders, then the investment was thus illegal for being in violation
deemed to have the power to invest corporate funds in another of Section 17-1/2 of the Corporation Law.
corporation or business, as a means of obtaining the best
returns of their investible funds. Araneta claims that the investment was not illegal as it was
Examples: subsequently ratified by the Board of Directors in a resolution. Also
A fishing company, through its board, should be allowed to since the company was engaged in the manufacture of sugar bags, it
place say its investible fund of P100,000.00 in PLDT or San was thus perfectly legitimate for Ma-Ao Sugar either to manufacture
Miguel commercial papers or even perhaps their shares, if they sugar bags or invest in another corporation engaged in said
offer the best return at that point in time for the corporation, manufacture.

1
XXIX SEC QUARTERLY BULLETIN 2 (No. 2, June 1995). Issue: Whether or not the affirmative vote of the stockholders
2
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. representing 2/3 of the voting power is necessary


a corporation may exercise such other powers as may
Held: NO. The court held that the affirmative vote of the stockholders be essential or necessary to carry out its purpose or
representing 2/3 of the voting power is not necessary. purposes "as stated in its articles of incorporation."
o Section 45 provides expressly that no corporation shall
Doctrine: The corporation code allows a corporation to invest its funds possess or exercise any corporate power except those
in another corporation for any other purpose other than the main conferred by the Corporation Code, or by its articles of
purpose. incorporation.
Provided that the board has been authorized by affirmative vote Under such terms, the ratificatory vote of stockholders or
of the stockholders representing 2/3 of the voting power. members to legally allow a corporation to invest funds outside
BUT if the investment is made in a corporation whose business of its primary purpose (and those which are necessary or
is important to the investing corporation and would aid it in its incidental to the exercise of such purpose) would be limited to
purpose, then to require authority of the stockholders would be pursuing the secondary purposes of the corporation.
to unduly curtail the power of the board of directors. 5. Consequences of Non-Obtaining of Ratificatory Vote 2
BUT when the purchase of shares of another corporation is The non-obtaining of the ratificatory vote of the stockholders or
done solely for investment and not to accomplish the purpose members under Section 42 of the Code should be construed to
of its incorporation, the vote of approval of the stockholders is be within the realm of ultra vires contracts of the second type,
necessary. having been entered into by representatives of the corporation
not duly authorized.
4. Investments Outside of Secondary Purposes 1 6. Confirmation of the Business Enterprise Level of
If one where to limit the review to the wordings of Section 42, Relationship
the answer would seem to be in the affirmative. The provisions of Section 42 of the Corporation Code recognize
However, the terms of Section 42 are deemed to be the legal standing of stockholders or members of ever corporate
circumscribed by the provisions of Sections 36 and 45 of the set-up on matters that affect the business enterprise, as it
Corporation Code. grants them standing to vote on matters, and does not leave the
o Section 36, after enumerating express powers of crucial decision of whether or not to invest corporate funds in
corporations, provides an all-encompassing clause that non-primary business enterprise within the sole business
discretion of the Board.

1 2


Dividends from retained earnings can only be declared to those
G. Declare Dividends (Section 43) who are stockholders of the corporation; dividends cannot be
declared to creditors as part of the settlement of debts. Nielson
Section 43. Power to declare dividends. & Co. v. Lepanto Consolidated Mining Co., 26 SCRA 540 (1968).
The board of directors of a stock corporation may declare dividends Stock dividend is the amount that the corporation transfers
out of the unrestricted retained earnings which shall be payable in from its surplus profit account to its capital account. It is the
cash, in property, or in stock to all stockholders on the basis of same amount that can loosely be termed as the trust fund of
outstanding stock held by them: Provided, That any cash dividends the corporation. NTC v. CA, 311 SCRA 508 (1999).
due on delinquent stock shall first be applied to the unpaid balance on When the Board distributes, it is based on the number of shares
the subscription plus costs and expenses, while stock dividends shall and to all stockholders. The Board cannot choose who will
be withheld from the delinquent stockholder until his unpaid receive or not.
subscription is fully paid: Provided, further, That no stock dividend o However, in cases where the stockholder has not fully
shall be issued without the approval of stockholders representing not paid for his share, his cash dividends will first be applied
less than two-thirds (2/3) of the outstanding capital stock at a regular to your unpaid subscription (which you should have
or special meeting duly called for the purpose. (16a) paid according to your contract).
(SEC Circular 11, s.2003) Unrestricted Retained Earnings not
Stock corporations are prohibited from retaining surplus profits in allocated for any project or debt of the corporation.
excess of one hundred (100%) percent of their paid-in capital stock, Kinds of Dividends
except: (1) when justified by definite corporate expansion projects or *Rights to dividends may be affected due to various types of shares
programs approved by the board of directors; or (2) when the Cash Property Stock
corporation is prohibited under any loan agreement with any financial All products of your investments
institution or creditor, whether local or foreign, from declaring Board Approval is sufficient to execute Stockholders
dividends without its/his consent, and such consent has not yet been approval is required
secured; or (3) when it can be clearly shown that such retention is No meeting is required Meeting is required
necessary under special circumstances obtaining in the corporation, for approval
such as when there is need for special reserve for probable Issued in cash Treasury shares which New shares of stocks
contingencies. (n) have been reissued as issued from unissued
dividends are actually shares
property dividends


Only upon declaration of the board will a corporation, such as when there is need for special
stockholder have a right to claim their cash reserve for probable contingencies.3
or property dividends. Under the SEC Rules Governing the Distribution of Excess Profits
of Corporations, where the financial statements of the
1. Retention of Surplus Profit corporation show surplus profits in excess of 100% of paid-up
Section 43 prohibits stock corporations from retaining surplus capital, it shall explain by footnotes why the same has not been
profits in excess of one-hundred percent (100%) of their paid-up declared as dividends; if the explanation is not satisfactory, the
capital stock,1 except in the following situations: SEC shall direct the corporation to distribute the excess as
a. When justified by definite corporate expansion projects dividends.4
or programs approved by the board of directors;2 The power granted to stockholders to demand from the Board
i. Definite Mere possibility of expansion is the declaration of dividends under Section 43 is one of the few
insufficient to withhold surplus profit. instances under the Code where the stockholders themselves
b. When the corporation is prohibited under any loan exercise a primary power, instead of the usual ratificatory vote
agreement with any financial institution or creditor, on actions taken primarily by the board of directors.
whether local or foreign, from declaring dividends 2. Report to SEC
without its/his consent, and such consent has not yet Any declaration of dividends, whether cash or stock, shall be
been secured; or reported to the SEC within fifteen (15) days from the date of
c. When it can be clearly shown that such retention is declaration. For corporations whose shares or securities are
necessary under special circumstances obtaining in the listed in the stock exchange or registered and licensed under the
Revised Securities Act (now the Securities Regulation Code), the
report shall be filed with the SEC before or simultaneously with
the release or publication of the notice of declaration of
dividends to stockholders.5
1
Even under the old Corporation Law, the SEC had issued the Rules Governing
the Distribution of Excess Profits of Corporations (1973), which provides that 3. Restrictions on Banks
"All corporations which have surplus profits in excess of necessary
3
requirements for capital expansion and reserves shall declare and distribute the SEC RULES GOVERNING THE DISTRIBUTION OF EXCESS PROFITS OF CORPORATIONS includes
excess profits as dividends to stockholders. (Section 1) as justification for non-declaration of dividends when the same is consistent
2
SEC RULES GOVERNING THE DISTRIBUTION OF EXCESS PROFITS OF CORPORATIONS provides with policy or requirements of a government office.
4
that the amounts appropriated for such purpose shall be segregated from the Section 2 thereof.
5
free surplus; and that upon completion of the expansion program, the reserve Section 3, SEC RULES GOVERNING THE DISTRIBUTION OF EXCESS PROFITS OF
established shall be declared as stock dividends. CORPORATIONS (1973)


Under Section 57 of the General Banking Law of 2000,1 no bank the same interest of both the managing and the managed corporations
or quasi-bank shall declare dividends greater than its own or control more than one-third (1/3) of the total outstanding
accumulated net profits then on hand deducting therefrom its capital stock entitled to vote of the managing corporation; or (2)
losses and bad debts. Neither shall the bank or quasi-bank where a majority of the members of the board of directors of the
declare dividends, if at the time of declaration: managing corporation also constitute a majority of the members of
a. Its clearing account with the Bangko Sentral is the board of directors of the managed corporation, then the
overdrawn; management contract must be approved by the stockholders of the
b. It is deficient in the required liquidity floor for managed corporation owning at least two-thirds (2/3) of the total
government deposits for five (5) or more consecutive outstanding capital stock entitled to vote, or by at least two-thirds
days; (2/3) of the members in the case of a non-stock corporation. No
c. It does not comply with the liquidity standards/ratios management contract shall be entered into for a period longer than
prescribed by the Bangko Sentral for purposes of five years for any one term.
determining funds available for dividend declaration; or
d. It has committed a major violation as may be The provisions of the next preceding paragraph shall apply to any
determined by the Bangko Sentral. contract whereby a corporation undertakes to manage or operate all
or substantially all of the business of another corporation, whether
H. Management Contracts (Section 44): Why the difference in rule such contracts are called service contracts, operating agreements or
between entity and individual? otherwise: Provided, however, That such service contracts or
operating agreements which relate to the exploration, development,
Section 44. Power to enter into management contract. exploitation or utilization of natural resources may be entered into for
No corporation shall conclude a management contract with another such periods as may be provided by the pertinent laws or regulations.
corporation unless such contract shall have been approved by the (n)
board of directors and by stockholders owning at least the majority of
the outstanding capital stock, or by at least a majority of the members Atty. Hofilea While this provision provides substantial basis
in the case of a non-stock corporation, of both the managing and the for a corporations management of another, the board of the
managed corporation, at a meeting duly called for the purpose: managed corporation must not abdicate their power
Provided, That (1) where a stockholder or stockholders representing completely. At the end of the day, they must still call the shots.
1. Coverage of Management Contract (Section 44(2))

1
Rep. Act 8791.


A management contract is not the same as an agency contract, o Exception: Under these principles, the ratificatory
and therefore is not revocable at will. Nielson & Co., Inc. v. procedure should not therefore be applicable to a
Lepanto Consolidated Mining, 26 SCRA 540 (1968); Ricafort v. corporation that is organized primarily as a
Moya, 195 SCRA 247 (1991). management company, and its entering into a
2. Rationale for Ratification Requirements1 management contract is clearly within the primary
On Part of the Managed Corporation: Such a management purpose of the corporation and in accordance with the
contract is a deviation from the principle under Section 23 that contractual understanding with the stockholders of such
the corporate affairs shall be managed by the board of managing corporation.
directors, and thereby a departure from such an arrangement 3. Ratification Requirements When There is Common Control of
would require the approval of the stockholders under the Involved Corporations (Section 44(1))
principle that it would vary the contractual corporate 4. Cases Not Covered by Section 44 2
arrangements, by allowing basically an outsider to involve itself It would seem from the express language of Section 44, that
in the management of corporate affairs. when it comes to a management contract entered into by the
On Part of the Managing Corporation: The rationale for managed corporation under the definition of Section 44, not
ratificatory measures on the part of the managing corporation is with another corporation but with a partnership or an
that the management arrangement is a deviation from the individual, the same would not be covered by and thereby need
principle also that the board of directors in the managing not comply with the ratificatory requirements of Section 44.
corporation assumed office with the understanding that they
would devote their time and resources for the affairs of the I. Purchase Own Shares (Section 41)
corporation, and the entering into the management contract They become treasury shares.
whereby the board, as the direct agents of the managing Requisites:
corporation, would be devoting their time and resources o Legal purpose
towards the operations of another corporation, would be a o Out of unrestricted earnings
deviation from such a contractual relationship, and thereby
would require the confirmation of the stockholders of the III. Implied Powers
managing corporation. Examples:

1 2


When the articles expressly provide that the purpose of the duly-organized corporation, unless specifically revoked by
corporation was to engage in the transportation of person by another law. Umale v. ASB Realty Corp., 652 SCRA 215 (2011).
water, such corporation cannot engage in the business of land The act of issuing checks is within the ambit of a valid corporate
transportation, which is an entirely different line of business, act, for it as for securing a loan to finance the activities of the
and, for which reason, may not acquire any certificate of public corporation, hence, not an ultra vires act. Atrium Management
convenience to operate a taxicab service. Luneta Motor Co. v. Corp. v. Court of Appeals, 353 SCRA 23 (2001).
A.D. Santos, Inc., 5 SCRA 809 (1962).
A corporation whose primary purpose is to generate electric V. Other Powers (Section 36)
power has no authority to undertake stevedoring services to
unload coal into its pier since it is not reasonably necessary for A. Sell Land and Other Properties
the operation of its power plant. NPC v. Vera, 170 SCRA 721 When the corporations primary purpose is to market,
(1989). distribute, export and import merchandise, the sale of land is
A corporation organized to engage as a lending investor cannot not within the actual or apparent authority of the corporation
engage in pawnbroker. Philipinas Loan Co. v. SEC, 356 SCRA 193 acting through its officers, much less when acting through the
(2001). treasurer. Articles 1874 and 1878 of Civil Code requires that
A mining company has no power to engage in real estate when land is sold through an agent, the agents authority must
development. Heirs of Antonio Pael v. Court of Appeals, 372 be in writing, otherwise the sale is void. San Juan Structural v.
SCRA 587 (2001). CA, 296 SCRA 631 (1998).1
An officer who is authorized to purchase the stock of another
corporation has implied power to perform all other obligations B. Borrow Funds
arising therefrom such as payment of the shares of stock. Inter- The power to borrow money is one of those cases where even a
Asia Investments Industries v. Court of Appeals, 403 SCRA 452 special power of attorney is required under Article 1878 of Civil
(2003). Code. There is invariably a need of an enabling act of the
corporation to be approved by its Board of Directors. The
IV. Incidental Powers argument that the obtaining of loan was in accordance with the
As a creature of the law, the powers and attributes of a ordinary course of business usages and practices of the
corporation are those set out, expressly or implied, in the law.
1
Among the general powers granted by law to a corporation is AF Realty & Dev., Inc. v. Dieselman Freight Services Co., 373 SCRA 385 (2002);
Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003); Cosco
the power to sue in its own name. This power is granted to a
Philippines Shipping, Inc. v. Kemper Insurance Company, 670 SCRA 343 (2012).


corporation is devoid of merit because the prevailing practice in shopping is necessarya certification not signed by a duly
the corporation was to explicitly authorize an officer to contract authorized person renders the petition subject to dismissal.
loans in behalf of the corporation. China Banking Corp. v. Court Gonzales v. Climax Mining Ltd., 452 SCRA 607 (2005);2 such as
of Appeals, 270 SCRA 503 (1997). the administrator or project manager, Esteban, Jr. v. Vda. de
Onorio, 360 SCRA 230 (2001); or the General Manager, Central
C. Power to Sue and Be Sued Cooperative Exchange Inc. v. Enciso, 162 SCRA 706 (1988).
Under Section 36 in relation to Section 23 of Corporation Code, Nonetheless, such lack of authority may be cured: even if the
where a corporation is an injured party, its power to sue is counsel executed the verification and certificate of non-forum
lodged with its Board of Directors. A minority stockholder who shopping before the board authorized him, the passing of the
is a member of the Board has no such power or authority to sue board resolution of authorization before the actual filing of the
on the corporations behalf. Tam Wing Tak v. Makasiar, 350 complaint. Median Container Corp. v. Metropolitan Bank and
SCRA 475 (2001).1 Trust Co., 561 SCRA 622 (2008); the submission in the motion
1. Power to Bind the Corporation in a Suit for reconsideration of the authority to sign the verification and
When the power to sue is delegated by the by-laws to a certification constitutes substantial compliance with the
particular officer, such officer may appoint counsel to represent procedural requirements. Asean Pacific Planners v. City of
the corporation in a pre-trial hearing without need of a formal Urdaneta, 566 SCRA 219 (2008).
board resolution. Citibank, N.A. v. Chua, 220 SCRA 75 (1993). When a corporate officers has been granted express power by
For counsel to sign the certification for the corporation, he must the Board of Directors to institute a suit, the same is considered
specifically be authorized by the Board of Directors. BPI Leasing broad enough to include the power of said corporate officer to
Corp. v. CA, 416 SCRA 4 (2003); Mariveles Shipyard Corp. v. CA, execute the verification and certification against forum
415 SCRA 573 (2003). shopping required in initiatory pleadings under the Rules of
2. Certificate of Non-Forum Shopping: Court. Cunanan v. Jumping Jap Trading Corp., 586 SCRA 620
If the petitioner is a corporation, a board resolution authorizing (2009).
a corporate officer to execute the certification against forum
2
Also DBP v. Court of Appeals, 440 SCRA 200 (2004); Public Estates Authority v.
Uy, 372 SCRA 180 (2001); Philippine Airlines, Inc. v. Flight Attendance and
1
Shipside Inc. v. Court of Appeals, 352 SCRA 334 (2001); SSS v. COA, 384 SCRA Stewards Association of the Philippines (FASAP), 479 SCRA 605 (2006); Metro
548 (2002); United Paragon Mining Corp. v. Court of Appeals, 497 SCRA 638 Drug Distribution, Inc. v. Narcisco, 495 SCRA 286 (2006); Cagayan Valley Drug
(2006); Mediserv, Inc. v. Court of Appeals, 617 SCRA 284 (2010); Cebu Bionic Corp. v. Commissioner of Internal Revenue, 545 SCRA 10 (2008) Mediserv, Inc.
Builders Supply, Inc. v. DBP, 635 SCRA 13 (2010); Ellice Agro-Industrial Corp. v. v. Court of Appeals, 617 SCRA 284 (2010); Cosco Philippines Shipping, Inc. v.
Young, 686 SCRA 51 (2012). Kemper Insurance Company, 670 SCRA 343 (2012).


A President of a corporation, among other enumerated rule that allows service of summons upon an agent50 of the
corporate officers and employees, can sign the verification and corporation. E.B. Villarosa & Partners Co., Ltd. v. Benito, 312
certification against non-forum shopping in behalf of the SCRA 65 (1999).
corporation without the benefit of a board resolution. South
Cotabato Communications Corp. v. Sto. Tomas, 638 SCRA 566 To sue and be sued (Additional Notes)
(2011). A de facto corporation may also sue and be sued, and their
3. Service of Summons on Corporations status as de facto cannot be assailed collaterally unless in a case
Section 11, Rule 14 of the 1997 Rules of Civil Procedure uses the duly submitted for that purpose.
term general manager and unlike the old provision in the General Rule: The rule that the power of the corporation to sue
Rules of Court, it does not include the term agent. and be sued in any court is lodged with the Board of Directors
Consequently, the enumeration of persons to whom summons that exercise its corporate powers, is not well-established.
may be served is restricted, limited and exclusive following Exception: The only exception to such rule is when the
the rule on statutory construction expressio unios est exclusion circumstances allow the filing by a relator-stockholder of a
alterius. Therefore, the earlier cases that uphold service of derivative suit in behalf of the corporation without prior
summons upon a construction project manager; 1 a approval of the Board of Directors or Trustees.8
corporations assistant manager; 2 ordinary clerk of a Example:
corporation; 3 private secretary of corporate executives; 4 Even if the counsel executed the verification and certificate of
retained counsel; 5 officials who had charge or control of the non-forum shopping before the board authorized him, the
operations of the corporation, like the assistant general passing of the board resolution of authorization before the
manager;6 or the corporations Chief Finance and Administrative actual filing of the complaint, or the submission in the motion
Officer;7 no longer apply since they were decided under the old for reconsideration of the authority to sign the verification and
certification constitutes substantial compliance with the

1 procedure requirements.9
Kanlaon Construction Enterprises Co., Inc. v. NLRC, 279 SCRA 337 (1997).
2
Gesulgon v. NLRC, 219 SCRA 561 (1993).
3
Golden Country Farms, Inc. v. Sanvar Development Corp., 214 SCRA 295 D. Power to Hire Employees and Appoint Agents
(1992); G & G Trading Corp. v. Court of Appeals, 158 SCRA 466 (1988).
4
Summit Trading and Dev. Corp. v. Avendao, 135 SCRA 397 (1985); also
8
Vlason Enterprises Corp. v. Court of Appeals, 310 SCRA 26 (1999). Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.
5
Republic v. Ker & Co., Ltd., 18 SCRA 207 (1966). (2013 ed.). Manila, Philippines: Rex Book Store.
6 9
Villa Rey Transit, Inc. v. Far East Motor Corp., 81 SCRA 298 (1978). Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.
7
Far Corporation v. Francisco, 146 SCRA 197 (1986). (2013 ed.). Manila, Philippines: Rex Book Store.


Except where the authority of employing servants and agents is profits, and would constitute a breach by the Board of
expressly vested in the board of directors or trustees, an officer Directors of its fiduciary duties to the stockholders.1
or agent who has general control and management of the Doctrine of Corporate Social Responsibility 2
corporations business, or a specific part thereof, may bind the o Corporations being creatures of law and receiving the
corporation by the employment of such agents and employees protection of the State as well as profiting from society
as are usual and necessary in the conduct of such business. But must bear certain non-profit and social responsibilities.
the contracts of employment must be reasonable. Yu Chuck v. o Under this theory, donations and other contributions
Kong Li Po, 46 Phil. 608 (1924). made by the Board of Directors would not constitute
ultra vires acts.
E. Provide Gratuity Pay for Employees (Section 36[10]) The limitation: Reasonable it depends
Providing gratuity pay for employees is an express power of a o The amount should not be so big of an amount such
corporation under the Corporation Code, and cannot be that it infringes the capacity to conduct business and
considered to be ultra vires to avoid any liability arising from the the amount necessary to pay back creditors.
issuance of resolution granting such gratuity pay. Lopez Realty o If donations constitute merely a wastage or have no
v. Fontecha, 247 SCRA 183, 192 (1995). reasonable means of enhancing the business enterprise
The underlying rationale for the express power of corporation (e.g. goodwill), then they would be unreasonable
to grant gratuities is that they engender loyalty among the donations and are ultra vires.3
corporations human resources and grants them motivation to Donations cannot be made in aid of a political party.
remain with the corporation, and thereby increase their o Atty. Hofilea The Omnibus Election Code amended
productivity and avoid wastage occurring through unnecessary the provision of the Corporation Code, and states that
high turn-over of personnel. donations can be made to political candidates.

F. Power to Make Donations (Section 36[9]) G. Enter Into a Partnership or Joint Venture: Tuason & Co. v. Bolanos,
Doctrine of Maximization of Profits 95 Phil. 106 (1954); SEC Opinion, dated 29 February 1980.
o Definitely this cannot be justified as beneficial for the
1
corporation because you are parting with property.
o Essentially, every donation made by the corporation 2
would contravene the doctrine of maximization of (2013 ed.). Manila, Philippines: Rex Book Store.
3


Tuason & Co. v. Bolanos Doctrine: The true rule is that though a corporation has no power to
enter into a partnership, it may nevertheless enter into a joint venture
Facts: J.M. Tuason & Co. brought an action for the recovery of with another where the nature of that venture is in line with the
possession of real property against Bolanos. Bolanos alleges ownership business authorized by its charter.
of the land by prescription. The case was ruled in favor of Tuason A joint venture is essentially a partnership arrangement,
(prescription does not run against registered property). although of a special type, since it pertains to a particular
project or undertaking.1 Although Tuason does not elaborate on
On appeal, Bolanos alleges, among others, that the complaint by Tuason why a corporation may become a co-venturer or partner in a
should have been dismissed for not having been brought by the real joint venture arrangement, it would seem that the policy behind
party in interest. This is because the action is brought in behalf of JM the prohibition on why a corporation cannot be made a partner
Tuason & Co. Inc. by Gregorio Araneta Inc., its managing partner. do not apply in a joint venture arrangement. Being for a
particular project or undertaking, when the board of directors of
Issue: Whether or not the case should have been dismissed on the a corporation evaluate the risks and responsibilities involved,
ground that the case was not brought by the proper party in interest they can more or less exercise their own business judgment is
determining the extent by which the corporation would be
Held: NO. What Section 2, Rule 2 of the Rules of Court provide is that involved in the project and the likely liabilities to be incurred.
the action be brought in the name of, but not necessarily by the real Unlike in an ordinarily partnership arrangement which may
party in interest. While the complaint states that the plaintiff is expose the corporation to any and various liabilities and risks
represented herein by its Managing Partner Gregorio Araneta, Inc., which cannot be evaluated and anticipated by the board, the
another corporation, there is nothing against one corporation being situation therefore in a joint venture arrangement, allows the
represented by another person, natural or juridical, in a suit in court. board to fully bind the corporation to matters essentially within
the boards business appreciation and anticipation.2
The contention that Gregorio Araneta, Inc. cannot act as managing
1
partner for plaintiff on the theory that it is illegal for two corporations to BAUTISTA, supra, at p. 50. In Torres v. Court of Appeals, 278 SCRA 793, 86 SCAD
enter into a partnership is without merit. There is nothing in the record 812 (1997), the Supreme Court held unequivocally that a joint venture
agreement for the development and sale of a subdivision project would
to indicate that the venture in which plaintiff is represented by Gregorio constitute a partnership pursuant to the elements thereof under Article 1767 of
Araneta, Inc. as its managing partner is not in line with the corporate the Civil Code that defines when a partnership exists.
2
business of either of them. Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.


exercise of the powers so conferred. (n)
The prevailing rule in the United States is that "unless it is
expressly authorized by statute or charter, a corporation cannot A corporation has no power except those expressly conferred
ordinarily enter into partnerships with other corporations or on it by the Corporation Code, its charter, and those that are
with individuals, for, in entering into a partnership, the identity implied or incidental to its existence. In turn, a corporation
of the corporation is lost or merged with that of another and exercises said powers through its Board of Directors and /or its
the direction of the affairs is placed in other hands than those duly authorized officers and agents. Monfort Hermanos
provided by law of its creationA corporation can act only Agricultural Dev. Corp. v. Monfort III, 434 SCRA 27 (2004).
through its duly authorized officers and agents and is not bound 1. First Type Ultra Vires: Those which are outside of the express,
by the acts of anyone else, while in a partnership each member implied and incidental powers of the corporation.
binds the firm when acting within the scope of the An ultra vires act is one committed outside the object for which
partnership."1 a corporation is created as defined by the law of its organization
The doctrine is grounded on the theory that the stockholders of and therefore beyond the power conferred upon it by law. The
a corporation are entitled, in the absence of any notice to the term ultra vires is distinguished from an illegal act for the
contrary in the articles of incorporation, to assume that their former is merely voidable which may be enforced by
directors will conduct the corporate business without sharing performance, ratification, or estoppel, while the latter is void
that duty and responsibility with others.2 and cannot be validated. Atrium Management Corp. v. CA, 353
SCRA 23 (2001).
VI. ULTRA VIRES DOCTRINE 2. Second Type Ultra Vires: Those which have been executed on
behalf of the corporation without proper authority from the
A. Types of Ultra Vires Acts (Section 45) Board of Directors.
When the President enters into speculative contracts without
Section 45. Ultra vires acts of corporations. prior board approval, and without subsequent Board
No corporation under this Code shall possess or exercise any corporate ratification, nor were the transactions included in the reports of
powers except those conferred by this Code or by its articles of the corporation, such contracts do not bind the corporation. It
incorporation and except such as are necessary or incidental to the must be pointed out that the Board of Directors, not the
President, exercises corporate powers. Safic Alcan & Cie v.
Imperial Vegetable Oil Co., Inc., 355 SCRA 559 (2001).
1
FLETCHER CYC. CORPORATIONS (Perm. Ed.) 2520.
2 Example:
BAUTISTA, TREATISE ON PHILIPPINE PARTNERSHIP LAW (1978 Ed.), at p. 9.


Contracts or acts of a corporation must be made either by the
Board of Directors or by a corporate agent duly authorized by Harden, a stockholder of Balatoc, as well as other stockholders filed a
the Board absent such valid delegation/ authorization, the case against Benguet and Balatoc praying that the contract be declared
rule is that the declaration of an individual directors relating to unlawful, and subsequently annulled, and that the shares of stock
the affairs of the corporation, but not in the course of, or issued to Benguet be obliterated. They based their complaint on a
connected with the performance of authorized duties of such provision in the then Corporation Law (adopted from the Act of
director, are held not binding on the corporation. Manila Metal Congress of 1916) which states that it shall be unlawful for any
Container Corp. v. PNB, 511 SCRA 444 (2006). member of a corporation engaged in agriculture or mining (...) to be in
3. Third Type Ultra Vires: Those which are per se contrary to law, any wise interested in any other corporation engaged in agriculture or in
morals and public policy. mining.
Example:
Although the arrangement between the two mining companies Issue: Whether or not the contract should be annulled for illegality.
was prohibited under the terms of the old Corporation Law, the
Supreme Court did not declare the nullity of the agreements on Held: NO. The provision was enacted based on public policy which
the ground that only private rights and interests, as dictates the need to regulate mining rights. The penalties imposed in
distinguished from public interests, were involved in the case. what is now section 190 (A) of the Corporation Law for the violation of
Harden v. Benguet Consolidated Mining Co., 58 Phil. 140 the prohibition in question are of such nature that they can be enforced
(1933). only by a criminal prosecution or by an action of quo warranto. But
these proceedings can be maintained only by the Attorney-General in
Harden v. Benguet Consolidated Mining Co. representation of the Government. Moreover, Benguet Company has
committed no civil wrong against the plaintiffs. In this case, Harden has
Facts: Benguet Consolidated, a sociedad anonima, and Balatoc Mining no legal standing.
Co., a corporation, were engaged in the business of mining gold. During
its early years, Balatoc was underdeveloped so it entered into a contract Doctrine: Even where corporate contracts are illegal per se, when only
with Benguet Consolidated wherein Benguet will erect power plants and public or government policy is at stake and no private wrong is
develop a milling plant for Balatoc. In return, Balatoc gave Benguet committed, the courts will leave the parties as they are, in accordance
shares with a par value of P600K. The contract was a result of a general with their original contractual expectations.
stockholders meeting held by Balatoc. The project soon after turned
out well, with Benguet profiting from their shares. B. General Judicial Attitude Towards the Ultra Vires Doctrine


The plea of ultra vires will not be allowed to prevail, whether donation of 4,000 shares of stock as originally planned into a
interposed for or against a corporation, when it will not advance renunciation in favor of the children of all the companys right,
justice but, on the contrary, will accomplish a legal wrong to the title, and interest as beneficiary in and to the proceeds of the
prejudice of another who acted in good faith. Zomer Dev. Corp. life insurance policies subject to the express condition that said
v. Intl Exchange Bank, 581 SCRA 115 (2009). proceeds should be retained as a loan drawing interest at 5%
per annum and shall be payable after the company shall have
C. Ratification of Ultra Vires Acts: first settled in full the balance of its present remaining bonded
Acts done by the Board of Directors which are ultra vires cannot indebtedness to NDC. Estefania as guardian of the children then
be set-aside if the acts have been ratified by the stockholders. acted this donation.
Pirovano v. De la Rama Steamship Co., Inc., 96 Phil. 335 (1954). After a few years the stockholders formally ratified the donation stated
in the resolutions.
Pirovano v. De la Rama Steamship Co., Inc
The president of the corporation, Sergio Osmena filed an inquiry before
Facts: The heirs of Enrico Pirovano filed before CFI of Rizal an action SEC alleging that said donation was void because the corporation acted
seeking to enforce some board resolutions which gives his children the beyond its scope of powers because a corporation cant dispose of his
proceeds of the insurance policies taken on the life of the deceased. assets by gift.
Pirovano, former president of steamship corporation, was said to have
contributed greatly to progress of the company by raising its paid-up Issue: Whether or not the donation is valid and enforceable.
capital from P240K to P15.5M. A few years before he died in the hands
of the Japanese, the company insured the life of Pirovano in various Held: YES. The resolution is not an ultra-vires act on the part of the
insurance companies for P1M. corporation. The corporation was given broad and unlimited powers to
The first series of resolutions was issued wherein a sum of carry out the purpose for which it was organized which includes the
P400k convertible to 4k shares of stock at par shall be set aside power to (1) invest and deal with corporate money not immediately
for his heirs. This was later changed because, it was found by required in such manner as from time to time may be determined (2)
the sister of Estefania de la Rama, Lourdes, that in computing aid in any other manner to any person, association or corporation of
the actual value of the stocks, the widow of Pirovano as which any obligation is held by this corporation. The donation
guardian of the children would have twice as much voting undoubtedly comes within the scope of this broad power.
power as her other 4 sisters.
The board adopted a resolution changing the form of the The grant or donation is question is remunerative in nature and was


given in consideration of the services rendered by the heirs father or o Acts done in excess of corporate officers scope of
the corporation. The donation has already been perfected such that the authority cannot bind the corporation. However, when
corporation could no longer rescind it. It was embodied in a Board subsequently a compromise agreement was on behalf
Resolution. Representatives of the corporation and even its creditors as of the corporation being represented by its President
the NDC have given their concurrence. The donation was a corporate acting pursuant to a Board of Directors resolution, such
act carried out by the corporation not only with the sanction of the constituted as a confirmatory act signifying ratification
Board of Directors but also of its stockholders. The donation hasreached of all prior acts of its officers. NPC v. Alonzo-Legasto,
a stage of perfection which is valid and binding upon the corporation 443 SCRA 342 (2004).
and cannot be rescinded unless there exists legal grounds for doing so.

Doctrine: Said donation even if ultra vires is not void and if voidable, its
infirmity has been cured by ratification and subsequent acts of the
corporation. The corporation is now estopped or prevented from
contesting the validity of the donation. To allow the corporation to undo
what it has done would be most unfair and contravene the well-settled
doctrine that the defense of ultra vires cannot be set up or availed of in
any completed transaction.

Ratification can be both express and implied.
Even when a particular corporate act does not fall within the
express or implied powers of the corporation, nevertheless it
will not be set aside when, not being malum prohibitum, the
corporation, through its senior officers or its Board of Directors,
are estopped from questioning the legality of such act, contract
or transaction. Carlos v. Mindoro Sugar Co., 57 Phil. 343
(1932).1

1
Republic v. Acoje Mining Co., 3 SCRA 361 (1963); Crisologo Jose v. Court of
Appeals, 177 SCRA 594 (1989).


DIRECTORS, TRUSTEES AND OFFICERS corporation of which he is a director shall thereby cease to be a
director. Trustees of non-stock corporations must be members
Board of Directors is the body which: thereof. A majority of the directors or trustees of all corporations
organized under this Code must be residents of the Philippines.
1. Exercises all powers provided for under the Corporation Code;
2. Conducts all business of the corporation;
3. Controls and holds all property of the corporation. Doctrine of Centralized Management1
Its members have been characterized as trustees or directors clothed o General Rule: The corporations consent is that of its
with a fiduciary character. It is clearly separate and distinct from the Board of Directors.
corporate entity itself. Hornilla v. Salunat, 405 SCRA 220 (2003). o Exception: Specified instances in the Corporation Code
Atty. Hofilea There must be a minimum of five (5) directors where the particular exercise of the corporate power by
and a maximum of fifteen (15). the Board, in order to be binding and effective, requires
the consent or ratification of the stockholders or
I. DOCTRINE OF CENTRALIZED MANAGEMENT: Powers of Board of members, and also on the part of the State.
Directors (Section 23) o Right of Appraisal: It should be noted that although for
efficiency of running of corporate affairs the rule of
majority has been adopted in the case of stockholders
Section 23. The board of directors or trustees.
Unless otherwise provided in this Code, the corporate powers of all and members, the Corporation Code still recognizes
corporations formed under this Code shall be exercised, all business that in certain instances a dissenting stockholder whose
conducted and all property of such corporations controlled and held contractual expectation has either been frustrated or
by the board of directors or trustees to be elected from among the altered by the decision of the majority, should be given
the right not have to stay within the confines of the
holders of stocks, or where there is no stock, from among the
corporate contractual relationship. In such instances,
members of the corporation, who shall hold office for one (1) year
the dissenting stockholder is granted an option to
until their successors are elected and qualified.
withdraw from such relationship, by the exercise of the
Every director must own at least one (1) share of the capital stock of right of appraisal.
the corporation of which he is a director, which share shall stand in his o Courts Attitude Towards the Boards Exercise of
name on the books of the corporation. Any director who ceases to be Power: The Board of a corporation has sole authority to
the owner of at least one (1) share of the capital stock of the
1


determine policy and conduct the ordinary business of o Thus, contracts or acts of a corporation must be made
the corporation within the scope of its charter. As long either by the Board of Directors or by a corporate agent
as the board acts honestly and the contract does not duly authorized by the board.
defraud or abuse the rights of the minority, the courts o Absent such valid delegation/authorization, the rule is
will not interfere in their judgments and transactions. that the declarations of an individual director relating to
The minority members of the board and the minority the affairs of the corporation, but not in the course of,
stockholders cannot come to court upon allegations of or connected with the performance of authorized duties
want of judgment or lack of efficiency on the part of the of such director, are held not binding on the
majority and change the course of the administration of corporation.
corporate affairs. Atty. Hofilea The one share required to be held by a director
Section 23 expressly provides that the corporate powers of all is a qualifying share and in practice is ignorable.
corporations shall be exercised by the Board of Directors.
Manila Metal Container Corp. v. PNB, 511 SCRA 444 (2006).1 A. Rationale for Centralized Management Doctrine:
o The source of power of the Board of Directors is The raison detre behind the conferment of corporate powers
primarily and directly vested by law; it is not a on the Board of Directors is not lost on the Court indeed, the
delegated power from the stockholders or members of concentration in the Board of the powers of control of
the corporation.2 corporate business and appointment of corporate officers and
Just as a natural person may authorize another to do certain managers is necessary for efficiency in any large organization.
acts in his behalf, so may the Board of Directors validly delegate Stockholders are too numerous, scattered and unfamiliar with
some of its functions to individual officers or agents appointed the business of a corporation to conduct its business directly.
by it. And so the plan of corporate organization is for the stockholders
to choose the directors who shall control and supervise the
conduct of corporate business. Filipinas Port Services v. Go, 518
SCRA 453 (2007).
1
Yu Chuck v. Kong Li Po, 46 Phil. 608, 614 (1924); Gamboa v. Victoriano, 90
SCRA 40 (1979); Reyes v. RCPI Employees Credit Union, Inc., 499 SCRA 319 Filipinas Port Services v. Go
(2006); Yasuma v. Heirs of Cecilio S. De Villa, 499 SCRA 466 (2006); Raniel v.
Jochico, 517 SCRA 221 (2007); Republic v. Coalbrine International, 617 SCRA
491 (2010). Facts: Filports Board of Directors (herein respondents) enacted a
2
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. resolution creating six new positions. People were elected into said 6


offices and given a monthly salary. They also increased the salaries of management of the corporations regular business affairs, unless more
the Chairman and other officers. Eliodoro Cruz (previous board director) extensive power is expressly conferred.
wrote a letter to the Board questioning these decisions, saying that the
Board was not authorized to do so by the companys by-laws as A corporation is an artificial being and can only exercise its
required by Section 35 of the Corporation Code. powers and transact its business through the instrumentalities
of its Board of Directors, and through its officers and agents,
Issue: Whether or not the Board of Directors had the power to create when authorized by resolution or by its by-laws.
the assailed positions Examples:
o Consequently, when legal counsel was clothed with
Held: YES. While the by-laws do not expressly provide for the boards authority through formal board resolution, his acts bind
authority to create an executive committee, the Court cannot deem that the corporation which must be held bound the
the positions created automatically formed an executive committee. actuations of its counsel of record. De Liano v. Court of
The executive committee referred to in Sec. 35 means a committee Appeals, 370 SCRA 349 (2001).
that has equal powers with the board and must be distinguished from o The physical acts of the corporation, like the signing of
other committees that can be created and controlled by the board. In documents, can be performed only by natural persons
this case, the positions created are ordinary positions were created in duly authorized for the purpose by corporate by-laws or
accordance with the regular business of Filport; thus, it is entirely within by a special act of the board of directors. Firme v.
the boards power to create them and provide remuneration therefor. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003);
Plus, Cruz himself moved to create the positions of AVPS for Finance, Shipside Inc. v. Court of Appeals, 352 SCRA 334 (2001).
Operations, and Administration during his incumbency as Filport
president. B. Theories on Source of Board Power
1. Theory of Original Power The source of the power of the
Doctrine: As per Section 23 of the Corporation Code, the corporate Board comes directly from the law, and the Board is originally
powers of all corporations formed under the code shall be exercised by and directly granted corporate power as the embodiment of the
the board, and all property owned and business conducted by the corporation. This theory has no democratic notions but actually
corporation shall also be held and controlled by the board. The board is is more akin to the principles of autocracy.
the sole authority to determine policies, enter into contracts, and a. Accordingly there is little for the stockholders to do
conduct the ordinary business of the corporation within the scope of its beyond electing directors, making by-laws and
charter. However, the authority of the board is restricted to the exercising certain other special powers defined by law.


These notions are in accordance with the mandate of stockholders. By drawing themselves the powers of the
Section 23 of the Corporation Code. corporation, they occupy positions of trusteeship in relation to
b. Under the theory of original power, the Board is vested the stockholders. Angeles v. Santos, 64 Phil. 697 (1937).
with the legal or naked title to the properties and
business enterprise of the corporation, being viewed as Angeles v. Santos
a medium or the corpus, with the stockholders being
considered as the beneficiaries, and thereby a fiduciary Facts: A complaint was instituted by Angeles, de Lara, Bernabe, as
relationship established between the Board as the stockholders and member of the minority of the Board of Directors, for
trustee, and the stockholders as the beneficiaries. and in behalf of the corporation, Paraaque Rice Mill, Inc., against
c. Atty. Hofilea the Board of Directors vis--vis the Santos, Mayuga, Pascual, and Rodriguez who constitute the majority of
stockholders have a fiduciary/trust relationship. the Board of Directors. Generally, the allegations consists of denial of
2. Theory of Delegated Power the authority exercised by the Santos as president of the Corporation to give access to the
Board is viewed as delegated to them by stockholders. Under corporations books which was then necessary because (1) de Lara was
such theory, the source of primary theory can override the conducting an investigation, (2) such books should have been in the
decisions of its delegates. hands of the treasurer (Bernabe) and not the president, and (3) that the
a. Such theory promotes the notion of agency in the defendants had been disposing of the assets of the corporation without
corporate set-up, where the real sources of power are authority from the Board. The court issued an ex parte order of
the stockholders or members, and the representatives receivership appointing Melchor de Lara as receiver but the defendants
thereof would be the Board. It is also consistent with objected claiming that the Court had no jurisdiction over the Paraaque
notions in Property Law that as a general rule, the Rice Mill, Inc., because it had not been include as party defendant in this
owners exercise ultimate power and disposition over case and that, therefore the court could not properly appoint a receiver
the subject matter to which he holds title. The of the corporation pendente lite.
stockholders or members are the real owners of the
corporation, and to them the corporate powers must Issue: Whether or not the trial court was without jurisdiction to appoint
belong, and that the Board of Directors or Trustees a receiver and should have dismissed the case
merely act as their agents or representatives.
Delegated Powers Coming from the Stockholders: The Board of Held: NO. That the action was properly instituted by the plaintiff as
Directors is a creation of the stockholders and controls and stockholders for and in behalf of the corporation Paraaque Rice Mill,
directs the affairs of the corporation by delegation of the Inc. and the lower court committed no reveiwable error in appointing a


receiver of the corporation pendente lite. constitute the board of trustees. During the annual members meeting
held on April 6, 1998, there were only eleven (11) living member-
Doctrine: Where a majority of the board of directors wastes or trustees, as four (4) had already died. Out of the eleven, seven (7)
dissipates the funds of the corporation or fraudulently disposes of its attended the meeting through their respective proxies. The meeting
properties, or performs ultra vires acts, the court, in the exercise of its was convened and chaired by Atty. Sabino Padilla Jr. over the objection
equity jurisdiction, and upon showing that intra-corporate remedy is of Atty. Antonio C. Pacis, who argued that there was no quorum. In the
unavailing, will entertain a suit filed by the minority members of the meeting, Petitioners Ernesto Tanchi, Edwin Ngo, Virginia Khoo, and
board of directors, for and in behalf of the corporation, to prevent Judith Tan were voted to replace the four deceased member-trustees.
waste and dissipation and the commission of illegal acts and otherwise
redress the injuries of the minority stockholders against the wrongdoing Issue: Whether or not the meeting was null and void for lack of quorum
of the majority.
Held: NO. Under Section 52 of the Corporation Code, the majority of
One of the most important rights of a qualified shareholder or the members representing the actual number of voting rights, not the
member is the right to vote for the directors or trustees who are number or numerical constant that may originally be specified in the
to manage the corporate affairs. The right to choose the articles of incorporation, constitutes the quorum. Under the By-Laws of
persons who will direct, manage and operate the corporation is GCHS, membership in the corporation shall, among others, be
significant, because it is the main way in which a stockholder terminated by the death of the member. The dead members who are
can have a voice in the management of corporate affairs, or in dropped from the membership roster in the manner and for the cause
which a member in a nonstock corporation can have a say on provided for in the By-Laws of GCHS are not to be counted in
how the purposes and goals of the corporation may be determining the requisite vote in corporate matters or the requisite
achieved. Once the directors or trustees are elected, the quorum for the annual members meeting. With 11 remaining
stockholders or members relinquish corporate powers to the members, the quorum in the present case should be 6. Therefore, there
board in accordance with law. Tan v. Sycip, 499 SCRA 216 being a quorum, the annual members meeting, conducted with six
(2006). members present, was valid (as to other resolutions).

Tan v. Sycip HOWEVER, the election of the four trustees cannot be legally upheld
for the obvious reason that it was held in an annual meeting of the
Facts: Grace Christian High School (GCHS) is a nonstock, non-profit members (where a majority of the Board were present), not of the
educational corporation with fifteen (15) regular members, who also board of trustees. We cannot ignore the GCHS bylaw provision, which


specifically prescribes that vacancies in the board must be filled up by
the remaining trustees who must sit as a board in order to validly elect The directors or trustees and officers to be elected shall perform the
the new ones. duties enjoined on them by law and the by-laws of the corporation.
Unless the articles of incorporation or the by-laws provide for a
Doctrine: Membership in and all rights arising from a non-stock greater majority, a majority of the number of directors or trustees as
corporation are personal and non-transferable, unless the articles of fixed in the articles of incorporation shall constitute a quorum for the
incorporation or the bylaws of the corporation provide otherwise. The transaction of corporate business, and every decision of at least a
determination of whether or not dead members are entitled to majority of the directors or trustees present at a meeting at which
exercise their voting rights (through their executor or administrator) there is a quorum shall be valid as a corporate act, except for the
depends on the articles of incorporation or bylaws. election of officers which shall require the vote of a majority of all the
members of the board.
Atty. Hofilea if you push the point that the directors are the
agents of the stockholders, there may be complications because Directors or trustees cannot attend or vote by proxy at board
in agency, the principal can override the agent. However, in the meetings.
case of corporations, the stockholders (principal) are not
allowed to overrule or supplant the decisions of the Board of Atty. Hofilea the secretary as a matter of policy should not
Directors (agent). also be the treasurer. This was laid down via a SEC rule and not
found in the Corporation Code.
C. Board Must Act As a Body (Section 25) General Rule: The grant of corporate power is to the board as a
body, and not to the individual members. The corporation can
Section 25. Corporate officers, quorum. be bound only by the collective act of the board.
Immediately after their election, the directors of a corporation must o The rationale for this rule is the public policy, that it
formally organize by the election of a president, who shall be a makes better management practice for the board to sit
director, a treasurer who may or may not be a director, a secretary down, to discuss corporate affairs, and decide on the
who shall be a resident and citizen of the Philippines, and such other basis of their consensus.1
officers as may be provided for in the by-laws. Any two (2) or more
positions may be held concurrently by the same person, except that no
1
one shall act as president and secretary or as president and treasurer The SEC has opined that directors and trustees can only exercise their power
at the same time. as a board, not individually. They shall meet and counsel each other and any
determination affecting the corporation shall be arrived at only after


Exception: A corporation can be bound even by the act of its A Director-Treasurer has no power to bind the company even in
officers, but always because of the act or default of, or as an transactions that are pursuant to the primary purpose its
implied authority coming from the Board. corporation, especially when the by-laws specifically provided
1. Directors or Trustees Cannot Act Individually to Bind the that the acts entered into can only be done by the Board of
Corporation Directors. Ramirez v. Orientalist Co., 38 Phil. 634 (1918).
Contracts or acts of corporation must be made either by the o The implication is clear in reference to outsiders dealing
Board of Directors or by a corporate agent duly authorized by with the corporation, that not all corporate actions
the Board. Absent such valid delegation, the rule is that the need formal board approval. The board need not come
declaration of an individual director relating to the affairs of the together and act as a body to perform a corporate act.
corporation, but not in the course of, or connected with the In many cases no act is required of the members of the
performance of authorized duties of such director, are held not board in order to bind the corporation; the fact that
binding on the corporation.1 they know of a particular corporate transaction or
2. Ratification by the Board does not need formal meeting contract, and they stayed silent about it, or worse, they
A corporation, through its Board of Directors, should act in the allowed the corporation to gain by the transaction or
manner and within the formalities prescribed by its charter or contract, would already bind the corporation.2
by the general law. Thus, directors must act as a body in a Between the act of the Board as a body affirming informally the
meeting called pursuant, otherwise, any action taken therein perfection of a contract entered into in behalf of the
may be questioned by any objecting director or shareholder. Be corporation by a senior officer, and the subsequent formal
that as it may, jurisprudence tells us that an action of the Board board resolution rejecting the same contract, the former must
of Directors during a meeting, which was illegal for lack of prevail under the doctrine of estoppel. Acua v. Batac
notice, may be ratified either expressly, by the action of the Producers Cooperative Marketing Assn., 20 SCRA 526 [1967]).
directors in subsequent legal meeting, or impliedly, by the Exercise of the powers of the Board of Directors may either be
corporation's subsequent course of conduct. Lopez Realty v. express and formal through the adoption of a board resolution
Fontecha, 247 SCRA 183 (1995). in a meeting called for the purpose, or it may be implied where
the Board collectively and knowingly allows the President to
enter into important contracts in the pursuit of the business of

consultation at a meeting of the board attended by at least a quorum. SEC
Opinion, 10 March 1972, SEC FOLIO 1960-1976, at p. 526.
1 2


the corporation. Board of Liquidators v. Heirs of Maximo M. 2. Ratification from the board
Kalaw, 20 SCRA 987 (1967).
3. Directors or Trustees cannot bind the Board in a Stockholders
Board of Liquidators v. Heirs of Maximo M. Kalaw or Members Meeting
See Tan v. Sycip, 499 SCRA 216 (2006).
Facts: National Coconut Corporation (NACOCO) through its Kalaw 4. Directors or Trustees Cannot Attend or Act by Proxy or
entered into several contracts involving copra trading activities which Alternate1
became unprofitable. NACOCO suffered losses NACOCO herein alleges On account of their responsibility to the corporation, and by the
that under the by-laws of the corporation, the general manager only has fact that they were elected into the Board based on their
the power to perform or execute on behalf of the corporation upon personal qualifications, business acumen and background,
prior approval of the Board all contracts necessary and essential to the directors or trustees cannot validly act by proxy.
proper accomplishment for which the Corporation was organized. The SEC has ruled that alternate directors are not allowed by
law, since directors are required to exercise their judgment and
Issue: Whether or not Kalaw and the rest of the board were guilty discretion in running the affairs of the corporation and cannot
negligence and bad faith and/or breach of trust for having entered into be substituted by others because their position is one of trust
the unprofitable contracts and confidence.2

Held: NO. Under the circumstances, Kalaws acts were valid corporate D. Effects of Bogus Board: The acts or contracts effected by a bogus
acts. Evidence shows that it was the practice of the corporation to allow board would be void pursuant to Article 1318 of Civil Code3 because of
its general manager to negotiate contracts, in its copra trading for and the lack of consent. Islamic Directorate of the Philippines v. Court of
in NACOCOs behalf, without prior board approval. The Court ruled that Appeals, 272 SCRA 454 (1997).
if the by-laws were to be literally followed, the board should give its
stamp of prior approval on all corporate contracts. But [in this case] the

board itself, by its acts and through acquiescence, practically laid aside 1
the by-law requirement of prior approval (2013 ed.). Manila, Philippines: Rex Book Store.
2
SEC Opinions, dated 27 May 1970 and 25 April 2985, addressed to
Polyphosphates, Inc.
Doctrine: There are 2 ways by which corporate actions may come about 3
Article 1318. There is no contract unless the following requisites concur:
through its Board of Directors: (1) Consent of the contracting parties;
1. The board may empower or authorize the act or contract (2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established. (1261)


E. Executive Committee (Section 35) General Rule: The Board can overrule the decisions of an
executive committee.
Section 35. Executive committee. Exception: UNLESS, such contract has been executed by the
The by-laws of a corporation may create an executive committee, third party involved, or rights have already vested on third
composed of not less than three members of the board, to be parties.
appointed by the board. Said committee may act, by majority vote of
all its members, on such specific matters within the competence of the II. BUSINESS JUDGMENT RULE:
board, as may be delegated to it in the by-laws or on a majority vote Business Judgment Rule The corporate principle recognizing
of the board, except with respect to: (1) approval of any action for corporate power and competence to be lodged primarily with
which shareholders' approval is also required; (2) the filing of the Board of Directors.
vacancies in the board; (3) the amendment or repeal of by-laws or the Established is the principle that when a resolution is passed in
adoption of new by-laws; (4) the amendment or repeal of any good faith by the board of directors, it is valid and binding, and
resolution of the board which by its express terms is not so amendable whether or not it will cause losses or decrease the profits of the
or repealable; and (5) a distribution of cash dividends to the central, the court has no authority to review them," adding that
shareholders. "[i]t is a well-known rule of law that questions of policy or
management are left solely to the honest decision of officers
Ultimate power must remain with the Board of Directors, and it and directors of a corporation, and the court is without
would be against corporate principle to empower the Executive authority to substitute its judgment [for that] of the board of
Committee with authority that the Board itself cannot directors; the board is the business manager of the corporation,
countermand.1 and so long as it acts in good faith its orders are not reviewable
It is within the power of the Board of Directors to authorize any by the courts." Montelibano v. Bacolod-Murcia Miling Co., 5
person or committee to undertake corporate acts. The board SCRA 36 (1962).
has power to constitute even an executive committee, even
when no such committee is provided for in the articles and by- Montelibano v. Bacolod-Murcia Miling Co., Inc.
laws of the corporation. Filipinas Port Services, Inc. v. Go, 518
SCRA 453 (2007). Facts: The Bacolod-Murica Milling entered into Milling Contracts with
Montelibano and Gonzaga & Co. (planters). The contract provided that
the resulting product should be divided in the ratio of 45% for the mill
1
and 55% for the planters. This was amended to give the planters an


increased participation of 60%. Years later, Bacolod denied the 5% share the corporation their management prerogatives/control on
increase of Petitioner citing that it had no consideration, thus its business matters over to the state. PSE v. Court of Appeals, 281
considered a donation a ultra vires act. SCRA 232 (1997).

Issue: Whether or not the Resolution is valid and binding on the PSE v. Court of Appeals
corporation and the planters
Facts: Puerto Azul Land Inc. (PALI), a domestic real estate corporation,
Held: YES. The amended contract has the same consideration as the made an application to the SEC for the purpose of having its stocks
main contract at it was just attached to the latter. there is no rational listed in order for it to be sold in the public. A year after a permit to sell
explanation for the company's assenting to the further concessions was granted, heirs of the former President Marcos claimed that
asked by the planters before the contracts were signed, except as President Marcos was the legal owner of certain properties forming part
further inducement for the planters to agree to the extension of the of the Puerto Azul Beach Hotel Complex which PALI claims to be among
contract period, to allow the company now to retract such concessions its assets. The PSE, taking into consideration these claims, rejected the
would be to sanction a fraud upon the planters who relied on such application for listing. In response, PALI sought the decision of the SEC
additional stipulations. As the resolution in question was passed in good which then reversed the decision of the PSE and ordered the latter to
faith by the board of directors, it is valid and binding, and whether or list the PALI stocks.
not it will cause losses or decrease the profits of the central, the court
has no authority to review them. Such is not an ultra vires act. Issue: Whether or not the SEC acted arbitrarily in reversing the decision
of the PSE and ordering the listing of PALI stocks
Doctrine: The court also reiterated the rule that questions of policy or of
management are left solely to the honest decision of officers and Held: YES. The PSE is engaged in a business imbued with high public
directors of a corporation, and the court is without authority to interest and is under the control and supervision of the SEC. Though
substitute its judgment with that of the Board of Directors; the board is under such control and supervision by the SEC, the PSE cannot be
the business manager of the corporation, and so long as it acts in good questioned on matters of internal management, policies, and
faith its orders are nor reviewable by the courts. administration in the absence of bad faith. In fact, in the decision
rendered by the board of the PSE, was found of good standing by the
Theoretical Basis for the Business Judgment Rule: The court. PSE was correct in denying the listing of the PALI stocks since
recognition of the corporation merely as an association of there were various allegations against the listing. Taking all these into
individuals who thereby do not give up through the medium of consideration, the PSE deemed that PALI stocks are not for the best


interest of the investing public and will deteriorate the high standards citing VILLANUEVA, PHILIPPINE CORPORATE LAW (1998 ed), p.
and goodwill upheld by the PSE. 288.

Doctrine: Questions of policy and of management are left to the honest Ong Yong v. Tiu
decision of the officers and directors of a corporation, and the courts
are without authority to substitute their judgment for the judgment of Facts: The Tiu family members are the owners of First Landlink Asia
the board of directors. The board is the business manager of the Development Corporation (FLADC). One of the corporations projects is
corporation, and so long as it acts in good faith, its orders are the construction of Masagana Citimall in Pasay City. However, due to
reviewable by the courts. financial difficulties (they were indebted to PNB for P190 million), the
Tius feared that the construction would not be finished. So to prevent
A. BJR First Branch: Resolutions approved, contracts and transactions the foreclosure of the mortgage on the two lots where the mall was
entered into, by the Board of Directors within the powers of the being built, they invited the Ongs to invest in FLADC. The two parties
corporation cannot be reversed by the Courts, not even on the behest entered into a Presubscription Agreement whereby each of them would
of the stockholders of the corporation.1 hold 1,000,000 shares each and be entitled to nominate certain officers.
The Board of Directors is the business manager of the The Tius contributed a building and two lots, while the Ongs
corporation, and so long as it acts in good faith, its orders are contributed P100M.
not reviewable by the courts. Estacio v. Pampanga I Electric
Cooperative, Inc., 596 SCRA 542 (2009). Two years later, the Tuis filed for rescission of the Presubscription
Questions of policy and management are left to the honest Agremement because the Ongs refused to issue them their shares of
decision of the officers and directors of a corporation, and the stock and from assuming positions of VP and Treasurer to which they
courts are without authority to substitute their judgment for the were entitled to nominate. The Ongs contended that they could not
judgment of the board of directors. Cua, Jr. v. Tan, 607 SCRA issue the new shares to the Tius because the latter did not pay the
645 (2009). capital gains tax and the documentary stamp tax of the lots. And
No court can, as an integral part of resolving the issues between because of this, the SEC would not approve the valuation of the
squabbling stockholders, order the corporation to undertake property contribution of the Tius. The Court of Appeals ordered
certain corporate acts, since it would be in violation of the liquidation of FLADC to enforce rescission of the contract which was
business judgment rule. Ong Yong v. Tiu, 401 SCRA 1 (2003), granted only to prevent squabbles and numerous litigations between
the parties.
1


Issue: Whether or not the Court of Appeals erred in ordering liquidation 2. When he is guilty of gross negligence or bad faith in directing
the affairs of the corporation;3
Held: YES. The Tius also argued that the rescission would not result into 3. When he acquires any personal or pecuniary interest in conflict
liquidation because their case is actually a petition to decrease the with his duty as such directors.4
capital stock. As provided in Section 122 of the Corporation Code, The above-enumerated exceptions when directors, trustees and
distribution of any of its assets or property is permitted only after lawful corporate officers may be held personally liable for corporate
dissolution and payment of all debts and liabilities. An exception is by acts, provide also the three (3) instances when courts are
decrease of capital stock. So the Tius claim that they do not violate the authorized to supplant the decision of the board, which is
liquidation procedures under the law. They were asking the court to deemed to be biased and may prove detrimental to the
compel FLADC to file a petition with SEC to approve the decrease in corporation.
capital stock. The Supreme Court ruled that it has no right to intrude Examples:
into the internal affairs of the corporation so it cannot compel FLADC to Directors and officers who purport to act for the corporation,
file the petition. Decreasing a corporations authorized capital stock is keep within the lawful scope of their authority and act in good
an amendment of the Articles of Incorporation, a decision that only the faith, do not become liable, whether civilly or otherwise, for the
stockholders and the directors can make. consequences of their acts, which are properly attributed to the
corporation alone. Benguet Electric Cooperative, Inc. v. NLRC,
Doctrine: See above. 209 SCRA 55 (1992).
If the cause of the losses is merely error in business judgment,
B. BJR Second Branch: General Rule: Directors and officers acting within not amounting to bad faith or negligence, directors and/or
such business judgment cannot be held personally liable for the officers are not liable. For them to be held accountable, the
consequences of such acts. However, when the directors or trustees mismanagement and the resulting losses on account thereof are
violate their duties, they can be held personally liable. This is consistent not the only matters to be proven; it is likewise necessary to
with the Law on Agency.1 show that the directors and/or officers acted in bad faith and
Exceptions: with malice in doing the assailed acts. Bad faith does not simply
1. When the director willfully and knowingly vote for patently connote bad judgment or negligence; it imports a dishonest
unlawful acts of the corporation;2 purpose or some moral obliquity and conscious doing of a
wrong, a breach of a known duty through some motive or
1
3
(2013 ed.). Manila, Philippines: Rex Book Store. Ibid.
2 4
Section 31, Corporation Code. Sections 31 and 34, Corporation Code.


interest or ill-will partaking of the nature of fraud. Filipinas Port Facts: Spouses Lipat (Alfredo and Estelita) owns Belas Export Trading
Services, Inc. v. Go, 518 SCRA 453 (2007). (BET), a single proprietorship engaged in garment manufacturing in
Quezon City. The Lipats also owned the Mystical Fashions in the United
III. COUNTER-VEILING DOCTRINES TO PROTECT CORPORATE States, which sells goods imported from the Philippines through BET.
CONTRACTS Estelita designated her daughter, Teresita, to manage BET in the
The doctrine of estoppel or ratification (as well as the doctrine Philippines while she was managing Mystical Fashions in the United
of apparent authority), is premised on a reliance in good faith States.
by a third party that the representative of the corporation has
proper authority as generally derived from law, corporate by- In order to facilitate the convenient operation of BET, Estelita executed
laws, or authorization from the board, either expressly or a special power of attorney appointing Teresita as her attorney-in-fact
impliedly by habit, custom, acquiescence in the general course to obtain loans. By virtue of this SPA, Teresita obtained a sizeable loan
of business. The nature of the transaction and the from Pacific Bank. Three months after the loan, BET was incorporated
circumstances under which the transaction is pursued are into a family corporation named Belas Export Corporation (BEC),
looked into by the courts to determine the proper application of engaged in the same business and utilized the same properties. The loan
the estoppel doctrine.1 was restructured in the name of BEC and secured with Lipats property.

A. Theory of Estoppel or Ratification BEC defaulted, and the bank foreclosed on the real mortgage and
The principle of estoppel precludes a corporation and its Board Eugenio Trinidad was the highest bidder. The spouses Lipat claim that
of Directors from denying the validity of the transaction entered the loan obtained by Teresita were ultra vires acts because they were
into by its officer with a third party who in good faith, relied on executed without the requisite board resolution of the Board of
the authority of the former as manager to act on behalf of the Directors of BEC. Pacific Bank and Trinidad alleged in common that
corporation. Lipat v. Pacific Banking Corp., 402 SCRA 339 petitioners Lipat cannot evade payments because they and the BEC are
(2003). one and the same, the latter being a family corporation. Respondent
Trinidad further claimed that he was a buyer in good faith and for value
Lipat v. Pacific Banking Corp. and that petitioners are estopped from denying BECs existence after
holding themselves out as a corporation.

Issue: Whether or not petitioners are estopped from asserting that the
1
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. acts were ultra vires for not being supported by Board Resolutions.


by-laws, or relevant provisions of law, yet, just as a natural person may
Held: YES. Firstly, it could not have been possible for BEC to release a authorize another to do certain acts for and on his behalf, the board of
board resolution no business or stockholders meetings were conducted directors may validly delegate some of its functions and powers to
nor were there election of officers held since its incorporation. In fact, officers, committees, or agents. The authority of such individuals to
not a single board resolution was passed by the corporate board and it bind the corporation is generally derived from law, corporate by-laws,
was Estelita Lipat and/or Teresita Lipat who decided business matters. or authorization from the board, either expressly or impliedly by habit,
custom, or acquiescence in the general course of business. Apparent
Secondly, the principle of estoppel precludes petitioners from denying authority, is derived not merely from practice. Its existence may be
the validity of the transactions entered into by Teresita Lipat with Pacific ascertained through (1) the general manner in which the corporation
Bank, who in good faith, relied on the authority of the former as holds out an officer or agent as having the power to act or, in other
manager to act on behalf of petitioner Estelita Lipat and both BET and words, the apparent authority to act in general, with which it clothes
BEC. Teresita Lipat had dealt with Pacific Bank on the mortgage contract him; or (2) the acquiescence in his acts of a particular nature, with
by virtue of a special power of attorney executed by Estelita Lipat. actual or constructive knowledge thereof, whether within or beyond the
Recall that Teresita Lipat acted as the manager of both BEC and BET and scope of his ordinary powers.
had been deciding business matters in the absence of Estelita Lipat.
Further, the export bills secured by BEC were for the benefit of In order to ratify the unauthorized act of an agent and make it
Mystical Fashion owned by Estelita Lipat. Hence, Pacific Bank cannot binding on the corporation, it must be shown that the governing
be faulted for relying on the same authority granted to Teresita Lipat by body or officer authorized to ratify had full and complete
Estelita Lipat by virtue of a special power of attorney. It is a familiar knowledge of all the material facts connected with the
doctrine that if a corporation knowingly permits one of its officers or transaction to which it relates. Ratification can never be made
any other agent to act within the scope of an apparent authority, it on the part of the corporation by the same person who
holds him out to the public as possessing the power to do those acts; wrongfully assume the power to make the contract, but the
thus, the corporation will, as against anyone who has in good faith dealt ratification must be by the officer or governing body having
with it through such agent, be estopped from denying the agents authority to make such contract. Vicente v. Geraldez, 52 SCRA
authority. 210 (1973).

Doctrine: While the power and responsibility to decide whether the
corporation should enter into a contract that will bind the corporation is
lodged in its board of directors, subject to the articles of incorporation,


The ratificatory act that would bind the corporation would have that the party entitled to assert it either has abandoned it or
to come from the Board of Directors or a properly authorized declined to assert it. Rovels Enterprises, Inc. v. Ocampo, 391
representative.1 SCRA 176 (2002).
o The admission by counsel on behalf of the corporation
of the latters culpability for personal loans obtained by C. Doctrine of Apparent Authority: Article 1883, Civil Code.
its corporate officers cannot be given legal effect when If a corporation intentionally or negligently clothes its officers or
the admission was without any enabling act or agents with apparent power to perform acts, it will be estopped
attendant ratification of corporate act, as would to deny such apparent authority is real, as to innocent third
authorize or even ratify such admission. In the absence persons dealing in good faith with such officers or agents.
of such ratification or authority, such admission does Francisco v. GSIS, 7 SCRA 577 (1963).2
not bind the corporation. Aguenza v. Metropolitan o The Doctrine of Apparent Authority must proceed from
Bank and Trust Co., 271 SCRA 1 (1997). the nature of the position held by the corporate officer
o Acts done in excess of corporate officers scope of in question in that he represents the will of the
authority cannot bind the corporation. However, when corporation through the Board of Directors.3
subsequently a compromise agreement was on behalf
of the corporation being represented by its President Francisco v. GSIS
acting pursuant to a Board of Directors resolution, such
constituted as a confirmatory act signifying ratification Facts: Trinidad J. Francisco, in consideration of a loan, mortgaged parcel
of all prior acts of its officers. National Power Corp. v. of land with 21 bungalows known as Vic-Mari Compound. In January
Alonzo-Legasto, 443 SCRA 342 (2004). 1959, GSIS extrajudicially foreclosed the mortgage on the ground that
up to that date the Francisco was in arrears on her monthly
B. Doctrine of Laches or Stale Demands installments. On the same date, Atty. Vicente Franciscos (father of
The principle of laches or stale demands provides that the Trinidad) request was approved by the GSIS board which was sent in the
failure or neglect, for an unreasonable and unexplained length form of a telegram with the signature of Rodolfo Andal, general
of time, to do that which by exercising due diligence could or manager of GSIS. The defendant received the said amount however it
should have been done earlier, or the negligence or omission to did not, take over the administration of the compound as agreed upon.
assert a right within a reasonable time, warrants a presumption
2
United Coconut Planters Bank v. Planters Products, Inc., 672 SCRA 285 (2012).
1 3


Thus, the Franciscos continued to administer the same, but remitting For the Doctrine of Apparent Authority to apply, the party
the proceeds to the GSIS. Subsequently, letters were sent asking the invoking the same must prove the following:1
plaintiff for a proposal for the payment of her indebtedness, since the 1. The acts of the purported corporate officer or agent justifying
one-year period for redemption had expired. In reply, Atty. Francisco belief in the agency by the principal corporation.
protested against this, saying that they have already accepted his offer 2. Knowledge thereof by the principal corporation (i.e. its Board of
and that he has already commenced his part on the terms of his Directors) which is sought to be held; and
contract. 3. Reliance thereon by the principal corporation (i.e. its Board of
Directors) consistent with ordinary care and prudence.
Issue: Whether or not the compromise made is binding upon defendant Under Article 1910 of the New Civil Code,2 acts done by such
corporation. officers beyond the scope of their authority cannot bind the
corporation unless it has ratified such acts expressly or tacitly,
Held: YES. The compromise made through the telegrams is binding. or is estopped from denying themThus, contracts entered into
There was apparent authority that of the GM, Andal. Even assuming by corporate officers beyond the scope of authority are
there was a mistake in the telegram, GSIS notified the Franciscos too unenforceable against the corporation unless ratified by the
late and only after having received several remittances. There was Corporation. Woodchild Holdings, Inc. v. Roxas Electric
also notice to the GSIS, because Vicente attached the disputed telegram Constructions Co., Inc., 436 SCRA 235 (2004).
in replying to that which was sent by GSIS. Notice to an officer with o Atty. Hofilea what was unique here, which the
regard to matters within his authority is tantamount to notice to the presidents action was not binding, is that there was a
corporation. There was thus implied ratification. limit to the authority of the president to sell in
connection with the land.
Doctrine: Persons transacting with corporations need not disbelieve
every act of its officers, especially those regular on their face. They are
entitled to rely upon external manifestations of corporate consent. And
1
Woodchild Holdings, Inc. v. Roxas Electric Constructions Co., Inc., 436 SCRA
if a corporation knowingly permits its officers to do acts with apparent 235 (2004) as cited in Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013).
authority, it is estopped from denying such authority. Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.
2
Article 1910.
The principal must comply with all the obligations which the agent may have
contracted within the scope of his authority.

As for any obligation wherein the agent has exceeded his power, the principal is
not bound except when he ratifies it expressly or tacitly. (1727)


Woodchild Holdings, Inc. v. Roxas Electric Constructions Co., Inc.
Doctrine: For an act of the principal to be considered as an implied
Facts: Roxas Electric and Construction Company Inc (RECCI) owned 2 ratification of an unauthorized act of an agent, such act must be
parcels of land, Lot B1 and Lot B2. RECCIs Board of Directors issued a inconsistent with any other hypothesis than that he approved and
resolution authorizing the corporation through its President, Roberto intended to adopt what had been done in his name.
Roxas, to sell B2 and to sign and execute the necessary documents. Ratification is based on waiver (intentional relinquishment of a
Roxas sold B2 to Woodchild Holdings Inc (WHI) through its President, known right). Ratification cannot be inferred from acts that a
Jonathan Dy. In the Deed of Absolute Sale, Roxas also granted WHI a principal has a right to do independently of the unauthorized
right of way over B1 and an option to purchase certain portions thereof act of the agent. If writing is required to grant an authority to do
in case the need arose as earlier requested by WHI. After Roxas died, a particular act, ratification of that act must also be in writing.
WHI demanded that RECCI sell a portion of B1 but it refused claiming it
never authorized Roxas to do so. The general rule remains that, in the absence of authority from
the Board of Directors, no person, not even its officers, can
Issue: Whether or not RECCI is estopped from claiming that Roxas had validly bind a corporation. If a corporation, however,
not authority to sell B1. consciously lets one of its officers, or any other agent, to act
within the scope of an apparent authority, it will be estopped
Held: NO. For the principle of apparent authority to apply, the WHI was from denying such officers authorityUnmistakably, the Courts
burdened to prove the following: (a) the acts of RECCI justifying belief in directive in Yao Ka Sin Trading is that a corporation should first
the agency by the WHI; (b) knowledge by RECCI which is sought to be prove by clear evidence that its corporate officer is not in fact
held; and, (c) reliance thereon by WHI consistent with ordinary care and authorized to act on its behalf before the burden of evidence
prudence. shifts to the other party to prove, by previous specific acts, that
an officer was clothes by the corporation with apparent
The apparent power of an agent is to be determined by the acts of the authority. Westmont Bank v. Inland Construction and Dev.
principal and not by the acts of the agent. There is no evidence of Corp., 582 SCRA 230 (2009).
specific acts made by the RECCI showing or indicating that it had full
knowledge of any representations made by Roxas to WHI that it had Westmont Bank v. Inland Construction and Dev. Corp.
authorized Roxas to grant WHI an option to buy B1, or to create a
burden or lien thereon. There is no implied ratification when RECCI Facts: Inland Construction and Development Corp. executed real estate
received the P5M purchase price for B2. mortgages over its 3 properties and 3 promissory notes for the loans it


obtained from Westmont Bank. A Deed of Assignment, Conveyance and o If a corporation knowingly permits one of its officers to
Release was executed by Aranda (President of Inland) wherein he act within the scope of an apparent authority, it holds
assigns all his rights and interest in Hanil-Gonzalez Corp in favour of him out to the public as possessing the power to do
Abrantes. In the deed, the obligations of Inland (including that with those acts, the corporation will, as against anyone who
Westmont Bank) shall be transferred to Abrantes. Westmont Banks has in good faith dealt with it through such agent, be
Account officer, Calo, signed for its conformity to the deed. Inland then estopped from denying the agents authority. Soler v.
filed a complaint for injunction in the Regional Trial against Westmont Court of Appeals, 358 SCRA 57 (2001); Rural Bank of
Bank when the latter foreclosed the properties mortgaged by Inland. In Milaor (Camarines Sur) v. Ocfemia, 325 SCRA 99 (2000)
their Answer, the bank claimed that it had no knowledge of such o The authority of a corporate officer dealing with third
assignment of obligation and did not conform to it. persons may be actual or apparent . . . the principal is
liable for the obligations contracted by the agent. The
Issue: Whether or not Westmont Bank is bound by the deed of agents apparent representation yields to the principal's
Assignment true representation and the contract is considered as
entered into between the principal and the third
Held: YES. Calo (signee in the deed of assignment) was the one assigned person. First Philippine Intl Bank v. Court of Appeals,
to transact on behalf of the Bank with respect to the loan transactions 252 SCRA 259 (1996).
with Inland. Because of this, it is presumed that he had the authority to Victim Standing for doctrine to apply the doctrine of
sign for the bank in the Deed of Assignment. The Court stated that if a apparent authority cannot apply to benefit a party who deals
corporation consciously lets one of its officers, or any other agent, to act with the corporation aware of the corporate representatives
within the scope of an apparent authority it will be estopped from lack of authority.1
denying such officers authority. The burden of proof is set upon the o Apparent authority is determined only by the acts of the
Corporation. In this case the Bank failed to discharge its primary burden principal and not by the acts of the agent. There can be
of proving that Calo was not authorized to bind it. no apparent authority of an agent without acts or
conduct on the part of the principal; such acts must
Doctrine: The Court stated that if a corporation consciously lets one of have been known and relied upon in good faith as a
its officers, or any other agent, to act within the scope of an apparent result of the exercise of reasonable prudence by a third
authority it will be estopped from denying such officers authority. The party as claimant and such acts or conduct must have
burden of proof is set upon the Corporation.
1


produced a change of position to the third partys transaction of discounting the checks involving the same
detriment. personalities wherein any enabling resolution from the Board
o Persons who deal with corporate agents within was dispensed with and yet the bank was able to collect from
circumstances showing that the agents are acting in the corporation. Nyco Sales Corp. v. BA Finance Corp., 200
excess of corporate authority, may not hold the SCRA 637 (1991).
corporation liable. Traders Royal Bank v. Court of Per its Secretarys Certificate, the foundation had given its
Appeals, 269 SCRA 601 (1997). President ostensible and apparent authority to inter alia deal
Apparent authority may be ascertained through (1) the general with the respondent Bank, and therefore the foundation is
manner in which the corporation holds out an officer or agent estopped from questioning the Presidents authority to obtain
as having the power to act, or, in other words the apparent the subject loans from the respondent Bank. Lapulapu
authority to act in general with which is clothes them; or (2) the Foundation, Inc., v. Court of Appeals, 421 SCRA 328 (2004).
acquiescence in his acts of a particular nature, with actual or A verbal promise given by the Chairman and President of the
constructive knowledge thereof, within or beyond the scope of company to the general manager and chief operating officer to
his ordinary powers. Inter-Asia Investment Industries v. Court give the latter unlimited sick leave and vacation leave benefits
of Appeals, 403 SCRA 452 (2003). and its cash conversion upon his retirement or resignation,
Examples: when not an integral part of the companys rules and policies, is
When an officer in a banking corporation arrange a credit line not binding on the company when it is without the approval of
agreement and forwards the same to the legal department at its the Board of Directors. Kwok v. Philippine Carpet
head officer, and the bank did no disaffirm the contract, then it Manufacturing Corp., 457 SCRA 465 (2005).
is bound by it. Premier Dev. Bank v. Court of Appeals, 427 SCRA The acceptance of the offer to purchase by the clerk of the
686 (2004). branch of the bank, and the representation that the manager
A corporation cannot disown its Presidents act of applying to had already approved the sale (which in fact was not true),
the bank for credit accommodation, simply on the ground that it cannot bind the bank to the contract of sale, it being obvious
never authorized the President by the lack of any formal board that such a clerk is not among the bank officers upon whom
resolution. The following placed the corporation and its Board putative authority may be reposed by a third party. There is,
of Directors in estoppel in pais: Firstly, the by-laws provides for thus, no legal basis to bind the bank into any valid contract of
the powers of the President, which includes, executing contracts sale with the buyers, given the absolute absence of any
and agreements, borrowing money, signing, indorsing and approval or consent by any responsible officer of the bank. DBP
delivering checks; secondly, there were already previous v. Ong, 460 SCRA 170 (2005).


Rationale for the Doctrine of Apparent Authority: Naturally, letter agreement). Later, the bank reorganised its management and
the third person has little or no information as to what occurs in Atty. Dayday replaced Atty. Soluta. Atty. Dayday informed Spouses
corporate meeting; and he must necessarily rely upon the Pronstroller that their deposit would be forfeited because the second
external manifestations of corporate consent. The integrity of letter agreement was a mistake because Atty. Soluta had no authority to
commercial transactions can only be maintained by holding the give an extension.
corporation strictly to the liability fixed upon it by its agents in
accordance with law. What transpires in the corporate board Issue: Whether or not Associated Bank is bound by the Letter-
room is entirely an internal matter. Hence, petitioner may not Agreement signed by Atty. Soluta under the doctrine of apparent
impute negligence on the part of the respondents in failing to authority.
find out the scope of Atty. Solutas authority. Indeed, the public
has the right to rely on the trustworthiness of bank officers and Held: YES. Undoubtedly, the Associated Bank had previously allowed
their acts. Associated Bank v. Pronstroller, 558 SCRA 113 Atty. Soluta to enter into the first agreement without a board resolution
(2008). expressly authorizing him; thus, it had clothed him with apparent
authority to modify the same via the second letter-agreement. It is not
Associated Bank v. Pronstroller the quantity of similar acts which establishes apparent authority, but
the vesting of a corporate officer with the power to bind the
Facts: The Spouses Vaca executed a Real Estate Mortgage in favor of corporation.
Associated Bank over their parcel of residential land in Green Meadows
Subdivision. Eventually, the property was foreclosed and sold at public Doctrine: The doctrine of apparent authority, with special reference
auction with Associated Bank as the highest bidder. However, the Vacas to banks, had long been recognized in this jurisdiction. Apparent
commenced an action for the nullification of the real estate mortgage authority is derived not merely from practice. Its existence may be
and the foreclosure sale. Pending its resolution in the Supreme Court, ascertained through 1) the general manner in which the corporation
Associated Bank negotiated with the Spouses Pronstroller through Atty. holds out an officer or agent as having the power to act, or in other
Jose Soluta, the banks Vice President and member of its Board of words, the apparent authority to act in general, with which it clothes
Directors. Letter agreements were executed whereby the Spouses him; or 2) the acquiescence in his acts of a particular nature, with actual
Pronstrollers would give a downpayment (first letter agreement), and or constructive knowledge thereof, within or beyond the scope of his
then given an extension to pay the balance which would be given upon ordinary powers.
delivery of the property subsequent to the resolution of the Vaca case
with such property being free from occupants (embodied in the second


Atty. Hofilea the by-laws do not always have all the details The fact that a director is only holding the share as a nominee of
of the officers but it is a good place to start to determine another person does not disqualify him as a director. What the
whether the officer you are dealing with has authority or not to law requires is that he has legal title to the share. Under the old
deal with you regarding the matter. Absent this, you can ask the Corporation Law it was required that every director must own
company to provide you with a Board Resolution authorizing a "in his own right" at least one share of the capital stock of the
particular person to deal with you and under what limitations. corporation. Under the present Section 23 of the Corporation
Code, it requires only that the share of a director "shall stand in
IV. Qualifications of Directors/Trustees (Sections 23 and 27) his name on the books of the corporation."1
The 1-share requirement is a continuing requirement
Section 23. The board of directors or trustees. 2. Rules on Additional Qualifications and Disqualifications
Unless otherwise provided in this Code, the corporate powers of all The qualifications provided for in the law are only minimum
corporations formed under this Code shall be exercised, all business qualifications; additional qualifications and disqualifications can
conducted and all property of such corporations controlled and held be provided for but only by proper provisions in the by-laws of
by the board of directors or trustees to be elected from among the the corporation. Gokongwei, Jr. v. SEC, 89 SCRA 336 (1979).
holders of stocks, or where there is no stock, from among the o Atty. Hofilea other qualifications may be found
members of the corporation, who shall hold office for one (1) year from the laws (e.g. Philippine resident, possess legal
until their successors are elected and qualified. capacity). As a general rule, citizenship is not a
requirement to be a director of a corporation. However,
Every director must own at least one (1) share of the capital stock of it may be a requirement in cases directors of corporate
the corporation of which he is a director, which share shall stand in his public utilities operating on a franchise.
name on the books of the corporation. Any director who ceases to be
the owner of at least one (1) share of the capital stock of the Gokongwei, Jr. v. Securities and Exchange Commission
corporation of which he is a director shall thereby cease to be a
director. Trustees of non-stock corporations must be members Facts: John Gokongwei, a stockholder of San Miguel Corporation (and a
thereof. A majority of the directors or trustees of all corporations president and stockholder of Robina Corp. and Consolidated Foods
organized under this Code must be residents of the Philippines. Corp., a competitor of SMC, in various areas, such as Instant Coffee, Ice

1. Qualifications
1


Cream, Poultry and Hog Feeds and many more), filed a petition for directors is expressly conferred by law. Every corporation has the
declaration of nullity of amended by-laws, cancellation of certificate of inherent power to adopt by-laws for its internal government, and to
filing of the amended-by laws, injunction and damages against the regulate the conduct and prescribe the rights and duties of its members
majority of the members of the Board of Directors of the SMC based on towards itself and among themselves in reference to the management
the following grounds: of its affairs. And under section 21 of the Corporation Law, a
Corporations have no inherent power to disqualify a corporation may prescribe in its by-laws the qualifications, duties and
stockholder from being elected as director depriving him of his compensation of directors, officers and employees ...
vested right because he is an officer of a competitor company.
The corporation has been investing corporate funds in other A director must own at least one share of stock. Pea v. Court
corporations and business outside of the primary purpose of the of Appeals, 193 SCRA 717 (1991).1
corporation The law does not require that a Vice-President be a stockholder.
Baguio v. Court of Appeals, 226 SCRA 366 (1993).
Issue: Whether or not the corporation has the power to disqualify a Beneficial ownership under VTA no longer qualifies. Lee v. Court
competitor from being elected to the board of directors as a reasonable of Appeals, 205 SCRA 752 (1992).
exercise of corporate authority
Lee v. Court of Appeals
Held: YES. Any corporation may amend its articles of incorporation by a
vote or written assent of the stockholders representing at least 2/3 of Facts: Herein petitioners were served summons in accordance with a
the subscribed capital stock of the corporation. It cannot be said that third party complaint filed against Alfa Integrated Textile Mills of which
prior to this, Gokongwei has a vested right to vote and be voted for in Lee and Lacdao was president and vice president respectively. They
the face of the fact that the law at the time such right as stockholder claim that the summons for Alfa was erroneously served upon them
was acquired contained the prescription that the corporate charter and considering that the management of Alfa had been transferred to
the by-law shall be subject to amendment, alteration and modification. Development Bank of the Philippines. They claim that the voting trust
Every person who buys a stock with a corporation impliedly contracts agreement between Alfa and DBP vests all management and control of
that the will of the majority shall govern in all matters within the limits Alfa to the DBP. DBP claimed that it was not authorized to receive
of the act of incorporation and lawfully enacted by-laws and not summons on behalf of Alfa since DBP had not taken over the company
forbidden by law. which has a separate and distinct corporate personality and existence.

Doctrine: The authority of a corporation to prescribe qualifications of
1
Also Detective & Protective Bureau, Inc. v. Cloribel, 26 SCRA 255 (1969).


director, what is material is the legal title to, not beneficial ownership
Issue: Whether or not the execution of the voting trust agreement by of, the stock as appearing on the books of the corporation.
Lee and Lacdao whereby all their shares to the corporation have been
transferred to the trustee deprives the stockholder of their positions as 3. Rule on Corporate Stockholders1
directors of the corporation. In cases of corporate stockholders or corporate members of a
corporation, such entities cannot be qualified to be elected as
Held: YES. Lee and Lacdao, by virtue of the voting trust agreement such to the board of the corporation. A corporation cannot act
executed in 1981 disposed of all their shares through assignment and by itself but only through its officers and agents, and as such a
delivery in favor of DBP, as trustee. Consequently, Lee and Lacdao corporation cannot attend personally board meetings of the
ceased to own at least one outstanding share in their names on the corporation wherein it is elected as a director, but only through
books of Alfa as required under Section 23 of the new Corporation code. representative or a proxy, which would contravene the
They also ceased to have anything to do with the management of the established rule that a director may not be represented by a
enterprise, they ceased to be directors. Hence, the transfer of their proxy at a meeting of the board.2
shares to the DBP created vacancies in their respective positions as In the case of corporate stockholders or corporate members,
directors of Alfa. In the absence of a showing that DBP had caused to be their representation in the board can be achieved by making
transferred in their names one share of stock for the purpose of their individual representatives trustees of the shares or
qualifying as directors of Alfa, Lee and Lacdao could no longer deemed membership, which would then make them stockholders or
to retain their status as officers of Alfa. Hence, the service of summons members of record, and thereby qualified to be elected to the
to Alfa through Lee and Lacbao was invalid. board, but at the same time maintaining legal responsibility of
trustees to the corporate stockholder or members.
Doctrine: A voting trust agreement results in the separation of the 4. Disqualifications
voting rights of a stockholder from his other rights. This may create a
dichotomy between the equitable or beneficial ownership of the Section 27. Disqualification of directors, trustees or officers.
corporate shares of a stockholder, on the one hand, and the legal title No person convicted by final judgment of an offense punishable by
thereto on the other. With the omission of the phrase "in his own right" imprisonment for a period exceeding six (6) years, or a violation of this
[in the new corporation code] the election of trustees and other persons Code committed within five (5) years prior to the date of his election
who in fact are not the beneficial owners of the shares registered in
their names on the books of the corporation becomes formally 1
legalized. Hence, this is a clear indication that in order to be eligible as a (2013 ed.). Manila, Philippines: Rex Book Store.
2
Section 26, Corporation Code.


or appointment, shall qualify as a director, trustee or officer of any number of directors to be elected multiplied by the number of his
corporation. shares shall equal, or he may distribute them on the same principle
among as many candidates as he shall see fit: Provided, That the total
Punishable by imprisonment or a period exceeding 6 years: number of votes cast by him shall not exceed the number of shares
regardless of your actual sentence, so long as the crime was owned by him as shown in the books of the corporation multiplied by
punishable by a period exceeding 6 years, you will be the whole number of directors to be elected: Provided, however, That
disqualified once convicted. no delinquent stock shall be voted. Unless otherwise provided in the
Conviction of a violation of the Corporation Code: since it is only articles of incorporation or in the by-laws, members of corporations
the Court who can determine if you have violated the Code, which have no capital stock may cast as many votes as there are
then you probably need to have been convicted of such trustees to be elected but may not cast more than one vote for one
violation in order to be considered disqualified. candidate. Candidates receiving the highest number of votes shall be
declared elected. Any meeting of the stockholders or members called
V. Election of Directors and Trustees for an election may adjourn from day to day or from time to time but
not sine die or indefinitely if, for any reason, no election is held, or if
A. Directors (Sections 24 and 26) there not present or represented by proxy, at the meeting, the owners
of a majority of the outstanding capital stock, or if there be no capital
Section 24. Election of directors or trustees. stock, a majority of the member entitled to vote.
At all elections of directors or trustees, there must be present, either
in person or by representative authorized to act by written proxy, the Entitle to Vote Do you include in counting, for purposes of
owners of a majority of the outstanding capital stock, or if there be no a majority present in a meeting, those delinquent stockholders?
capital stock, a majority of the members entitled to vote. The election Does this phrase apply to stock corporations?
must be by ballot if requested by any voting stockholder or member. By ballot it is not necessary that a majority of the
In stock corporations, every stockholder entitled to vote shall have the stockholders agree that the election be by ballot. So long as one
right to vote in person or by proxy the number of shares of stock (any) shareholder requests for the election to be conducted
standing, at the time fixed in the by-laws, in his own name on the by ballot, then such should be done.
stock books of the corporation, or where the by-laws are silent, at the Atty. Hofilea the number of seats for directors must be
time of the election; and said stockholder may vote such number of maintained. It cannot be altered beyond that prescribed by the
shares for as many persons as there are directors to be elected or he articles of incorporation. However, in reality, if no one objects
may cumulate said shares and give one candidate as many votes as the


then the stockholders can choose to just fill some of the seats Cumulative voting is reckoned to be equitable since it allows
and not all. stockholders the opportunity for representation on the board of
1. Cumulative Voting1 directors in proportion to their holdings. Such minority
Cumulative Voting v. Straight Voting representation is believed not to interfere with the principle of
o Cumulative voting is a voting procedure wherein a majority rule since the number of directors elected by each
stockholder is allowed to concentrate his votes and give group will vary with its proportion of ownership.
one candidate as many votes as the number of directors o On the other hand, the system of cumulative voting has
to be elected multiplied by the number of his shares been criticized by other sectors because in tends to
shall equal. partisan representation in the board, which is
o Straight voting allows a simple majority of the inconsistent with the notion that a director properly
shareholders to elect the entire board of directors represents all interest groups in the corporate setting.
leaving the minority shareholders unrepresented. Under 2. Report on Election of Directors, Trustees and Officers
straight voting, each shareholder simply votes the
number of shares he owns for each director nominated. Section 26. Report of election of directors, trustees and officers.
Section 24 of the Corporation Code expressly provides for Within thirty (30) days after the election of the directors, trustees and
cumulative voting in the election of the directors of stock officers of the corporation, the secretary, or any other officer of the
corporations. The provisions for cumulative voting are corporation, shall submit to the Securities and Exchange Commission,
mandatory. the names, nationalities and residences of the directors, trustees, and
The policy of cumulative voting is to allow minority stockholders officers elected. Should a director, trustee or officer die, resign or in
the capacity to be able to elect representatives to the board of any manner cease to hold office, his heirs in case of his death, the
directors.2 secretary, or any other officer of the corporation, or the director,
o No exception is provided for in Section 24 so that the trustee or officer himself, shall immediately report such fact to the
articles may not provide for restriction or suppression of Securities and Exchange Commission.
the principle of cumulative voting in stock corporations.
The provisions of Section 26 of the Corporation Code are
deemed to be mandatory and jurisdictional. And the

1
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. determination of who are the legal directors and officers of the
2
Glazer, Glazer, & Grofman, Cumulative Voting In Corporate Elections:
Introducing Strategy into the Equation, 35 S. CAROLINA L. REV. 295 (1934).


corporation is conditioned upon the reports submitted to the Reyna Law office is the lawyer of Belen and Nograles and not of
SEC pursuant to said section.1 Premium and that the Articles of Incorporation of Premium shows that
Since under Section 26 of the Corporation Code all corporations Belen, Nograles and Reyes are not majority stockholders.
are mandated to submit a formal report to the SEC on the
changes in their directors and officers, then only those directors Issue: Whether or not the filing of the case for damages against private
and officers appearing in such report (General Information respondent bank (International Corporate Bank) was authorized by a
Sheet) to the SEC are deemed legally constituted to bind the duly constituted Board of Directors of the petitioner corporation
corporation, especially in the bringing of suits in behalf of the
corporation. Premium Marble Resources v. Court of Appeals, Held: NO. The Minutes of the Meeting of the Board on April 1, 1982
264 SCRA 11 (1996). states that the newly elected officers for the year 1982 were Oscar Gan,
Mario Zavalla, Aderito Yujuico and Rodolfo Millare, petitioner however,
Premium Marble Resources v. Court of Appeals failed to show proof that this election was reported to the SEC. In fact,
the last entry in their General Information Sheet with the SEC, as of
Facts: The case began when Premium Marble Resources Inc., assisted by 1986 appears to be the set of officers elected in March 1981. The claim,
Atty. Arnulfo Dumadag as counsel, filed an action for damages against therefore, of petitioners as represented by Atty. Dumadag, that Zaballa,
International Corporate Bank. Later, the same corporation, i.e., et al., are the incumbent officers of Premium has not been fully
Premium, but this time represented by Siguion Reyna, Montecillio and substantiated. Hence, the court agrees with the finding of the Court of
Ongsiako Law Office as counsel, filed a motion to dismiss the action of Appeals, that in the absence of any board resolution from its board of
petitioners on the ground that the filing of the case was without directors the [sic] authority to act for and in behalf of the corporation,
authority from its duly constituted board of directors as shown by the the present action must necessarily fail. The power of the corporation to
excerpt of the minutes of the Premiums board of directors meeting. In sue and be sued in any court is lodged with the board of directors that
its opposition to the motion to dismiss, Premium thru Atty. Dumadag exercises its corporate powers.
contended that the persons who signed the board resolution namely
Belen, Jr., Nograles & Reyes, are not directors of the corporation and Doctrine: By the express mandate of the Corporation Code (Section 26),
were allegedly former officers and stockholders of Premium who were all corporations duly organized pursuant thereto are required to submit
dismissed for various irregularities and fraudulent acts; that Siguion within the period therein stated (30 days) to the Securities and
Exchange Commission the names, nationalities and residences of the
directors, trustees and officer selected.
1


The underlying policy of the Corporation Code is that the 23, there is no more unexpired term during which Ramirez could
business and affairs of a corporation must be governed by a serve. VVCC on the other hand alleges that a members term shall be for
board of directors whose members have stood for election, and one year and until his successor is elected and qualified; otherwise
who have actually been elected by the stockholders, on an stated, a members term expires only when his successor to the Board is
annual basis. Only in that way can the directors continued elected and qualified.
accountability to the shareholders, and the legitimacy of their
decisions that bind the corporations stockholders, be assured. Issue: Whether or not the remaining directors of a corporations Board,
The shareholder vote is critical to the theory that legitimizes the still constituting a quorum, can elect another director to fill in a vacancy
exercise of power by the directors or officers over properties caused by the resignation of a hold-over director
that they do not own. Valle Verde Country Club, Inc. v. Africa,
598 SCRA 202 (2009). Held: NO. Makalintals term of office began in 1996 and expired in 1997,
but, by virtue of the holdover doctrine in Section 23 of the Corporation
Valle Verde Country Club, Inc. v. Africa Code, he continued to hold office until his resignation on November 10,
1998. This holdover period, however, is not to be considered as part of
Facts: The Valle Verde Country Club (VVCC) has a 9-member Board of his term, which, as declared, had already expired. His resignation as a
Directors. From 1997 to 2001, the requisite quorum for holding of the holdover director did not change the nature of the vacancy (i.e. vacancy
stockholders meeting could not be obtained so the directors continued by expiration of term of director); the vacancy due to the expiration of
to serve in hold-over capacity. In 1998, two directors resigned and were Makalintals term had been created long before his resignation. As
replaced. Africa questions the election of the two directors with the correctly pointed out by the RTC, when remaining members of the VVCC
Securities and Exchange Commission for allegedly being in Board elected Ramirez to replace Makalintal, there was no more
contravention of Section 29 of the Corporation Code which states that unexpired term to speak of, as Makalintals one-year term had already
all vacancies that occur other than by removal by the stockholders or expired. Pursuant to law, the authority to fill in the vacancy caused by
expiration of term may be filled by the vote of at least a majority of the Makalintals leaving lies with the VVCCs stockholders, not the remaining
remaining directors (if still constituting a quorum). However if the members of its board of directors.
vacancy was caused by either removal by the stockholders or expiration
of term, then it must be filled by a vote of the stockholders. Anyone Doctrine: It also bears noting that the vacancy referred to in Section 29
who would fill the vacancy prior to such will only serve for the contemplates a vacancy occurring within the directors term of office.
unexpired term. Africa points out that since Makalintals term had When a vacancy is created by the expiration of a term, logically, there is
already expired with the lapse of the one-year term provided in Section no more unexpired term to speak of. Hence, Section 29 declares that it


shall be the corporations stockholders who shall possess the authority more than fifteen (15) in number as may be fixed in their articles of
to fill in a vacancy caused by the expiration of a members term. incorporation or by-laws, shall, as soon as organized, so classify
themselves that the term of office of one- third (1/3) of their number
Corporations are required under Section 26 of the Corporation shall expire every year; and subsequent elections of trustees
Code to submit to the SEC within thirty (30) days after the comprising one-third (1/3) of the board of trustees shall be held
election the names, nationalities, and residences of the annually and trustees so elected shall have a term of three (3) years.
directors, trustees and officers of the Corporation. In order to Trustees thereafter elected to fill vacancies occurring before the
keep stockholders and the public transacting business with expiration of a particular term shall hold office only for the unexpired
domestic corporation properly informed of their organization period.
operational status, the SEC has issued the rule requiring the
filing of the General Information Sheet. Monfort Hermanos No person shall be elected as trustee unless he is a member of the
Agricultural Dev. Corp. v. Monfort III, 434 SCRA 27 (2004). corporation.
When the names of some of the directors who signed the board
resolution does not appear in the General Information Sheet Unless otherwise provided in the articles of incorporation or the by-
filed with the SEC, then there is doubt whether they were laws, officers of a non-stock corporation may be directly elected by the
indeed duly elected members of the Board legally constituted to members. (n)
bring suit in behalf of the Corporation. Monfort Hermanos
Agricultural Dev. Corp. v. Monfort III, 434 SCRA 27 (2004). Section 138. Designation of governing boards.
The provisions of specific provisions of this Code to the contrary
B. CUMULATIVE VOTING (Section 24) notwithstanding, non-stock or special corporations may, through their
Cumulative Voting in Corporate Elections: Introducing Strategy articles of incorporation or their by-laws, designate their governing
in the Equation, 35 South Carolina L. Rev. 295 boards by any name other than as board of trustees. (n)
See previous sections.
In non-stock corporations, the default rule in the election of
C. Trustee (Sections 92 and 138) trustees is straight voting. Unlike the mandatory rule for
cumulative voting for stock corporations, in non-stock
Section 92. Election and term of trustees. corporations, it is possible to provide for other types of voting in
Unless otherwise provided in the articles of incorporation or the by-
laws, the board of trustees of non-stock corporations, which may be


either the articles of incorporation or the by-laws of the The theory of delegated power of the board of directors
corporation.1 similarly explains why, under Section 29 of the Corporation
Code, in cases where the vacancy in the corporations board of
VI. Vacancy in Board (Section 29) directors is caused not only by the expiration of a members
term, the successor so elected to fill in a vacancy shall be
Section 29. Vacancies in the office of director or trustee. elected only for the unexpired term of his predecessors in
Any vacancy occurring in the board of directors or trustees other than office. The law has authorized the remaining members of the
by removal by the stockholders or members or by expiration of term, board to fill in a vacancy only in specified instances, so as not to
may be filled by the vote of at least a majority of the remaining retard or impair the corporations operations; yet, in recognition
directors or trustees, if still constituting a quorum; otherwise, said of the stockholders right to elect the members of the board, it
vacancies must be filled by the stockholders in a regular or special limited the period during which the successor shall serve only to
meeting called for that purpose. A director or trustee so elected to fill the unexpired term of his predecessor in office. Valle Verde
a vacancy shall be elected only or the unexpired term of his Country Club, Inc. v. Africa, 598 SCRA 202 (2009).
predecessor in office. Any position in the board to be filled by reason of an increase in
the number of directors or trustees shall be filled only by an
A directorship or trusteeship to be filled by reason of an increase in election at a regular or at a special meeting of stockholders or
the number of directors or trustees shall be filled only by an election members duly called for the purpose, or in the same meeting
at a regular or at a special meeting of stockholders or members duly authorizing the increase of directors or trustees if so stated in
called for the purpose, or in the same meeting authorizing the increase the notice of the meeting.2
of directors or trustees if so stated in the notice of the meeting.
VII. Term of Office, Hold-over Principle
A by-law provision or company practice of giving a stockholder a Hold-over a situation that arises when no successor is
permanent seat in the Board would be against the provision of cleared due to valid and justifiable reason, and the incumbent
Sections 28 and 29 of Corporation Code which requires member holds over and continues to function until another officer is
of the board of corporations to be elected. Grace Christian High chosen and qualified.3
School v. Court of Appeals, 281 SCRA 133 (1997). o A hold-over situation does not disqualify an incumbent
officer from seeking another term in office.

1 2
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. Section 39, Corporation Code.
3
(2013 ed.). Manila, Philippines: Rex Book Store. SEC Opinion No. 06-18, 20 March 2006


o In the event no new board is elected and qualified after corporations stockholders. That a director continues to serve
the original one-year term of the board of directors, after one year from his election (i.e., on a holdover capacity),
then under the hold-over principle, the existing board, if cannot be considered as extending his term. This holdover
still constituting a quorum, is still a legitimate board period, however, is not to be considered as part of his term,
with full authority to bind the corporation.1 which, as declared, had already expired. Valle Verde Country
o Directors may lawfully fill vacancies occurring in the Club, Inc. v. Africa, 598 SCRA 202 (2009).
board, and such officials, as well as the original 1. Non-Permanency of Board Seat
directors, hold-over until qualification of their A by-law provision or company practice of giving a stockholder a
successors. Government v. El Hogar Filipino, 50 Phil. permanent seat in the Board would be against the provision of
399 (1927). Sections 28 and 29 of Corporation Code which requires member
The remedy is quo warranto to question the legality and proper of the board of corporations to be elected. Grace Christian High
qualification of persons elected to the board. Ponce v. School v. Court of Appeals, 281 SCRA 133 (1997).
Encarnacion, 94 Phil. 81 (1953). The mandatory requirements for an annual election of the
The remaining members of a corporations board of directors Board of Directors is an aspect of good corporate governance, in
cannot elect another director to fill in a vacancy caused by the that it subjects the directors to a periodic review of the
resignation of a hold-over director. The holdover period is not performance of their duties and responsibilities, thereby making
part of the term of office of a member of the board of directors. them more responsive to the interests of the stockholders
Consequently, when during the holdover period, a director whose mandate they must win annually. Valle Verde Country
resigns from the board, the vacancy can only be filled-up by the Club, Inc. v. Africa, 598 SCRA 202 (2009).
stockholders, since there is no term left to fill-up pursuant to
the provisions of Section 29 of the Corporation which mandates VIII. Removal of Directors or Trustees (Section 28)
that a vacancy occurring in the board of directors caused by the
expiration of a members term shall be filled by the Section 28. Removal of directors or trustees.
Any director or trustee of a corporation may be removed from office
1
The Corporation Code does not require the taking of an oath of office to by a vote of the stockholders holding or representing at least two-
qualify the elected directors and officers. Election alone does not make the thirds (2/3) of the outstanding capital stock, or if the corporation be a
person elected, a director but there must be an acceptance, either express or
implied, although he is rebuttably presumed to accept upon notification, or non-stock corporation, by a vote of at least two-thirds (2/3) of the
enters upon the duties of an office after his election or appointment. SEC members entitled to vote: Provided, That such removal shall take
Opinion, 21 January 1986, XX SEC QUARTERLY BULLETIN (Nos. 1 & 2, March & June, place either at a regular meeting of the corporation or at a special
1986).


meeting called for the purpose, and in either case, after previous Exception: When the director is elected by the minority through
notice to stockholders or members of the corporation of the intention cumulative voting, he may not be removed without cause even
to propose such removal at the meeting. A special meeting of the if there is a 2/3 vote.
stockholders or members of a corporation for the purpose of removal A stockholders meeting called for the removal of a director is
of directors or trustees, or any of them, must be called by the valid only when called by at least two- thirds of the outstanding
secretary on order of the president or on the written demand of the capital stock. Roxas v. De la Rosa, 49 Phil. 609 (1926).
stockholders representing or holding at least a majority of the 2. Board Has No Power to Discipline or Remove One of Their Own
outstanding capital stock, or, if it be a non-stock corporation, on the Only stockholders or members have the power to remove the
written demand of a majority of the members entitled to vote. Should directors or trustees elected by them, as laid down in Section 28
the secretary fail or refuse to call the special meeting upon such of Corporation Code. Raniel v. Jochico, 517 SCRA 221, 230
demand or fail or refuse to give the notice, or if there is no secretary, (2007).
the call for the meeting may be addressed directly to the stockholders o It is implied in Section 28 that since the power to
or members by any stockholder or member of the corporation signing remove directors is vested with the stockholders, then
the demand. Notice of the time and place of such meeting, as well as such power cannot be exercised by the Board, whether
of the intention to propose such removal, must be given by publication that be pursuant to a resolution passed by the Board or
or by written notice prescribed in this Code. Removal may be with or even when such power of removal is granted to the
without cause: Provided, That removal without cause may not be used Board by provisions in the articles of incorporation
to deprive minority stockholders or members of the right of and/or by-laws of the corporation. Such provision in the
representation to which they may be entitled under Section 24 of this articles or by-laws is null and void for being contrary to
Code. law and public policy.1
3. What Constitutes Cause as Basis for Removal?
1. Removal of Directors and Trustees The Corporation Code does not define the cause that can be a
General Rule: Any director may be removed from office by a legal basis for removal of a member of the Board. What is clear
vote of the stockholders holding or representing two-third (2/3) is that for cause goes into the three duties of a director and
of the outstanding capital stock. officer loyalty, obedience and diligence.
o When removal is for cause, the 2/3 vote is the minimum The provisions under Section 28 are mandatory (i.e. notice) and
to remove a director. failure to comply with the procedure, even if the removal
o When removal is without cause, the 2/3 vote is also
1
enough to remove a director. Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.


resolution was approved by at least 2/3 of the outstanding The president shall preside at all meetings of the directors or trustee
capital stock, would make such removal void.1 as well as of the stockholders or members, unless the by-laws provide
otherwise. (n)
IX. Directors or Trustees Meetings (Sections 49, 53, 54 and 92)
A. Requisites for a Valid Board Meeting
Section 49. Kinds of meetings. 1. Meeting of the directors or trustees duly assembled as a
Meetings of directors, trustees, stockholders, or members may be board, at the place, time and manner provided in the by-laws;
regular or special. (n) A director or trustee cannot attend nor be represented in a
board meeting by proxy.2
Section 53. Regular and special meetings of directors or trustees. SEC Memorandum Circular No. 15, series of 2001, pursuant to
Regular meetings of the board of directors or trustees of every the terms of the Code of Commerce, embodies the guidelines
corporation shall be held monthly, unless the by-laws provide for the conduct of teleconferencing and videoconferencing (i.e.,
otherwise. conferences or meetings through electronic medium or
telecommunications where the participants who are not
Special meetings of the board of directors or trustees may be held at physically present are located at different local or international
any time upon the call of the president or as provided in the by-laws. places) of board of directors, providing for safeguards to ensure
the integrity of the meeting, the proper recording of the
Meetings of directors or trustees of corporations may be held minutes thereof and the safekeeping of the electronic recording
anywhere in or outside of the Philippines, unless the by-laws provide mechanism as part of the records of the corporation.3
otherwise. Notice of regular or special meetings stating the date, time SEC held that a trustee may now be allowed to vote through the
and place of the meeting must be sent to every director or trustee at internet, provided that the internet medium to be used is akin
least one (1) day prior to the scheduled meeting, unless otherwise to or similar to the one being used in videoconferencing or
provided by the by-laws. A director or trustee may waive this teleconferencing, where a participant can see or hear the actual
requirement, either expressly or impliedly. (n) proceedings of a board meeting and actively participate in the

2
Section 54. Who shall preside at meetings. SEC Opinion, 7 February 1994, XXVIII SEC Quarterly Bulletin 4 (No. 3, March
1994)
3
Likewise, Section 15 of the General Banking Law of 2000 provides that the
meeting of the board of directors of banks may be conducted through modern
1
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. technologies such as, but not limited to, teleconferencing and
(2013 ed.). Manila, Philippines: Rex Book Store. videoconferencing.


deliberation of the Board; but that a trustee may not validly meetings. Dead members shall not be counted. Tan v. Sycip,
vote by email along, which was deemed an inadequate medium 499 SCRA 216 (2006).
because a user-participants role in such case is passive In stock corporations, the presence of a quorum is ascertained
considering that his access to the entire proceedings is limited and counted on the basis of the outstanding capital stock, as
to the information in print transmitted through the internet.1 defined by Section 137 of the Corporation Code. Tan v. Sycip,
The SEC has opined that the Corporation Code does not confer 499 SCRA 216 (2006).
upon any stockholder the right to attend board meeting and When the principle for determining quorum for stock
that the allowance of stockholders to attend board meeting is corporations is applied by analogy to non-stock corporations,
upon the discretion of the board itself.2 only those who are actual members with voting rights should be
2. Presence of the required quorum; and counted. Tan v. Sycip, 499 SCRA 216 (2006).
3. Decision of the majority of the quorum or, in other cases, a
majority of the entire board. C. Abstention: In a board meeting, an abstention is presumed to be
counted as an affirmative vote insofar as it may be construed as an
B. Quorum acquiescence in the action of those who voted affirmatively; but such
The quorum in the meeting of the Board shall be the presence presumption, being merely prima facie would not hold in the face of
of a majority of the number of directors as fixed in the articles clear evidence to the contrary. Lopez v. Ericta, 45 SCRA 539 (1972).
of incorporation. The required vote to pass a resolution shall be
a majority vote of the directors present at such meeting where D. Minutes of Meetings
quorum is achieved.3 The signing of the minutes by all the members of the board is
For stock corporations, the quorum referred to in Section 52 not requiredthere is no provision in the Corporation Code
of the Corporation Code is based on the number of outstanding that requires that the minutes of the meeting should be signed
voting stocks. For non-stock corporations, only those who are by all the members of the board. The signature of the corporate
actual, living members with voting rights shall be counted in secretary gives the minutes of the meting probative value and
determining the existence of a quorum during members credibility. People v. Dumlao, 580 SCRA 409 (2009).
The entries contained in the minutes are prima facie evidence of
1
SEC Opinion No. 26, addressed to Ms. Jaycel E. Sato; SEC Opinion No. 27,
what actually took place during the meeting, pursuant to
series of 2003, addressed to Mr. Arthur Mar O. Alivio.
2
SEC Opinion, 21 January 1992, XXVI SEC QUARTERLY BULLETIN 6 (No. 2, June Section 44, Rule 130 of the Revised Rule on Evidence. People v.
1992). Dumlao, 580 SCRA 409 (2009).
3


Resolution versus Minutes of Meetings: A resolution is distinct the return upon their shares adequately furnishes the motives
and different from the minutes of the meetinga board for service, without compensation. But they can receive
resolution is a formal action by a corporate board of directors or remunerations for executive officer position. Western Institute
other corporate body authorizing a particular act, transaction, of Technology, Inc. v. Salas, 278 SCRA 216 (1997).1
or appointment, while, on the other hand, minutes are a brief
statement not only of what transpired at a meeting, usually of Western Institute of Technology, Inc. v. Salas
stockholders/members or directors/trustees, but also at a
meeting of an executive committee. People v. Dumlao, 580 Facts: The Salas family are the majority and controlling members of the
SCRA 409 (2009). Board of Trustees of the Western Institute of Technology, a stock
corporation engaged in the operation, among others, of an educational
X. COMPENSATION OF DIRECTORS (Section 30) institution. The Villasis (minority stock holders of the corporation)
contest the resolution passed by the Board of Directors which increased
Section 30. Compensation of directors. the officers of the officers of the corporation. Such resolution was
In the absence of any provision in the by-laws fixing their supposedly passed in accordance with the amended by-laws of the WIT
compensation, the directors shall not receive any compensation, as on compensation of all officers of the corporation.
such directors, except for reasonable pre diems: Provided, however,
That any such compensation other than per diems may be granted to Issue: Whether or not such grant of compensation is in violation of the
directors by the vote of the stockholders representing at least a proscription against such under Section 30 of the Corporation Code.
majority of the outstanding capital stock at a regular or special
stockholders' meeting. In no case shall the total yearly compensation Held: NO. The proscription, however, against granting compensation to
of directors, as such directors, exceed ten (10%) percent of the net director/trustees of a corporation is not a sweeping rule. Worthy of
income before income tax of the corporation during the preceding note is the clear phraseology of Section 30 which state: "[T]he directors
year. shall not receive any compensation, as such directors." The implication
is that members of the board may receive compensation, in addition to
Functions of Directors and Trustees v. Functions of Officers: reasonable per diems, when they render services to the corporation in a
Directors and trustees are not entitled to salary or other capacity other than as directors/trustees. Herein, resolution 48, s. 1986
compensation when they perform nothing more than the usual granted monthly compensation to Salas, et. al. not in their capacity as
and ordinary duties of their office, founded on the presumption
that directors and trustees render service gratuitously, and that
1
Singson v. Commission on Audit, 627 SCRA 36 (2010).


members of the board, but rather as officers of the corporation, more
particularly as Chairman, Vice-Chairman, Treasurer and Secretary of Relationship between Directors and Stockholders
Western Institute of Technology. Clearly, therefore, the prohibition with o A director when he sits on the Board is required to act
respect to granting compensation to corporate directors/trustees as in independence from those who elected him.
such under Section 30 is not violated in this particular case. In this sense, the director is not a mere
representative or agent of the stockholder
Doctrine: Directors or trustees, as the case may be, are not entitled to The director is an agent of the
salary or other compensation when they perform nothing more than corporation NOT of the stockholder.
the usual and ordinary duties of their office. This rule is founded upon a o There is a trust relationship (fiduciary)
presumption that directors/trustees render service gratuitously, and Relationship between Directors/Officers and the Corporation
that the return upon their shares adequately furnishes the motives for o Directors act in representation of the Corporation.
service, without compensation. Under Section 30 of the Corporation o As such, the directors must act for the interest of the
Code, there are only two (2) ways by which members of the board can corporation.
be granted compensation apart from reasonable per diems: (1) when
there is a provision in the by-laws fixing their compensation; and (2) A. Directors as Fiduciaries
when the stockholders representing a majority of the outstanding Pre-Corporation Code: Palting v. San Jose Petroleum, Inc., 18
capital stock at a regular or special stockholders' meeting agree to give SCRA 924.
it to them.
Palting v. San Jose Petroleum, Inc.
General Rule: The Courts of law will not meddle into business
determination, one of which is salary scale of people. Facts: San Jose Petroleum, Inc. (SJ PETROLEUM), a corporation
Exception: When the amount becomes huge and unreasonable, organized and existing in the Republic of Panama, applied and was
the courts may come in and suspend the enforcement of the by- granted by the Securities and Exchange Commission license to sell 2M
law provision. (later increased to 5M) shares of capital stock. SJ Petroleum claims that
o Generally, dividends and compensation policies the proceeds of the sale will be used to finance the operations of San
represent areas of conflicts of interests and these are an Jose Oil Corporation which has 14 petroleum exploration concessions in
exception to the business judgment rule. various provinces. Palting and other prospective investors filed with the
SEC an opposition to said registration on the ground that the tie-up
XI. FIDUCIARY DUTIES OF DIRECTORS AND OFFICERS between SJ Petroleum, a Panamanian corporation and SJ Oil, a domestic


corporation violates the Constitution, the Corporation Law and the citizens by virtue of the Parity Agreement. Said US citizens can either
Petroleum Act of 1949. In its answer, SJ Petroleum stated that it was a directly or indirectly own or control the business enterprise.
business enterprise enjoying parity rights, with respect to mineral
resources in the Philippines, which may be exercised pursuant to the Nature of Duties of Directors and Officers: Prime White
Laurel-Langley Agreement, through a medium, the SJ Oil. Cement Corp. v. IAC, 220 SCRA 103 (1993).

Issue: Whether or not the tie-up between the respondent San Jose Prime White Cement Corp. v. Intermediate Appellate Court
Petroleum, a foreign corporation, and San Jose Oil Company, Inc., a
domestic mining corporation, is violative of the Constitution, the Laurel- Facts: Prime White Cement Corp (PWCC) thru its President and
Langley Agreement, the Petroleum Act of 1949, and the Corporation Chairman of the Board entered into a dealership agreement with
Law. Alejandro Te, making him the exclusive dealer and/or distributor of
PWCCs cement products in the entire Mindanao area for 5 years. The
Held: YES. SJ Petroleum is not accorded with Parity Rights, which would agreement is that the price of cement per bag (P9.70) is fixed for the
have allowed the Company to interest in mining. entire 5-year period, and that Te must sell 20,000 bags per month.
1. It is not owned or controlled directly by US citizens because it is
owned and controlled by Panamanian corporation; Later, PWCC through its corporate secretary informed Te that the board
2. It is not indirectly owned and controlled by US citizens because of directors decided to impose limitations on their agreement, including
the controlling corporation is in turn owned by two Venezuelan limiting the period of the dealership (3 months), decreasing allocation
corporations; (8,000 bags) and increasing the price per bag (P13.30). Te demanded the
3. Although the two Venezuelan corporations claim to be owned enforcement of the original dealership agreement but PWCC refused to
by stockholders residing in the US, there is no showing that said comply. The latter even entered into an exclusive dealership agreement
stockholders were US citizens; with Napoleon Co for the marketing of the cement in Mindanao, hence
4. The word indirectly should not be unduly stretched in this suit.
application.
Issue: Whether or not the "dealership agreement" referred by the
Doctrine: Our Constitution provides that, the exploitation of natural President and Chairman of the Board of PWCC is a valid and enforceable
resources shall be limited to citizens of the Philippines or to contract.
corporations or associations at least 60% of the capital of which is
owned by such citizens. However, this right was earlier extended to US Held: NO. The general rules provided by the Corporate Law (in force at


the time of the case) as well as the present Corporation Code whereby his own advantage and benefit. As corporate managers, directors are
the corporate powers are exercised by the Board of Directors and may committed to seek the maximum amount of profits for the corporation.
be delegated to its president or officers cannot apply with the case on A director's contract with his corporation is not in all instances
hand, since the said rules pertain to dealings with 3rd persons (i.e. void or voidable. If the contract is fair and reasonable under the
person outside the corporation). In this case, Te was not only an circumstances, it may be ratified by the stockholders provided a
ordinary stockholder of PWCC, but was a member of the Board of full disclosure of his adverse interest is made.
Directors and Auditor of the corporation. He is what is often referred to Section 32 of the Corporation Code provides the general rule as
as a self-dealing director. well as the exception on dealings of directors, trustees or
officers with the corporation. Although the old Corp Law does
Granting arguendo that the dealership agreement involved here not contain a similar provision, the said provision incorporates
would be valid and enforceable if entered into with a person other than well-settled principles in corporate law.
a director or officer of the corporation, the fact that the other party to
the contract was a Director and Auditor of the petitioner corporation In Philippine jurisdiction, the members of the Board of Directors
changes the whole situation. The contract was neither fair nor have a three-fold duty: duty of obedience, duty of diligence, and
reasonable. Based on the original agreement that provided a flat rate of the duty of loyalty. Accordingly, the members of the board of
P9.70 per bag for 5-years, respondent Te must have knowledge that directors (1) shall direct the affairs of the corporation only in
within that period, there would be a considerable rise in the price of accordance with the purpose for which it was organized; (2)
white cement. As director, respondent Tes bounden duty was to act in shall not willfully and knowingly vote for or assent to patently
such manner as not to unduly prejudice PWCC. However, it is quite clear unlawful acts of the corporation or act in bad faith or with gross
that he was guilty of disloyalty to the corporation, that he was negligence in directing the affairs of the corporation; and (3)
attempting in effect, to enrich himself at the expense of the shall not acquire any personal or pecuniary interest in conflict
corporation. Furthermore, there is no showing that the stockholders with their duty as such directors or trustees. Strategic Alliance
ratified the dealership agreement or that they were fully aware of its Dev. Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2009),
provisions. The contract was therefore not valid and this Court cannot citing VILLANUEVA, PHILIPPINE CORPORATE LAW, 2001, p. 318.
allow him to reap the fruits of his disloyalty.
Strategic Alliance Dev. Corp. v. Radstock Securities Ltd.
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 Facts: The Construction Development Corporation of the Philippines
conflict with those of the corporation, he cannot sacrifice the latter to (CDCP) had a 30-year franchise to construct, operate and maintain toll


facilities in the North and South Luzon Tollways. Basay Mining
Corporation (an affiliate of CDCP) obtained loans from Marubeni Second. The PNCC Board admitted liability for the Marubeni loans
Corporation of Japan amounting to P10 billion, which CDCP guaranteed despite PNCCs total liabilities far exceeding its assets. There is no
solidarily. Thereafter, CDCP changed its corporate name to PNCC to dispute that the Marubeni loans, once recognized, would wipe out the
reflect the governments (90.3%) shareholding in the corporation. assets of PNCC, virtually emptying the coffers of the PNCC. While
PNCC insists that it remains financially viable, the figures in the COA
The money owed Marubeni remained unpaid and unacknowledged for Audit Reports tell otherwise.
20 years. But in October 2000, PNCC recognized this financial obligation
to Marubeni. Barely 3 months after, Marubeni assigned its entire credit Third. In a debilitating self-inflicted injury, the PNCC Board revived what
to Radstock Corporation for less than P100 million, who in turn sought appeared to have been a dead claim by abandoning one of PNCCs
to collect from PNCC. Eventually, Radstock and PNCC entered into the strong defenses, which is the prescription of the action to collect the
compromise agreement whereby PNCC shall assign to a third party Marubeni loans. In this case, Basay Mining obtained the Marubeni loans
assignee (designated by Radstock) all its rights and interests in specified sometime between 1978 and 1981. While Radstock claims that
real properties (amounting to P6Billion - reduced obligation) provided numerous demand letters were sent to PNCC, based on the records, the
the assignee shall be duly qualified to own real properties in the extrajudicial demands to pay the loans appear to have been made only
Philippines. PNCC shall also assign to Radstock 20% of the outstanding in 1984 and 1986. Meanwhile, the written acknowledgment of the debt,
capital stock of PNCC, and 6% share in the gross toll revenue of the in the form of Board Resolution No. BD-092-2000, was issued only on 20
Manila North Tollways Corporation from 2008-2035. October 2000. The PNCC Board admitted liability for the Marubeni loans
despite the fact that the same might no longer be judicially collectible.
Issue: Whether or not the PNCC Board Acted in Bad Faith and with
Gross Negligence in Directing the Affairs of PNCC Fourth. The basis for the admission of liability for the Marubeni loans,
which was an opinion of the Feria Law Office, was not even shown to
Held: YES. The PNCC Board blatantly violated its duty of diligence as it the PNCC Board. Atty. Raymundo Francisco, the Asset Privatization Trust
miserably failed to act in good faith in handling the affairs of PNCC. trustee overseeing the proposed privatization of PNCC at the time, was
responsible for recommending to the PNCC Board the admission of
First. For almost two decades, the PNCC Board had consistently refused PNCCs liability for the Marubeni loans. Atty. Francisco based his
to admit liability for the Marubeni loans because of the absence of a recommendation solely on a mere alleged opinion of the Feria Law
PNCC Board resolution authorizing the issuance of the letters of Office - which he did not show to the board. The PNCC Board admitted
guarantee. liability for the P10.743 billion Marubeni loans without seeing, reading


or discussing the Feria opinion which was the sole basis for its charter or by the general law. Lopez Realty, Inc. v. Fontecha,
admission of liability. Such act surely goes against ordinary human 247 SCRA 183 (1995)
nature, and amounts to gross negligence and utter bad faith, even
bordering on fraud, on the part of the PNCC Board in directing the C. Duty of Diligence (Section 31)
affairs of the corporation. Owing loyalty to PNCC and its stockholders,
the PNCC Board should have exercised utmost care and diligence in Section 31. Liability of directors, trustees or officers.
admitting a gargantuan debt that would certainly force PNCC into Directors or trustees who willfully and knowingly vote for or assent to
insolvency, a debt that previous PNCC Boards in the last two decades patently unlawful acts of the corporation or who are guilty of gross
consistently refused to admit. The PNCC Board knew that PNCC, as a negligence or bad faith in directing the affairs of the corporation or
government owned and controlled corporation (GOCC), must rely acquire any personal or pecuniary interest in conflict with their duty as
exclusively on the opinion of the Office of the Government Corporate such directors or trustees shall be liable jointly and severally for all
Counsel (OGCC), which they did not abide by. damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons.
The act of the PNCC Board in issuing Board Resolution No. BD-092-2000
expressly admitting liability for the Marubeni loans demonstrates the When a director, trustee or officer attempts to acquire or acquires, in
PNCC Boards gross and willful disregard of the requisite care and violation of his duty, any interest adverse to the corporation in respect
diligence in managing the affairs of PNCC, amounting to bad faith and of any matter which has been reposed in him in confidence, as to
resulting in grave and irreparable injury to PNCC and its stockholders. which equity imposes a disability upon him to deal in his own behalf,
This reckless and treacherous move on the part of the PNCC Board he shall be liable as a trustee for the corporation and must account for
clearly constitutes a serious breach of its fiduciary duty to PNCC and its the profits which otherwise would have accrued to the corporation.
stockholders, rendering the members of the PNCC Board liable under
Section 31 of the Corporation Code. Duty of Diligence The directors must act with due diligence in
all the times that it would bind the corporation.
Doctrine: See above. Exception to the Business Judgment Rule:
o Knowingly and willfully vote This is the default idea
B. Duty of Obedience about a directors vote, but it may be overturned.
A corporation, through its Board of Directors, should act in the o Patently unlawful Where the directors made a
manner and within the formalities, if any, prescribed by its decision without knowledge that the act was unlawful,
they are protected from being personally liable.


However, where a person with reasonable sense is and grossly ignorant, and therefore should pay for the losses
supposed to know that the act is unlawful, the directors
wont be protected. Held: YES. It appears that the dividends were made in installments so as
The directors of the corporation shall be personally liable to not to affect the financial condition of the corporation. In other words,
reimburse the corporation for the amounts of dividends that the corporation did not then have an actual bona fide surplus from
wrongfully declared and paid to stockholders, when they failed which the dividends could be paid. As stated, the authorized capital
to consider that the recorded retained earnings in the books of stock was P20,000 divided into 2,000 shares of the par value of P10
the corporation was illusory considering the various accounts each, which only P10,030 was subscribed and paid. Deducting the
receivables that had to be written off as uncollectible. Steinberg P3,300 paid for the purchase of the stock, there would be left P7,000 of
v. Velasco, 52 Phil. 953 (1929). paid up stock, from which deduct P3,000 paid in dividends, there would
be left P4,000 only. In this situation, it is apparent the directors did not
Steinberg v. Velasco act in good faith or that they were grossly ignorant of their duties. As
such, they are liable to pay.
Facts: Steinberg (plaintiff) was the receiver of Sibugey Trading Company,
while Velasco et. al (defendants) were the members of the Board of Doctrine: Creditors of a corporation have the right to assume that so
Directors. In 1922, the Board of Directors of Sibugey authorized the long as there are outstanding debts and liabilities, the board of directors
purchase of, and purchased, 330 shares of the capital stock of the will not use the assets of the corporation to purchase its own stock, and
corporation at the price of P3,300, and that at the time the purchase, that it will not declare dividends to stockholders when the corporation
the corporation was indebted in the sum of P13,807.50, and that, it had is insolvent.
accounts receivable in the sum of P19,126.02. In the same year, a General Duty to Exercise Reasonable Care. The directors of a
resolution to distribute dividends amounting to P3,000 was approved by corporation are bound to care for its property and manage its
the board. In 1923, the petition was filed for its dissolution upon the affairs in good faith, and for a violation of these duties resulting
ground that it was insolvent, its accounts payable amounted to they will be liable for damages cause, and that if they act
P9,241.19, and its accounts receivable P12,512.47. Stienberg now beyond their power, and the corporation losses, or dispose of
alleges, this was all, wrongfully done and in bad faith, and to the injury its property without authority, they will be required to make
and fraud of its creditors. He now prays that Velasco et. al. pay the sums good the loss out of their private estates.
of money wrongfully given to them with interest and cost. Want of Knowledge, Skill, or Competency. If directors commit
an error of judgment through mere recklessness or want of
Issue: Whether or not the board of directors did not act in good faith ordinary prudence or skill, they may be held liable for the


consequences. A director is bound not only to exercise proper Issue: Whether or not the directors neglected their duty by accepting
care and diligence, but ordinary skill and judgment. As he is the cashiers statement of liabilities and failing to inspect the depositors
bound to exercise ordinary skill and judgment, he cannot set up ledger
that he did not possess them.
Held: NO. The Court held that the directors should not be held
The President being closer to the operations of the bank on a answerable for taking the cashiers statement of liabilities to be as
day-to-day basis is more liable for breach of diligence when correct as the statement of assets always was. The directors confidence
compared to directors who must act on the basis of reports and seemed warranted by the semi-annual examinations and they were
representations to them during board meetings. Bates v. encouraged in their belief that all was well by the president, whose
Dresser, 251 U.S. 524, 64 L. Ed. 388, 40 S. Ct. 247 [1919). responsibility and knowledge were greater than theirs. Dresser, on the
other hand, was daily at the bank, he had the deposit ledger in his
Bates v. Dresser hands, and he had hints and warning regarding the theft from other
employees of the bank. In accepting the presidency, Dresser must be
Facts: Dresser was the president and executive officer, a large taken to have contemplated responsibility for losses to the bank, if
stockholder, of the National City Bank of Cambridge. Earl was the chargeable to his fault. Those that happened was chargeable to his
cashier and Coleman was the banks bookkeeper. An auditor reported fault, after he had warnings that should have led to steps that would
that the daily balance book was very much behind, that it was have made the fraud impossible.
impossible to prove the deposits and that a competent bookkeeper
should be employed. Coleman kept the deposit ledger and this was the Doctrine: The directors were not bound by virtue of the office
work that fell into his hands. Coleman then acted as paying and gratuitously assumed by them to call in the passbooks and compare
receiving teller, in addition to his other duty. Later, Coleman began a them with the ledger, and until the event showed the possibility they
series of thefts which he effectively hid from the Board of Directors who hardly could have seen that their failure to look at the ledger opened a
attributed the decline of monthly deposits to competition with rival way to fraud.
banks. The banks semi-annual examinations by national bank
examiners found nothing that would raise suspicion. The directors also Although directors have the protection of the business
relied on the cashier since he was an honest man. However, if only Earl judgment rule against personal liability for decisions that cause
had opened the envelopes that came from the clearinghouse, he damage to the corporation, such protection is available only
wouldve discovered the fraud. when they act or decide based on an informed judgment and
not merely accept the representations and reports of the CEO.


Smith v. Van Gorkam, 488 A.2d 858, Supreme Court of duty by their failure to inform themselves of all information reasonably
Delaware, 1985). available to them and relevant to their decision to recommend the
merger. Van Gorkom breached his duty to care by offering $55 a share
Smith v. Van Gorkam because, the record is devoid of any competent evidence that $55
represented the per share intrinsic value of the Company. The business
Facts: Trans Union was suffering a tax credit problem prompting Van judgment rule was not a defense because the directors and Van Gorkom
Gorkom to sell his shares but eventually negotiated to involve all the didnt use any business judgment when they came to their decision.
stocks of Trans Union. A corporation called Marmon was attempting a
leverage buy-out of Trans Union. Van Gorkom proposed a price of $55 a Doctrine: In order to hide behind the business judgment rule, you have
share. Van Gorkom and his CFO didnt bother to do any research to see to show that you made an informed decision based on some principle of
how much the company was actually worth. He didnt even inform business.
Trans Unions legal department about the transaction. Later, it was The rule itself is a presumption that in making a business
found that the value of $55 was only about 60% of what the company decision, the directors of a corporation acted on an informed
was worth. Van Gorkom called an emergency meeting of the board of basis, in good faith and in the honest belief that the action
directors, proposed the merger, and the directors gave preliminary taken was in the best interests of the company. ...Thus, the
approval. In the meeting, Van Gorkom did not disclose that there was party attacking a board decision as uninformed must rebut the
no basis for the $55 price and that there had been objections by Trans presumption that its business judgment was an informed one.
Union management regarding the merger. Neither did he provide the Under the business judgment rule there is no protection for
directors with copies of the merger agreement. The directors eventually directors who have made an unintelligent or unadvised
recommended that the shareholders approve the merger even though judgment. Basically, the actual decision is not so important,
they did not really learn if the terms of the merger were a good deal for what the courts will look to is whether there was an adequate
the company. The Appellate Court found that the directors were grossly decision-making process.
negligent because they approved the merger without substantial inquiry
or any expert advice. Therefore they breached their duty to care. For wrongdoing to make a director personally liable for debts of
the corporation, the wrongdoing approved or assented to by
Issue: Whether or not the actions of Van Gorkom and the board is the director must be a patently unlawful act. Mere failure to
protected by the Business Judgement Rule Doctrine. comply with the notice requirement of labor laws on company
closure or dismissal of employees does not amount to a
Held: NO. The Court found that the directors breached their fiduciary patently unlawful act. Patently unlawful acts are those declared


unlawful by law which imposes penalties for commission of such
unlawful acts. There must be a law declaring the act unlawful 4. That in case of an officer, the contract has been previously
and penalizing the act. Carag v. NLRC, 520 SCRA 28 (2007); Dy- authorized by the board of directors.
Dumalasa v. Fernandez, 593 SCRA 656 (2009).
Holding a corporate officer personally liable for directing the Where any of the first two conditions set forth in the preceding
corporate affairs with gross negligence or in bad faith does not paragraph is absent, in the case of a contract with a director or
amount to an application of the doctrine of piercing the veil of trustee, such contract may be ratified by the vote of the stockholders
corporate fiction, for such personal liability is imposed directly representing at least two-thirds (2/3) of the outstanding capital stock
under Section 31 to directors and officers of corporation who or of at least two-thirds (2/3) of the members in a meeting called for
are guilty of violating their duty of diligence. Sanchez v. the purpose: Provided, That full disclosure of the adverse interest of
Republic, 603 SCRA 229 (2009). the directors or trustees involved is made at such meeting: Provided,
however, That the contract is fair and reasonable under the
D. Duty of Loyalty (Sections 31 to 34) circumstances.

Section 32. Dealings of directors, trustees or officers with the Section 33. Contracts between corporations with interlocking
corporation. directors.
A contract of the corporation with one or more of its directors or Except in cases of fraud, and provided the contract is fair and
trustees or officers is voidable, at the option of such corporation, reasonable under the circumstances, a contract between two or more
unless all the following conditions are present: corporations having interlocking directors shall not be invalidated on
that ground alone: Provided, That if the interest of the interlocking
1. That the presence of such director or trustee in the board meeting in director in one corporation is substantial and his interest in the other
which the contract was approved was not necessary to constitute a corporation or corporations is merely nominal, he shall be subject to
quorum for such meeting; the provisions of the preceding section insofar as the latter
corporation or corporations are concerned.
2. That the vote of such director or trustee was not necessary for the
approval of the contract; Stockholdings exceeding twenty (20%) percent of the outstanding
capital stock shall be considered substantial for purposes of
3. That the contract is fair and reasonable under the circumstances; interlocking directors.
and


Section 34. Disloyalty of a director. Facts: John Gokongwei, a stockholder of San Miguel Corporation (and a
Where a director, by virtue of his office, acquires for himself a business president and stockholder of Robina Corp. and Consolidated Foods
opportunity which should belong to the corporation, thereby Corp., a competitor of SMC, in various areas, such as Instant Coffee, Ice
obtaining profits to the prejudice of such corporation, he must account Cream, Poultry and Hog Feeds and many more), filed a petition for
to the latter for all such profits by refunding the same, unless his act declaration of nullity of amended by-laws, cancellation of certificate of
has been ratified by a vote of the stockholders owning or representing filing of the amended-by laws, injunction and damages against the
at least two-thirds (2/3) of the outstanding capital stock. This majority of the members of the Board of Directors of the SMC based on
provision shall be applicable, notwithstanding the fact that the the following grounds:
director risked his own funds in the venture. Corporations have no inherent power to disqualify a
stockholder from being elected as director depriving him of his
Duty of Loyalty the directors must act primarily for the vested right because he is an officer of a competitor company.
interest of the corporation. The directors may pursue personal The corporation has been investing corporate funds in other
endeavors provided these do not conflict with the interest of corporations and business outside of the primary purpose of the
the corporation. corporation
1. Doctrine of Corporate Opportunity.
2. Using Inside Information Issue: Whether or not the corporation has the power to disqualify a
It is well established that corporate officers are not permitted to competitor from being elected to the board of directors as a reasonable
use their position of trust and confidence to further their exercise of corporate authority
private interests. The doctrine of corporate opportunity is
precisely recognition by the courts that the fiduciary standards Held: YES. It is well established that corporate officers "are not
could not be upheld where the fiduciary was acting for two permitted to use their position of trust and confidence to further their
entities with competing interest. The doctrine rest private interests." It is not denied that a member of the Board of
fundamentally on the unfairness, in particular circumstances, of Directors of the San Miguel Corporation has access to sensitive and
an officer or director taking advantage of an opportunity for his highly confidential information, such as: (a) marketing strategies and
personal profit when the interest of the corporation justly calls pricing structure; (b) budget for expansion and diversification; (c)
for protection. Gokongwei v. SEC, 89 SCRA 336 (1979). research and development; and (d) sources of funding, availability of
personnel, proposals of mergers or tie-ups with other firms.
Gokongwei v. SEC
It is obviously to prevent the creation of an opportunity for an officer or


director of San Miguel Corporation, who is also the officer or owner of a corporation, the Board of Directors are duty bound to hold the
competing corporation, from taking advantage of the information which assets of the corporation primarily for the payment of the
he acquires as director to promote his individual or corporate interests creditors. Mead v. McCullough, 21 Phil. 95 (1911).
to the prejudice of San Miguel Corporation and its stockholders, that the
questioned amendment of the by-laws was made. Certainly, where two Mead v. McCullough
corporations are competitive in a substantial sense, it would seem
improbable, if not impossible, for the director, if he were to discharge Facts: The complaint contains three causes of action one of which is for
effectively his duty, to satisfy his loyalty to both corporations and place the value of the personal effects alleged to have been left by Mead and
the performance of his corporation duties above his personal concerns. sold by the defendants. The parties organized the Philippine Engineering
& Construction Co. (PECC) by giving $2000 Mexican currency cash each,
Doctrine: See above. except for Mead who contributed property. Mead was also the general
manager until he resigned to accept employment with the Canton &
When a director-majority stockholder, who is the administrator Shanghai Railway Co.
of corporate affairs directly negotiating the sale of corporate
landholdings to the Government at great prices, purchases the Several contracts entered by Mead as general manager failed,
stocks of a shareholder without informing the latter of the on- specifically a wrecking contract with the navy. Because of these failures,
going negotiations, such director is deemed to have fraudulently the board voted to sell all the rights and interests of PECC to the
acquired the shareholdings by way of deceit practiced by means wrecking contract in favor of McCullough (along with some of Meads
of concealing his knowledge of important corporate affairs. personal effects). McCullough then incorporated a new company,
Strong v. Repide, 41 Phil. 947 (1909). Manila Salvage Association, and transferred all his rights and interests to
Doctrine of corporate opportunity applies to confidential the contract to MSA. Mead alleges that these were done in bad faith.
employees of the corporation. cf. Sing Juco v. Llorente, 43 Phil.
589 (1922). Issue: Whether or not the sale or transfer to McCullough of the assets of
said corporation was done within the laws and powers of the
E. Duty to Creditors and Outsiders corporation.
Under the trust fund doctrine, it would be a violation of the
right of creditors to allow the return to the stockholders of any Held: YES. A private corporation, which owes no special duty to the
portion of their capital or declare dividends outside of the public and which has not been given the right of eminent domain, has
unrestricted retained earnings. Also upon insolvency of the absolute right and power as against the whole world except the state, to


sell and dispose of all of its property. A transaction done in good faith directors resulting in the prejudice to one of the corporation,
which achieves substantial justice cannot be disturbed based on mere has no application to cases where fraud is alleged to have been
suspicions. committed to third parties. DBP v. Court of Appeals, 363 SCRA
307 (2001).
Doctrine: Generally speaking, the voice of a majority of the stockholders
is the law of the corporation, but there are exceptions to this rule. There H. SEC Revised Code of Corporate Governance (SEC Memorandum.
must necessarily be a limit upon the power of the majority. Without Circular No. 6, s. 2009)
such a limit the will of the majority would be absolute and irresistible Securities Regulation Code was issued pursuance to a mandate
and might easily degenerate into an arbitrary tyranny. Notwithstanding of the SEC.
these limitations upon the power of the majority of the stockholders, o Blue Sky Law To secure you from being misled by
their (the majoritys) resolutions, when passed in good faith and for a companies who actually offer you nothing since nothing
just cause, deserve careful consideration and are generally binding upon is backing them up.
the minority. SEC Revised Code of Corporate Governance applies to
specific corporations whose securities are registered in the
F. Corporate Dealings with Directors and Officers (Section 32) stock exchange; they are large companies with a lot of public
The provisions of Section 32 of the Corporation Code on self- shareholders.
dealings by directors/trustees and officers merely incorporate o The SEC hopes to protect the public from possible fraud
well-established principles in Corporate Law. A director who that large companies may commit in the process of
enters into a distributorship agreement with the corporation gathering investments.
would make the contract voidable at the option of the o These large companies must have at least two
corporation especially when the terms are disadvantageous to independent directors able to police the activities of the
the corporation. The director cannot claim the same doctrine as corporation (not merely a puppet of the shareholders)
an outsider dealing in good faith with the corporation. Prime and must be very transparent.
White Cement Corp. v. IAC, 220 SCRA 103 (1993).
XII. CORPORATE OFFICERS
G. Contracts Between Corporations with Interlocking Directors The general principles of agency govern the relation between
(Section 33) the corporation and its officers or agents, subject to the articles
The rule under Section 33 of Corporation Code allowing of incorporation, by-laws, or relevant provisions of law when
annulment of contracts between corporations with interlocking authorized, their acts bind the corporation, otherwise, their acts


cannot bind it. Yasuma v. Heirs of Cecilio S. De Villa, 499 SCRA and the foreclosure sale. Pending its resolution in the Supreme Court,
466 (2006); Litonjua v. Eternit Corp., 490 SCRA 204 (2006). Associated Bank negotiated with the Spouses Pronstroller through Atty.
Jose Soluta, the banks Vice President and member of its Board of
A. Powers of Corporate Officers: Directors. Letter agreements were executed whereby the Spouses
Just as a natural person may authorize another to do certain Pronstrollers would give a downpayment (first letter agreement), and
acts for and on his behalf, the Board of Directors may validly then given an extension to pay the balance which would be given upon
delegate some of its functions and powers to officers, delivery of the property subsequent to the resolution of the Vaca case
committees or agents the authority of such individuals to with such property being free from occupants (embodied in the second
bind the corporation is generally derived from law, corporate letter agreement). Later, the bank reorganized its management and
by-laws or authorization from the board, either expressly or Atty. Dayday replaced Atty. Soluta. Atty. Dayday informed Spouses
impliedly by habit, custom or acquiescence in the general Pronstroller that their deposit would be forfeited because the second
course of business. Cebu Mactan Members Center Inc. v. letter agreement was a mistake because Atty. Soluta had no authority to
Tsukahara, 593 SCRA 172 (2009). While it is a general rule that, give an extension.
in the absence of authority from the board of directors, no
person, not even its officers, can validly bind a corporation, the Issue: Whether or not Associated Bank is bound by the Letter-
Board may validly delegate some of its functions and powers to Agreement signed by Atty. Soluta under the doctrine of apparent
its officers, committee and agents. Associated Bank v. authority.
Pronstroller, 558 SCRA 113 (2008).1
Held: YES. Undoubtedly, the Associated Bank had previously allowed
Associated Bank v. Pronstroller Atty. Soluta to enter into the first agreement without a board resolution
expressly authorizing him; thus, it had clothed him with apparent
Facts: The Spouses Vaca executed a Real Estate Mortgage in favor of authority to modify the same via the second letter-agreement. It is not
Associated Bank over their parcel of residential land in Green Meadows the quantity of similar acts which establishes apparent authority, but
Subdivision. Eventually, the property was foreclosed and sold at public the vesting of a corporate officer with the power to bind the
auction with Associated Bank as the highest bidder. However, the Vacas corporation.
commenced an action for the nullification of the real estate mortgage
Doctrine: The general rule is that, in the absence of authority from the
board of directors, no person, not even its officers, can validly bind a
1
Yu Chuck v. Kong Li Po, 46 Phil. 608, 614 (1924); Cebu Mactan Members corporation. The power and responsibility to decide whether the
Center Inc. v. Tsukahara, 593 SCRA 172 (2009).


corporation should enter into a contract that will bind the corporation is bind the corporation, unless it has ratified such acts or is
lodged in the board of directors. However, just as a natural person may estopped from disclaiming them. Reyes v. RCPI Employees
authorize another to do certain acts for and on his behalf, the board Credit Union, Inc., 499 SCRA 319 (2006).
may validly delegate some of its functions and powers to officers, Doctrine of Apparent Authority: Corporate policies need not be
committees and agents. in writing. Contracts entered into by a corporate officer or
obligations or prestations assumed by such officer for and in
While the Court agrees that those who belong to the upper behalf of such corporation are binding on the said corporation
corporate echelons would have more privileges, it cannot be only if such officer acted within the scope of his authority or if
presume the existence of such privileges or benefitshe who such officer exceeded the limits of his authority, the corporation
claims the same is burdened to prove not only the existence of has ratified such contracts or obligations. Kwok v. Philippine
such benefits but also that he is entitled to the same. Kwok v. Carpet Manufacturing Corp., 457 SCRA 465 (2005).
Philippine Carpet Manufacturing Corp., 457 SCRA 465 (2005). 2. President. Peoples Aircargo v. Court of Appeals, 297 SCRA 170
Even though a judgment, decree or order is addressed to the (1998).
corporation only, the officers as well as the corporation itself, Requisites: Member of the Board of Directors and must possess
may be punished for contempt for disobedience to its terms, at at least one share
least if they knowingly disobey the courts mandate, since a
lawful judicial command to a corporation is in effect a command Peoples Aircargo v. Court of Appeals
to the officers. Heirs of Trinidad de Leon Vda. De Roxas v. Court
of Appeals, 422 SCRA 101 (2004). Facts: Peoples Aircargo is a domestic corporation, which was organized
1. Rule on Corporate Officers Power to Bind Corporation in the middle of 1986 to operate a customs bonded warehouse. To
An officers power as an agent of the corporation must be obtain a license for the corporation from the Bureau of Customs,
sought from the statute, charter, the by-laws or in a delegation Antonio Punsalan Jr., the corporation president, solicited a proposal
of authority to such officer, from the acts of the board of from Stefano Sano (who was preferred because of his membership in
directors formally expressed or implied from a habit or custom the task force supervising the transition of the bureau from the Marcos
of doing business. Vicente v. Geraldez, 52 SCRA 210 (1973); to the Aquino Government) for a feasibility study. This constituted the
Boyer-Roxas v. Court of Appeals, 211 SCRA 470 (1992). First Contract for which Sano was paid for. On December 1086, a
As a general rule, the acts of corporate officers within the scope Second Contract, this time for consultancy services, was made upon
of their authority are binding on the corporation, but when Punsalans request. The consultancy services included an Operations
these officers exceeded their authority, their actions cannot Manual and Seminar/Workshop for the employees of Peoples Aircargo.


Sano was not paid for the 2nd contract so he filed a collection case. By acts, and thus, the corporation will, as against anyone who has
this time, Punsalan had sold his shares and resigned as president. in good faith dealt with it through such agent, be estopped from
Peoples Aircargo denied that Sano conducted Consultancy services. It denying the agents authority.
alleged that the contract entered into between Sano and Punsalan was
without authority. It is the Board of Directors, not the President, that exercises
corporate powers. It must be emphasized that the basis for
Issue: Whether or not Punsalan, as president, has apparent authority to agency is representation and a person dealing with an agent is
enter into the second contract that could bind the corporation put upon inquiry and must discover upon his peril the authority
of the agent. Safic Alcan & Cie v. Imperial Vegetable Oil Co.,
Held: YES. Since the corporation had previously allowed Punsalan to Inc., 355 SCRA 559 (2001).
enter into the first contract with Sano without a board resolution A corporation may not distance itself from the acts of a senior
expressly authorizing him, thus, it had clothed its president with officer: "the dual roles of Romulo F. Sugay should not be
apparent authority to execute the Second Contract. Furthermore, allowed to confuse the facts." R.F. Sugay v. Reyes, 12 SCRA 700
private respondent prepared an operations manual and conducted a (1961).
seminar for the employees of petitioner in accordance with their The President is considered as the corporations agent, and as
contract. Petitioner accepted the operations manual, submitted it to the such, his knowledge of the repeal of a resolution in another
Bureau of Customs and allowed the seminar for its employees. As a juridical person in which his corporation has an interest, is
result of this, petitioner was given by the Bureau of Customs a license to ascribed to his principal under the theory of imputed
operate a bonded warehouse. Even if the Second Contract was outside knowledge. Rovels Enterprises, Inc. v. Ocampo, 392 SCRA 176
the usual powers of the president, petitioners ratification of said (2002).
contract and acceptance of benefits have made it binding, nonetheless. The President of the corporation which becomes liable for the
accident caused by its truck driver cannot be held solidarily
Doctrine: Contracts entered into by a corporate president without liable for the judgment obligation arising from quasi-delict, since
express prior board approval bind the corporation, when such officers the fact alone of being President is not sufficient to hold him
apparent authority is established and when these contracts are ratified solidarily liable for the liabilities adjudged against the
by the corporation. corporation and its employee. Secosa v. Heirs of Erwin Suarez
If a corporation knowingly permits one of its officers, or any Fancisco, 433 SCRA 273 (2004).
other agent, to act within the scope of an apparent authority, it 3. Corporate Secretary
holds him out to the public as possessing the power to do those Requisite: Resident and citizen of the Philippines


o The corporate secretary can be a member of the Board 4. Corporate Treasurer
of Directors since there is no prohibition for such. Requirement: May or may not be a director
In the absence of provisions to the contrary, the corporate A corporate treasurers function have generally been described
secretary is the custodian of corporate records he keeps the as to receive and keeps funds of the corporation, and to
stock and transfer book and makes proper and necessary disburse them in accordance with the authority given him by
entries therein. It is his duty and obligation to register valid the board or the properly authorized officers. Unless duly
transfers of stock in the books of the corporation; and in the authorized, a treasurer, whose power are limited, cannot bind
event he refuses to comply with such duty, the transferor- the corporation in a sale of its assets, which obviously is foreign
stockholder may rightfully bring suit to compel performance. to a corporate treasurers function. San Juan Structural v. Court
Torres, Jr. v. Court of Appeals, 278 SCRA 793 (1997). of Appeals, 296 SCRA 631, 645 (1998).
Although the corporate secretarys duty to record transfers of A corporate treasurer whose negligence in signing a
stock is ministerial, he cannot be compelled to do so when the confirmation letter for rediscounting of crossed checks, knowing
transferees title to said shares has no prima facie validity or is fully well that the checks were strictly endorsed for deposit only
uncertain. More specifically, a pledgor, prior to foreclosure and to the payees account and not to be further negotiated, may be
sale, does not acquire ownership rights over the pledged shares personally liable for the damaged caused the corporation.
and thus cannot compel the corporate secretary to record his Atrium Management Corp. v. Court of Appeals, 353 SCRA 23
alleged ownership of such shares on the basis merely of the (2001).
contract of pledge. Mandamus will not issue to establish a right, 5. Manager
but only to enforce one that is already established. Lim Tay v. Although a branch manager of a bank, within his field and as to
Court of Appeals, 293 SCRA 634 (1998); TCL Sales Corp. v. Court third persons, is the general agent and is in general charge of
of Appeals, 349 SCRA 35 (2001). the corporation, with apparent authority commensurate with
A sale that fails to comply with Section 40 of Corporation Code, the ordinary business entrusted him and the usual course and
cannot be invalidated when the buyer relies upon a Secretarys conduct thereof, yet the power to modify contracts of the bank
Certificate confirming authority. A secretarys certificate which remains generally with the board of directors. Being a branch
is regular on its face can be relied upon by a third party who manager alone is insufficient to support the conclusion that he
does not have to investigate the truths of the facts contained in has been clothed with apparent authority to verbally alter
such certification; otherwise business transactions of terms of the banks written contract, such as the mortgage
corporations would become tortuously slow and unnecessarily contract. Banate v. Philippine Countryside Rural Bank (Liloan,
hampered. Esguerra v. Court of Appeals, 267 SCRA 380 (1997). Cebu), Inc., 625 SCRA 21 (2010).


B. POWER OF THE BOARD TO APPOINT AND TERMINATE CORPORATE Held: YES. Guerras position was only created by the officers. The by
OFFICERS laws did not provide for the creation of his position. Therefore, he may
The law does not expressly indicate a limit over the term of the not be considered as an officer and the manner of removal provided
corporate officers. But it seems they should serve for a term of for in the by laws shall not be made applicable to him. He may thus be
one year so that the next set of directors will not be precluded removed by a mere resolution by the officers of the corporation.
from appointing a new set of corporate officers.
1. Who Is a Corporate Officer? (Section 25) The by-laws of the instant corporation in turn provide that in the board
Corporate officers in the context of P.D. No. 902-A are those of directors there shall be a president, a vice-president, a secretary and
officers of the corporation who are given that character by the a treasurer. These are the only ones mentioned therein as officers of the
Corporation Code or by the corporations by-laws. Gurrea v. corporation. The manager is not included. The by-laws provide that the
Lezama, 103 Phil. 553 (1958).1 officers of the corporation may be removed or suspended by the
affirmative vote of 2/3 of the corporation. The conclusion is inescapable
Gurrea v. Lezama that Guerra can be suspended or removed by said board of directors
under such terms as it may see fit and not as provided for in the by-
Facts: Gurrea sought to have Resolution No. 65 of the Board of Directors laws, without the 2/3 vote of the stockholders, as required when an
of the La Paz Ice Plant and Cold Storage Co., Inc., removing him from his officer is to be removed.
position of manager of said corporation declared null and void and to
recover damages incident thereto. The action is predicated on the Doctrine: One distinction between officers and agents of a corporation
ground that said resolution was adopted in contravention of the lies in the manner of their creation. An officer is created by the charter
provisions of the by-laws of the corporation, of the Corporation Law and of the corporation, and the officer is elected by the directors or the
of the understanding, intention and agreement reached among its stockholders. An agency is usually created by the officers, or one or
stockholders. more of them, and the agent is appointed by the same authority. It is
clear that the two terms officers and agents are by no means
Issue: Whether or not Gurrea was properly removed from his position interchangeable.
as manager of La Paz Ice Plant by a mere resolution.
The position of Executive Secretary, which is provided for in the
Societys by-laws, is an officer position. Since the appointment
1
Garcia v. Eastern Telecommunications Philippines, 585 SCRA 450 (2009); of the incumbent did not contain a fixed term, the implication
WQPP Marketing Communications, Inc. v. Galera, 616 SCRA 422 (2010).


was that the appointee held the appointment at the pleasure of
the Board of Directors, such that when the Board opted to Held: NO. Although the minutes of the organizational meeting show
replace the incumbent, technically there was no removal but that the Chairman mentioned the need of appointing a permanent
only an expiration of the term and there was no need of prior Executive Secretary, such statement alone cannot characterize the
notice, due hearing or sufficient grounds before the incumbent appointment of petitioner without a contract of employment definitely
could be separated from office. Mita Pardo de Tavera v. fixing her term because of the specific provision of Section 7.02 of the
1
Tuberculosis Society, 112 SCRA 243 (1982). Code of By-Laws that: The Executive Secretary shall hold office at the
pleasure of the Board of Directors, unless their term of employment
Mita Pardo de Tavera v. Tuberculosis Society shall have been fixed in their contract of employment. Besides the
word permanent could have been used to distinguish the
Facts: Dr. Buktaw, then executive secretary of the Board of Directors of appointment from acting capacity.
the Philippine Tuberculosis Society (Society) retired. Dr. Mita Pardo de
Tavera was appointed as his replacement. President Canizares sent an Doctrine: See above.
appointment letter. The letter of appointment, however, didnt include
a fixed term. Subsequently, de Tavera was removed from her post Ordinary company employees are generally employed not by
without telling her the cause. One of the defendants, Alberto Romulo action of the directors and stockholders but by that of the
was appointed to her position with a vote of 7(affirm)-2(abstain)- Management of the corporation who also determines the
1(objection). The defendants claimed denying that plaintiff was illegally compensation to be paid such employees. Corporate officers,
removed from her position as Executive Secretary and averring that on the other hand, are elected or appointed by the directors or
under the Societys by-laws, said position is held at the pleasure of the stockholders, and are those who are given that character either
Board of Directors and when the pleasure is exercised, it only means by the Corporation Code or by the corporations by-laws. Gomez
that the incumbent has to vacate the same because her term has v. PNOC Dev. and Management Corp., 606 SCRA 187 (2009).2
expired. o A mere manager not so named in the by-laws does is
not an officer of the corporation. Pamplona Plantation
Issue: Whether or not de Tavera was illegally dismissed Company v. Acosta, 510 SCRA 249 (2006).
o When the by-laws provide for the position of

1
PSBA v. Leao, 127 SCRA 778 (1984); Dy v. NLRC, 145 SCRA 211 (1986); Superintendent/ Administrator, it is clearly a
Visayan v. NLRC, 196 SCRA 410 (1991); Easycall Communications Phils., Inc. v.
King, 478 SCRA 102 (2005); Marc II Marketing, Inc. v. Joson, 662 SCRA 35
2
(2011); Barba v. Liceo de Cagayan University, 686 SCRA 648 (2012). Okol v. Slimmers World Intl, 608 SCRA 97 (2009).


corporate officer position and issues of reinstatement corporate officers before the NLRC. Matling, et al. moved to dismiss the
would be within the jurisdiction of the SEC and not the petition. They claimed that SEC, and not NLRC, had jurisdiction over the
NLRC. Ongkingco v. NLRC, 270 SCRA 613 (1997). case, the matter being an intra-corporate in nature. This is because
Although the by-laws provide expressly that the Board of Coros was also a member of the corporations Board of Directors prior
Directors shall have full power to create new offices and to to his termination.
appoint the officers thereto, any office created, and any officer
appointed pursuant to such clause does not become a Issue: Whether or not Coros, as Vice President for Finance and
corporate officer, but is an employee and the determination Administration, was a corporate office of Matling Industrial and
of the rights and liabilities relating to his removal are within the Commercial Corporation.
jurisdiction of the NLRC; they do not constitute intra-corporate
controversies. A different interpretation can easily leave the Held: NO. The position of Vice President for Finance and
way open for the Board of Directors to circumvent the Administration was not explicitly written in the by-laws. Coros was
constitutionally guaranteed security of tenure of the employee appointed Vice President by Matlings general manager and not by the
by the expedient inclusion in the By-Laws of an enabling clause Board of Directors. It was also the general manager who determined the
on the creation of just any corporate officer position. (at p. 27). amount of compensation he received. Therefore, Coros is merely an
The rulings in Tabang v. NLRC, 266 SCRA 462 (1997), and Nacpil employee and not a corporate officer. This being the case, NLRC and not
v. International Broadcasting Corp., 379 SCRA 653 (2002), SEC has jurisdiction over his complaint for illegal dismissal. In addition,
should no longer be controlling. Matling Industrial and there is no relation between his acquisition of his status as stockholder
Commercial Corp. v. Coros, 633 SCRA 12 (2010).1 or Director and his position as Vice President of Finance and
Administration. His position as stockholder or Director remained
Matling Industrial and Commercial Corp. v. Coros unaffected by his dismissal as Vice President. This is not an intra-
corporate controversy, because an intra-corporate controversy is one,
Facts: Ricardo R. Coros is the Vice President for Finance and which arises between a stockholder and a corporation.
Administration of Matling Industrial and Commercial Corporation.
However, Matling dismissed him. As a result, Coros filed a complaint for Doctrine: A position must be expressly mentioned in the By-laws in
illegal suspension and illegal dismissal against Matling and some of its order to be considered as a corporate office. The creation of an office
under a by-law enabling provision is not enough to make a position a
corporate office. A different interpretation can easily allow the Board to
1
Reiterated in Marc II Marketing, Inc. v. Joson, 662 SCRA 35 (2011); Barba v. circumvent the constitutional guarantee of security of tenure by
Liceo de Cagayan University, 686 SCRA 648 (2012).


including an enabling clause on the creation of any corporate office in cases and intra-corporate affairs regarding elections and appointments.
the by-laws. The Board may create appointive positions other than
those expressly mentioned in the by-laws. However, persons occupying Held: NO. It is the SEC who has jurisdiction in the abovementioned
such positions are not considered as corporate officers within the cases. The Articles of Incorporation of MICC expressly states that de
meaning of Section 25. Rossis position as Executive Vice-President was considered to be an
officer position.
2. Nature of Exercise of Power to Terminate Officers
An officers removal is a corporate act, and if such removal Doctrine: The SEC has the jurisdiction over removal of corporate officers
occasions an intra-corporate controversy, its nature is not as well as intra-corporate affairs regarding election and appointment of
altered by the reason or wisdom, or lack thereof, with which the corporate officers.
Board of Directors might have in taking such action. Perforce,
the matter would come within the area of corporate affairs and One who is included in the by-laws of a corporation in its roster
management, and such a corporate controversy would call for of corporate officers is an officer of said corporation and not a
SEC adjudicative expertise [now RTC Special Commercial mere employee being a corporate officer, his removal is
Courts], not that of NLRC. De Rossi v. NLRC, 314 SCRA 245 deemed to be an intra-corporate dispute cognizable by the SEC
(1999); Okol v. Slimmers World International, 608 SCRA 97 and not by the Labor Arbiter. Garcia v. Eastern
(2009). Telecommunications Philippines, 585 SCRA 450 (2009).

De Rossi v. NLRC XIII. LIABILITIES OF CORPORATE OFFICERS (Section 31)
Mere ownership by an officer (President) of majority of the
Facts: Armando de Rossi is an Italian Citizen and was the Executive Vice- equity of the corporation do not warrant a piercing of the veil of
President and General Manager of Matling Industrial and Commercial corporate fiction to make such officer personally liable for the
Corp. (MICC). He started to work in 1985 and was terminated in 1988 debts of the corporation. Palay, Inc. v. Clave, 124 SCRA 638
for failing to secure his employment permit and grossly mismanaged the (1093).1
business affairs of the companyhe allegedly diverted corporate funds
to his personal use. Aggrieved, he then filed a case against MICC in the Palay, Inc. v. Clave
NLRC for illegal dismissal.

1
Issue: Whether or not the NLRC has jurisdiction over illegal dismissal Pabalan v. NLRC, 184 SCRA 495 (1990); Sulo ng Bayan, Inc. v. Araneta, Inc. Inc.,
72 SCRA 347 (1976); Mindanao Motors Lines, Inc. v. CIR, 6 SCRA 710 (1962).


petitioners part. They had literally relied, albeit mistakenly, on
Facts: Palay, Inc., through its President, Albert Onstott executed a paragraph 6 of its contract with Dumpit when it rescinded the contract
Contract to Sell a parcel of land to Dumpit. Paragraph 6 of the contract to sell extrajudicially and had sold it to a third person. Onstott was made
provided for automatic extrajudicial rescission upon default in payment liable because he was then the President of the corporation. No
of any monthly installment after the lapse of 90 days from the sufficient proof exists on record that said petitioner used the
expiration of the grace period of 1 month, without need of notice and corporation to defraud private respondent. He cannot be made
with forfeiture of all installments paid. Dumpit paid the downpayment personally liable just because he appears to be the controlling
and several installments. Almost 6 years later, Dumpit wrote Palay, Inc. stockholder.
offering to update all his overdue accounts with interest, and seeking its
written consent to the assignment of his rights to a certain Lourdes Doctrine: The veil of corporate fiction may be pierced when it is used as
Dizon. Palay, Inc. informed him that his Contract to Sell had long been a shield to further an end subversive of justice; or for purposes that
rescinded pursuant to paragraph 6 of the contract, and that the lot had could not have been intended by the law that created it; or to defeat
already been resold. Dumpit filed a letter complaint with the National public convenience, justify wrong, protect fraud, or defend crime; or to
Housing Authority (NHA) for reconveyance. perpetuate fraud or confuse legitimate issues; or to circumvent the law
or perpetuate deception; or as an alter ego, adjunct or business conduit
Issue: Whether or not petitioners may be held liable for the refund of for the sole benefit of the stockholders.
the installment payments made by Dumpit.
A. GENERAL RULE: Corporate Officers Not Liable for Corporate Debts
Held: YES. Rights to the lot should be restored to Dumpit or the same Unless they have exceeded their authority, corporate officers
should be replaced by another acceptable lot. However, considering are, as a general rule, not personally liable for their official acts,
that the property had already been sold to a third person and there is because a corporation, by legal fiction, has a personality
no evidence on record that other lots are still available, private separate and distinct from its officers, stockholders and
respondent is entitled to the refund of installments paid plus interest at members. Price v. Innodata Phils., Inc., 567 SCRA 269 (2008).1
the legal rate of 12% computed from the date of the institution of the Corporate officers who entered into and signed contracts on
action. behalf of the corporation in their official capacities cannot be
made personally liable thereunder in the absence of stipulation
As a general rule, a corporation may not be made to answer for acts or
liabilities of its stockholders or those of the legal entities to which it may 1
Republic Planters Bank v. Court of Appeals, 216 SCRA 738 (1992); Lowe, Inc. v.
be connected and vice versa. There were no badges of fraud on Court of Appeals, 596 SCRA 140 (2009); Marc II Marketing, Inc. v. Joson, 662
SCRA 35 (2011); St. Tomas v. Salac, 685 SCRA 245 (2012).


to that effect, due to the personality of the corporation being To hold a director personally liable for debts of the corporation,
separate and distinct from the persons composing it. Western and thus pierce the veil of corporate fiction, the bad faith or
Agro Industrial Corp. v. Court of Appeals, 188 SCRA 709 wrongdoing of the director must be established clearly and
(1990).1 convincingly. Bad faith is never presumed. Bad faith does not
Officers of a corporation may become liable for its loans when connote bad judgment or negligence. Bad faith imports a
they have breached their duty of diligence under Section 31 of dishonest purpose. Bad faith means [a] breach of a known duty
the Corporation Code. Aratea v. Suico, 518 SCRA 501 (2007);2 or through some ill motive or interest. Bad faith partakes of the
when they have contractually made themselves personally nature of fraud. Carag v. NLRC, 520 SCRA 28 (2007).4
liable for a corporate loan. Prisma Construction & Dev. Corp. v. The finding of solidary liability among the corporation, its
Menchavez, 614 SCRA 590 (2010). officers and directors would patently be baseless when the
A corporation has a personality separate and distinct from the decision contains no allegation, finding or conclusion regarding
persons composing or representing it; hence, personal liability particular acts committed by said officers and director that
attaches only in exceptional cases, such as when the director, show them to have been individually guilty of unmistakable
trustee, or officer is guilty of bad faith or gross negligence in malice, bad faith, or ill-motive in their personal dealings with
directing the affairs of the corporation. Continental Cement third parties. When corporate officers and directors are sued
Corp. v. Asea Brown Boveri, Inc., 659 SCRA 137 (2011).3 merely as nominal parties in their official capacities as such,
Where the Chairman & President has made himself accountable they cannot be held liable personal for the judgment rendered
in the promissory note in his personal capacity and as against the corporation. NPC. v. Court of Appeals, 273 SCRA 419
authorized by the Board Resolution, and in the absence of any (1997).5
representation on the part of corporation that the obligation is An officer-stockholder who signs in behalf of the corporation to
all its own because of its separate corporate identity, we see no a fraudulent contract cannot claim the benefit of separate
occasion to consider piercing the corporate veil as material to juridical entity: Thus, being a party to a simulated contract of
the case. Prisma Construction & Dev. Corp. v. Menchavez, 614 management, petitioner Uy cannot be permitted to escape
SCRA 590 (2010). liability under the said contract by using the corporate entity
theory. This is one instance when the veil of corporate entity

1
Rustan Pulp & Paper Mills, Inc. v. IAC, 214 SCRA 665 (1992); Banque Generale
Belge v. Walter Bull and Co., 84 Phil. 164 (1949).
2 4
Singian, Jr. v. Sandiganbayan, 478 SCRA 348 (2005) EPG Constructions Co. v. CA, 210 SCRA 230 (1992).
3 5
Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590 (2010); Urban Emilio Cano Enterprises, Inc. v. CIR, 13 SCRA 291 (1965); Arcilla v. Court of
Ban, Inc. v. Pena, 659 SCRA 418 (2011). Appeals, 215 SCRA 120 (1992).


has to be pierced to avoid injustice and inequity. Paradise personal capacity. Tramat has its own distinct and separate personality.
Sauna Massage Corporation v. Ng, 181 SCRA 719 (1990). In the case at bench, there is no indication that petitioner David Ong
B. Rundown on Officers Liabilities: Tramat Mercantile, Inc. v. Court of could be held personally accountable under any of the mentioned cases
Appeals, 238 SCRA 14 (1994).1 (see doctrine).

Tramat Mercantile, Inc. v. Court of Appeals Doctrine: Personal liability of a corporate director, trustee or officer
along (although not necessarily) with the corporation may so validly
Facts: Melchor de la Cuesta (doing business under the name of Farmers attach, as a rule, only when:
Machineries) sold a tractor to Tramat Mercantile. David Ong, president 1. He assents
and manager of Tramat, issued a check for payment. In turn, Tramat a. To a patently unlawful act of the corporation
sold the tractor along with a lawn mower to MWSS. The latter refused b. For bad faith, or gross negligence in directing its affairs
to pay when it learned that the tractor was not brand new and there c. For conflict of interest, resulting in damages to the
were hidden defects. Ong then issued a stop payment for the check corporation, its stockholders or other persons
issued to de la Cuesta (it seems that Ong intended to pay de la Cuesta 2. He consents to the issuance of watered stocks or who, having
with the proceeds of the sale to MWSS). Because of this, de la Cuesta knowledge thereof, does not forthwith file with the corporate
filed an action for recovery of the P33,500 payment as well as P10,000 secretary his written objection thereto;
as attorney's fees. Ong answered that de la Cuesta had no cause of 3. He agrees to hold himself personally and solidarily liable with
action, and that the transaction was between de la Cuesta and Tramat the corporation;
Mercantile, not Ong. 4. He is made, by a specific provision of law, to personally answer
for his corporate action.
Issue: Whether or not Ong can be held liable in his personal capacity.
While the limited liability doctrine is intended to protect the
Held: NO. David Ong was acting as an officer of Tramat, not in his stockholder by immunizing him from personal liability for the
corporate debts, a corporate officer may nevertheless divest
himself of this protection by voluntarily binding himself to the
1
MAM Realty v. NLRC, 244 SCRA 797 (1995); NFA v. Court of Appeals, 311 SCRA payment of the corporate debts. Toh v. Solid Bank Corp., 408
700 (1999); Atrium Management Corp. v. Court of Appeals, 353 SCRA 23 (2001);
Malayang Samahan ng mga Manggawgawa sa M. Greenfield v. Ramos, 357 SCRA 544 (2003).
SCRA 77 (2001); Powton Conglomerate, Inc. v. Agcolicol, 400 SCRA 523 (2003); The corporate representatives signing as a solidary guarantee as
H.L. Carlos Construction, Inc. v. Marina Properties Corp., 421 SCRA 428 (2004); corporate representative did not undertake to guarantee
McLeod v. NLRC, 512 SCRA 222 (2007).


personally the payment of the corporations debt embodied in A.C. Ransom Labor Union-CCLU v. NLRC
the trust receipts. Debts incurred by directors, officers and
employees acting as such corporate agents are not theirs but Facts: On June 6, 1961, employees of AC Ransom, most being members
the direct liability of the corporation they represent. As an of the AC Ransom Labor Union, went on strike. The said strike was lifted
exception, directors or officers are personally liable for the on June 21 with most of the strikers being allowed to resume their
corporations debt if they so contractually agree or stipulate. work. However, twenty two strikers were refused reinstatement.
Tupaz IV v. Court of Appeals, 476 SCRA 398 (2005).
Bad faith does not arise just because a corporation fails to pay In 1969, the Hernandez family (owners of AC RANSOM) organized
its obligation, because the inability to pay ones obligation is not another corporation under the name of Rosario Industrial Corporation.
synonymous with fraudulent intent not to honor the The said company dealt in the same type of business as AC Ransom.
obligations. In order to piece the veil of corporate fiction, for
reasons of negligence by the director, trustee or officer in the In 1972, a decision to reinstate the 22 strikers was rendered by the
conduct of the transactions of the corporation, such negligence Court of Industrial Relations.
must be gross. Magaling v. Ong, 562 SCRA 152 (2008).
Directors or trustees who willfully or knowingly vote for or In 1973, RAMSOM filed an application for clearance to close and cease
assent to patently unlawful acts of the corporation or acquire operations which was granted, and as such the reinstatement of the 22
any pecuniary interest in conflict with their duty as such strikers has been precluded. Because of this, the Union subsequently
directors or trustees shall be liable jointly and severally for all asked the officers of Ransom to be personally liable for payment of the
damages resulting therefrom suffered by the corporation. EDSA back wages.
Shangri-La Hotel and Resorts, Inc. v. BF Corp., 556 SCRA 25
(2008). Issue: Whether or not the officers of the corporation should be held
personally liable to pay for the back wages.
C. SPECIAL PROVISIONS IN LABOR LAWS:
Since a corporate employer is an artificial person, it must have Held: YES. In the instant case, RANSOM, in foreseeing the possibility or
an officer who can be presumed to be the employer, being the probability of payment of back wages to the 22 strikers, organized
person acting in the interest of (the) employer as defined in ROSARIO to replace RANSOM, with the latter to be eventually phased
Article 283 of the Labor Code. A.C. Ransom Labor Union-CCLU out if the 22 strikers win their case.
v. NLRC, 142 SCRA 269 (1986). Note: The record does not clearly identify the officer or officers of
RANSOM directly responsible for failure to pay the back wages of the 22


strikers. In the absence of definite proof in that regard, it should be and bad faith in terminating their employment. AHS/Philippines
presumed that the responsible officer is the President of the v. Court of Appeals, 257 SCRA 319 (1996).2
corporation who can be deemed the chief operation officer thereof. Only the responsible officer of a corporation who had a hand in
illegally dismissing an employee should be held personally liable
Doctrine: Under Article 212 (c) of the Labor Code, Employee includes for the corporate obligations arising from such act. Maglutac v.
any person acting in the interest of an employer, directly or indirectly. NLRC, 189 SCRA 767 (1990); 3 and for the separate juridical
Since Ransom is an artificial person, it must have an officer who can be personality of a corporation to be disregarded as to make the
presumed to be the employer, being the person acting in the interest highest corporate officer personally liable on labor claims, the
of the employer (Ransom). wrongdoing must be clearly and convincingly established. Del
Rosario v. NLRC, 187 SCRA 777 (1990).
1. Overturning the A.C. Ransom Ruling: A corporation, being a juridical entity, may act only through its
Article 212(e) of the Labor Code, by itself, does not make a directors, officers and employees and obligations incurred by
corporate officer personally liable for the debts of the them, acting as corporate agents, are not theirs but the direct
corporation because Section 31 of the Corporation Code is still accountabilities of the corporation they represent. In labor
the governing law on personal liability of officers for the debts cases, corporate directors and officers are solidarily liable with
of the corporation. David v. National Federation of Labor the corporation for the termination of employment of
Unions, 586 SCRA 100 (2009). employees done with malice or bad faith. Brent Hospital, Inc. v.
Corporate officers cannot be held personally liable for damages NLRC, 292 SCRA 304 (1998).4
on account of the employees dismissal because the employer
corporation has a personality separate and distinct from its

2
Reiterated in Nicario v. NLRC, 295 SCRA 619 (1998); Flight Attendants and
officers who merely acted as its agents. Malayang Samahan ng Stewards Association of the Philippines v. Philippine Airlines, 559 SCRA 252
mga Mangagagawa sa M. Greenfields v. Ramos, 357 SCRA 77 (2008); M+W Zander Philippines, Inc. v. Enriquez, 588 SCRA 590 (2009); AMA
Computer College-East Rizal v. Ignacio, 590 SCRA 633, 659-660 (2009); Lowe,
(2001).1
Inc. v. Court of Appeals, 596 SCRA 140, 155 (2009); Peaflor v. Outdoor
Corporate officers are not personally liable for money claims of Clothing Manufacturing Corp., 618 SCRA 208 (2010).
3
discharged employees unless they acted with evident malice Reiterated in Gudez v. NLRC, 183 SCRA 644 (1990); Chua v. NLRC, 182 SCRA
353 (1990); Reahs Corp. v. NLRC, 271 SCRA 247 (1997)
4
Culili v. Eastern Telecommunications Philippines, Inc., 642 SCRA 338 (2011);
Grandteq Industrial Steel Products, Inc. v. Estrella, 646 SCRA 391 (2011); Alert
Security and Investigation Agency, Inc. v. Pasawilan, 657 SCRA 655 (2011);
Lynvil Fishing Enterprises, Inc. v. Ariola, 664 SCRA 679 (2012); Blue Sky Trading
1
AMA Computer College-East Rizal v. Ignacio, 590 SCRA 633, 659-660 (2009). Co., Inc. v. Blas, 667 SCRA 727 (2012).


In labor cases, corporate directors and officers are solidarily Under the Labor Code, in the case of corporations, it is the
liable with the corporation for the termination of employment president who responds personally for violation of the labor pay
of corporate employees done with malice or in bad faith. In this laws. Villanueva v. Adre, 172 SCRA 876 (1989).
case, it is undisputed that the corporate officers have a direct A.C. Ransom doctrine has been reiterated subsequently in
hand in the illegal dismissal of the employees. They were the Restuarante Las Conchas v. Llego, 314 SCRA 24 (1999).1
one, who as high-ranking officers and directors of the Since a corporation is an artificial person, it must have an officer
corporation, signed the Board Resolution retrenching the who can be presumed to be the employer, being the person
employees on the feigned ground of serious business losses that acting in the interest of the employer the corporation, in the
had no basis apart from an unsigned and unaudited Profit and technical sense only, is the employer. The manager of the
Loss Statement which, to repeat, had no evidentiary value corporation falls within the meaning of an employer as
whatsoever. Uichico v. NLRC, 273 SCRA 35 (1997). contemplated by the Labor code, who may be held jointly and
2. Limiting the A.C. Ransom Ruling to Insolvent Corporation severally liable for the obligation of the corporation to its
A.C. Ransom is not in point because there the corporation dismissed employees. NYK International Knitwear Corp. Phil. v.
actually ceased operations after the decision of the Court was NLRC, 397 SCRA 607 (2003).
promulgated against it, making it necessary to enforce it against 4. Definitive Overturning of A.C. Ransom Ruling:
its former president. When the corporation is still existing and It is settled that in the absence of malice, bad faith, or specific
able to satisfy the judgment in favor of the private respondent, provisions of law, a stockholder or an officer of a corporation
the corporate officers cannot be held personally liable. Lim v. cannot be made personally liable for corporate liabilities.
NLRC, 171 SCRA 328 (1989). McLeod v. NLRC, 512 SCRA 222 (2007).2
A.C. Ransom will apply only where the persons who are made
personally liable for the employees claims are stockholders-
officers of employer-corporation. In the case at bar, a mere
1
Reiterated in Carmelcraft Corp. v. NLRC, 186 SCRA 393 (1990); Valderrama v.
general manager while admittedly the highest ranking local
NLRC, 256 SCRA 466 (1996).
representative of the corporation, is nevertheless not a 2
Citing Land Bank of the Philippines v. Court of Appeals, 364 SCRA 375 (2001);
stockholder and much less a member of the Board of Directors Bogo-Medellin Sugarcane Planters Asso., Inc. v. NLRC, 296 SCRA 108 (1998);
nor an officer thereof. De Guzman v. NLRC, 211 SCRA 723 Complex Electronics Employees Assn. v. NLRC, 310 SCRA 403 (1999); Acesite
Corp. v. NLRC, 449 SCRA 360 (2005); Coca-Cola Bottlers Phils., Inc. v. Daniel, 460
(1992). SCRA 494 (2005); Suldao v. Cimech System Construction, Inc., 506 SCRA 256
3. Upholding the A.C. Ransom Ruling: (2006); Supreme Steel Pipe Corp. v. Bardaje, 522 SCRA 155 (2007); Culili v.
Eastern Telecommunications Philippines, Inc., 642 SCRA 338 (2011). Grandteq
Industrial Steel Products, Inc. v. Estrella, 646 SCRA 391 (2011).


Clearly, in A.C. Ransom, RANSOM, through its President, enunciate a general obligation under law for every person to act
organized ROSARIO to evade payment of backwages to the 22 fairly and in good faith towards one another. Valley Golf and
strikers. This situation, or anything similar showing malice or Country Club, Inc. v. Vda. De Caram, 585 SCRA 218 (2009).
bad faith on the part of Patricio, does not obtain in the present
case. [What applies therefore is the ruling [i]n Santos v. NLRC,
[254 SCRA 673 (1996)]. McLeod v. NLRC, 512 SCRA 222 (2007).1
It was clarified in Carag v. NLRC, 520 SCRA 28 (2007), and
McLeod v. NLRC, 512 SCRA 22 (2007), that Article 212(e) of the
Labor Code, by itself, does not make a corporate officer
personally liable for the debts of the corporationthe
governing law on personal liability of directors or officers for
debts of the corporation is still Section 31 of the Corporation
Code. Pantranco Employees Association (PEA-PTGWO) v. NLRC,
581 SCRA 598 (2009).2

D. Personal Liability of Trustees and Officers of Non-Stock Corporation
The non-stock corporation acted in clear bad faith when it sent
the final notice to a member under the pretense they believed
him to be still alive, when in fact it had very well known that he
had already died. Valley Golf and Country Club, Inc. v. Vda. De
Caram, 585 SCRA 218 (2009).
Non-stock corporations and their officers are not exempt from
the obligation imposed by Articles 19, 20 and 21 under the
Chapter on Human Relations of the Civil Code, which provisions

1
Reiterated in H.R. Carlos Construction, Inc. v. Marina Properties Corp., 421
SCRA 428 (2004); Pamplona Plantation Company v. Acosta, 510 SCRA 249
(2006); Elcee Farms, Inc. v. NLRC, 512 SCRA 602 (2007); Uy v. Villanueva, 526
SCRA 73 (2007).
2
Reiterated in David v. National Federation of Labor Unions, 586 SCRA 100
(2009).


RIGHT OF STOCKHOLDERS AND MEMBERS o Atty. Hofilea Shares of stock is intangible personal
property since the shares represent merely an interest

in the company.
I. What Does Share Represent?
The registration of shares in a stockholders name, the issuance
While shares of stock constitute personal property, they do not
of stock certificates, and the right to receive dividends which
represent property of the corporation [i.e., they are properties
pertain to the shares are all rights that flow from ownership.
of the stockholders who own them]. A share of stock only
Lim Tay v. Court of Appeals, 293 SCRA 634 (1998); TCL Sales
typifies an aliquot part of the corporations property, or the
Corp. v. Court of Appeals, 349 SCRA 35 (2001).
right to share in its proceeds to that extent when distributed

according to law and equity, but the holder is not the owner of
A. Sources of Shares:
any part of the capital [properties] of the corporation, nor is he
1. Shares acquired from the company itself these are shares
entitled to the possession of any definite portion of its assets.
that are sold from the unissued shares of the company.
The stockholder is not a co-owner of corporate property.
2. Shares acquired from a stockholder of the company these
Stockholders of F. Guanson and Sons, Inc. v. Register of Deeds
are shares sold by a stockholder of the company to another
of Manila, 6 SCRA 373 (1962).
person who may or may not be an existing stockholder.
o As early as the case of Fisher v. Trinidad, the Court

already declared that [t]he distinction between the
II. Preemptive Rights (Section 39)
title of a corporation, and the interest of its members or

stockholders in the property of the corporation, is
familiar and well-settled. The ownership of that Section 39. Power to deny pre-emptive right.
property is in the corporation, and not in the holders of All stockholders of a stock corporation shall enjoy pre-emptive right to
shares of its stock. The interest of each stockholder subscribe to all issues or disposition of shares of any class, in
proportion to their respective shareholdings, unless such right is
consists in the right to a proportionate part of the
denied by the articles of incorporation or an amendment thereto:
profits whenever dividends are declared by the
corporation, during its existence, under its charter, and Provided, That such pre-emptive right shall not extend to shares to be
to a like proportion of the property remaining, upon the issued in compliance with laws requiring stock offerings or minimum
termination or dissolution of the corporation, after stock ownership by the public; or to shares to be issued in good faith
payment of its debts. Mobilia Products, Inc. v. with the approval of the stockholders representing two-thirds (2/3) of
Umezawa, 452 SCRA 736 (2005). the outstanding capital stock, in exchange for property needed for
corporate purposes or in payment of a previously contracted debt.


The pre-emptive rights of stockholders in a corporation are not
A. Pre-emptive rights defined statutory rights, but are common law rights, and exist even
Atty. Hofilea Before Mr. X can become a member of the when no specific grant or recognition of such right is provided
corporation, the existing stockholders must first be allowed to for in statutory law.2
buy whatever stocks the company desires to issue. Where not Atty. Hofilea Can pre-emptive rights be taken away? YES.
all the members of the corporation decide not to invest further, The right may be denied by the articles of incorporation or by
the remainder may be offered to Mr. X. the by-laws.
o The recognition of the pre-emptive right is intended to
protect both the proprietary and voting rights of a B. Extent of Coverage of Pre-emptive Rights
stockholder in a corporation. The proportionate Under the current provision Section 39 of the Corporation Code,
interests of a stockholder in a corporation determines the pre-emptive right of stockholders is recognized to exist to
his proportionate power to vote in corporate affairs "all issues or disposition of shares of any class." The use of the
when the law gives the stockholders a right to affirm or terms "issues or disposition" clearly provides that the pre-
deny board actions. The proportionate interest of the emptive right should now be available even to issues from the
stockholder to the outstanding capital stock also existing unsubscribed portion of the authorized capital stock
determines his proportionate share in the dividends when the board decides to open them for subscription, and
declared by the corporation, as well as his even to re-issuance or sale of treasury shares of the
proportionate right to the remaining assets of the corporation.3
corporation upon dissolution of the corporation. 1
Pre-emptive right under Section 39 of the Corporation Code C. Exceptions to Pre-emptive Rights
refers to the right of a stockholder of a stock corporation to 3 exceptions provided in Section 39: (1) debt, (2) in compliance
subscribe to all issues or disposition of shares of any class, in with the required public issuance, and (3) shares to be issued,
proportion to their respective shareholdings. Although it can with approval of the 2/3 of the stockholders, in exchange for
validly be withdrawn, it cannot be done in breach of fiduciary property for corporate purposes.
duties such as to perpetuate control over the corporation.
Majority Stockholders of Ruby Industrial Corp. v. Lim, 650 SCRA

461 (2011). 2
1 3
SEC Opinion, 11 August 1997, XXXII SEC QUARTERLY BULLETIN 15 (No. 2, Dec. Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.
1997); SEC EAD Memo, dated 29 July 1997. (2013 ed.). Manila, Philippines: Rex Book Store.


o The SEC has ruled that a majority vote of stockholders between the parties, until the transfer is recorded in the books of the
waiving the pre-emptive right in a meeting called for the corporation showing the names of the parties to the transaction, the
purpose would not be valid and binding on the date of the transfer, the number of the certificate or certificates and
individual stockholders since the pre-emptive right is a the number of shares transferred.
personal right of a stockholder, and accordingly, the
waiver should be given individually by the stockholders No shares of stock against which the corporation holds any unpaid
concerned or he may authorize somebody to execute claim shall be transferable in the books of the corporation. (35)
the same for and in his behalf by way of a special power
of attorney.1 Shares of stock of a corporation are not owned or are the assets
Issue v. Disposition of the corporation they are owned by the stockholders of
o Issue refers to new shares issued to stockholders. record. The corporation whose shares of stock are the subject of
o Disposition treasury shares owned by the company transfer transaction (through sale, assignment, donation, or any
may be disposed by the company by selling such to other mode of conveyance) need not be a part to transaction to
the stockholders. be valid; however, to bind the corporation as well as third
parties, it is necessary that the transfer is recorded in the books
III. Right to Transfer or Dispose of Shareholdings (Section 63) of the corporation. Forest Hills Golf & Country Club v. Vertex
Sales and Trading, Inc., 692 SCRA 706 (2013).
Section 63. Certificate of stock and transfer of shares.
The capital stock of stock corporations shall be divided into shares for A. Restriction on Transfers:
which certificates signed by the president or vice president, A contractual undertaking on restriction of transfer of shares
countersigned by the secretary or assistant secretary, and sealed with that has a reasonable business purpose and limited in coverage
the seal of the corporation shall be issued in accordance with the by- is valid and binding. Lambert v. Fox, 26 Phil. 588 (1914).
laws. Shares of stock so issued are personal property and may be
transferred by delivery of the certificate or certificates endorsed by Lambert v. Fox
the owner or his attorney-in-fact or other person legally authorized to
make the transfer. No transfer, however, shall be valid, except as Facts: John R. Edgar & Co found itself in such condition financially that
its creditors, including Lambert and Fox, agreed to take over the
1
SEC Opinion, 6 Dec. 1994, XXIX SEC QUARTERLY BULLETIN 10 (No. 2, June 1995); business, incorporate it and accept stock in payment of their respective
SEC Opinion, 12 Dec. 1994, XXIX SEC QUARTERLY BULLETIN 14 (No.2, June 1995);
credits. Eventually, Lambert and Fox became the two largest
SEC Opinion, 1 October 1981.


stockholders in the new corporation, John R. Edgar & Co., Incorporated. terms and considerations which are reasonable, and
A few days after incorporation, Lambert and Fox entered into an only when the corporation or the other stockholders do
agreement where they mutually agreed not to sell, transfer, or not or fail to exercise their option, is the offering
otherwise dispose of any part of their shareholdings until after one year stockholder at liberty to dispose of his shares to third
from the date of the agreement. A violation thereof would be liable for parties.
breach of contract and damages. Fox sold his stock to one of the Before you can sell your shares you must offer
corporations competitors, E.C. McCullough & Co. them first to the corporation or existing
shareholders
Issue: Whether or not Fox is liable. o Right of first option" grants to the corporation the
right to buy the shares at a fixed price, and would be
Held: YES. Fox contends that the stipulation in the contract suspending valid if the terms and consideration are reasonable.
the power to sell the stock is an illegal stipulation, is in restraint of trade o "Buy-back agreement" exists in situations when
and offends public policy. The Court sees otherwise. The suspension of shares are given or assigned to officers or employees
the power to sell has a beneficial purpose, results in the protection of under the condition that should they resign or be
the corporation as well as of the individual parties to the contract, and is terminated from employment, the corporation shall be
reasonable as to the length of time of the suspension. But the Court also granted the right to buy-back the shares. Such
said that the mentioned doctrine did not mean to cover the suspension stipulations are valid so long as the terms and the
of the right of alienation of stock, limiting ourselves to the statements consideration are reasonable.
that the suspension in this particular case is legal and valid. Void
o "Right of prior consent" provision would require that
Doctrine: See above. Requisites for valid restriction on transfer: any stockholder who may wish to sell, assign or dispose
Reasonableness of his shares in the corporation may do so only when he
Time-boundedness obtains the consent of the board of directors or other
stockholders of the corporation. Such stipulations are
Valid and Binding void since they unduly restrain the exercise of the
o "Right of first refusal" which would provide that a stockholder of his proprietary interest in the shares, as
stockholder who may wish to sell or assign his shares illustrated in a situation where a stockholder cannot
must first offer the shares to the corporation or to the dispose of his shares because of failure to obtain such
other existing stockholders of the corporation, under consent.


Before you can sell your shares, you must first Padgett v. Babcock & Templeton, Inc.
get the approval of the shareholders. Atty.
Hofilea states that consent rights are not valid Facts: Padgett was an employee of Babcock & Templeton, Inc. (BTI) and
because all the person, whose consent you bought 35 shares of the corporation. He was given 9 additional shares as
need, has to do is dissent. This is like making the Christmas Bonuses. The Certificates of Stock bore the words Non-
share non-transferable. transferable on their faces. Before he left BTI, Padgett proposed to the
If the provision states that you can only sell
President that BTI buy his 44 shares at par value plus interest or that he
upon the approval of a third person (who may be authorized to sell them to other people.
or may not even be a member of the
corporation) Issue: Whether or not the stocks are transferable.
o An absolute prohibition to transfer shares even when
contained in the articles of incorporation, would be void Held: YES. The court held that the notation be held null and void
since it would violate the provision of Section 63 of the because it is a limitation on the right of ownership and a restraint on
Corporation Code which treats of shares of stock as trade.
personal property of which the stockholder has the
inherent right to dispose as incident of his ownership.1 Doctrine: Any restriction on a stockholders right to dispose of his
1. RIGHT OF REFUSAL: shares must be construed strictly. Any attempt to restrain a transfer of
The indication on the face of the stock certificate that it is shares is regarded as being in restraint of trade, in the absence of a valid
Nontransferable alone does not compel the corporation to lien upon its shares, and except to the extent that valid restrictive
buy back the shares from the stockholder, and held that in the regulations and agreements exist and are applicable.
absence of a similar contractual obligation and of a legal
provision applicable thereto, it is logical to conclude that it Section 63 contemplates no restriction as to whom the stocks
would be unjust and unreasonable to compel the corporation to may be transferred. It does not suggest that any discrimination
comply with a non-existent or imaginary obligation. Padgett v. may be created by the corporation in favor of, or against a
Babcock & Templeton, Inc., 59 Phil. 232 (1933). certain purchaser. The owner of shares, as owner of personal
property, is at liberty, under said section to dispose them in
favor of whomever he pleases, without limitation in this
respect, than the general provisions of law. Fleishcher v. Botica
1
SEC Opinion, 20 February 1995, XXIX SEC QUARTERLY BULLETIN 4 (No. 3, Sept. Nolasco, 47 Phil. 583 (1925).
1995).


be transferred as therein provided. The holder of shares, as owner of
Fleishcher v. Botica Nolasco personal property, is at liberty, under said section, to dispose of them in
favor of whomsoever he pleases, without any other limitation in this
Facts: Manuel Gonzales was the original owner of five shares of stock of respect, than the general provisions of law.
Botica Nolasco Inc. Gonzales assigned and delivered said five shares to
Henry Fleischer to repay his debt to the latter. Doctor Miciano, who was The only limitation imposed by Section 63 is when the
the secretary-treasurer of said corporation, offered to buy from Henry corporation holds any unpaid claim against the shares intended
Fleischer, on behalf of the corporation, said shares of stock invoking to be transferred. A corporation, either by its board, its by-laws,
Article 12 of the by-laws, which states that the corporation had a or the act of its officers, cannot create restrictions in stock
preferential right to buy from Manuel Gonzalez said shares. Fleischer transfers, because Restrictions in the traffic of stock must have
refused. Thereafter, Fleischer requested Doctor Miciano to register said their source in legislative enactment, as the corporation itself
shares in his name but the latter refused to do so, saying that it would cannot create such impediment. By-laws are intended merely
be in contravention of the by-laws of the corporation. for the protection of the corporation, and prescribe relation, not
restriction; they are always subject to the charter of the
Issue: Whether or not Article 12 of the by-laws of the Botica Nolasco, corporation. Rural Bank of Salinas v. CA, 210 SCRA 510 (1992).
Inc., is in conflict with the provisions of the Corporation Law (Act. 1459) The right of first refusal is primarily an attribute of ownership.
Conversely, a waiver thereof is an act of ownership. To allow the
Held: YES. Section 13, paragraph 7 of the Corporation Law, empowers a PCGG to vote the sequestered shares for this purpose would be
corporation to make by-laws, not inconsistent with any existing law, for sanctioning its exercise of an act of strict ownership. PCGG v.
the transferring of its stock. Section 35 of the same specifically provides SEC, G.R. No. 82188, 30 June 1988 (unrep.)
that the shares of stock are personal property and may be transferred The agreement of co-shareholders to mutually grant the right of
by delivery of the certificate indorsed by the owner, etc. A stock first refusal to each other, by itself, does not constitute a
corporation in adopting a by-law governing transfer of shares of stock violation of the provisions of the Constitution limiting land
should take into consideration the specific provisions of Section 13 and ownership to Filipinos and Filipino corporations; if the foreign
35 of The Corporation Law, and said by-law should be made to shareholdings of a landholding corporation exceed 40%, it is not
harmonize with said provisions. It should not be inconsistent therewith. the foreign stockholders ownership of the shares which is
adversely affected by the capacity of the corporation to own
Doctrine: Section 35 defines the nature, character and transferability of landthat is, the corporation becomes disqualified to own land.
shares of stock. Under said section they are personal property and may This finds support under the basic corporate law principle that


the corporation and its stockholders are separate juridical to preserve and protect itself by excluding competitors or
entities. In this vein, the right of first refusal over shares hostile interests. The provision is made obviously to prevent a
pertains to the shareholders whereas the capacity to own land stockholder from creating an opportunity to take advantage of
pertains to the corporation. J.G. Summit Holdings, Inc. v. Court the information which he may have acquired as such to
of Appeals, 450 SCRA 169 (2005). promote his individual interest to the prejudice of the
In a landholding corporation which by constitutional mandate is corporation and other stockholders. The stockholders have a
limited to 40% foreign equity, and where there exists a right of fiduciary relation with their corporation for the collective
first refusal agreement between the co-shareholders, the fact benefit of the stockholders. Any person who intends to buy
that the corporations owns land cannot deprive stockholders of stock in a corporation does so with the knowledge that its
their right of first refusal. No law disqualifies a person from affairs are governed by the articles of incorporation and by-
purchasing shares in a landholding corporation even if the latter laws; and with such knowledge, the stockholder may be
will exceed the allowed foreign equity, what the law disqualifies considered to have consented to the disqualification to engage
is the corporation from owning land. J.G. Summit Holdings, Inc. in the same line of business and thus, it cannot be said that the
v. Court of Appeals, 450 SCRA 169 (2005). stockholders right is infringed. 2
2. Restraint of Trade: An agreement by which a person obliges The SEC, as a matter of policy, allows restrictions on transfer of
himself not to engage in competitive trade for five years is valid shares in the articles of incorporation if the same is necessary
and reasonable and not an undue or unreasonable restraint of and convenient to the attainment of the objective for which the
trade and is obligatory on the parties who voluntarily enter into company was incorporated, unless palpably unreasonable under
such agreement. xOllendorf v. Abrahamson, 38 Phil. 585 the circumstances. The underlying test as to whether the
(1918). restriction are valid and enforceable is whether the restriction is
Non-Competition Clause: The SEC has opined that a non- sufficiently reasonable as to justify the restriction overriding the
competition clause may be properly provided for as a condition general policy against restraint on alienation of personal
for being a stockholder in the articles of incorporation or by- property. The SEC has ruled that the period of one month is
laws of the corporation.1 deemed reasonably sufficient for the existing stockholder of
The SEC ruled that such disqualification provision is a valid and corporation within which to signify their desire to buy the
reasonable exercise of corporate authority since a corporation,
under the principle of self-preservation, has the inherent right

1 2
SEC Opinion, 12 August 1998, XXXIII SEC QUARTERLY BULLETIN 14 (No. 1, June, SEC Opinion, 12 August 1998, XXXIII SEC QUARTERLY BULLETIN 14 (No. 1, June,
1999). 1999).


shares of stock being offered for sale by any stockholder before the Bryan-Landon Company authorizing him to make demand on the
the same may be offered to third parties.1 secretary of the Visayan Electric Company to make the transfer which
petitioner seeks to have made through the medium of the mandamus of
B. Remedy If Registration Refused: this court.
Mandamus will not lie to compel the corporate secretary to
register the transfer of shares in the corporate books when the Issue: Whether or not a writ of mandamus will lie under the
petitioner is not the registered stockholder nor does he hold a circumstances of the case to allow the transfer of shares.
power of attorney from the latter. This is under the general rule
that as between the corporation one the one hand and its Held: NO. Petitioner did not have the right to demand the transfer since
shareholders on other, the corporation looks only to its books he was not the stockholder of record. Furthermore, even the Bryan-
for the purpose of determining who its shareholders are, so that Landon Company did not demand from Visayan Electric Company the
a mere indorsee of a certificate of stock, claiming to be the transfer of said shares. Neither did it give by way of a special power of
owner, will not necessarily be recognized as such by the attorney to petitioner the authority to effect such a transfer. Hence,
corporation and its officers, in absence of express instructions there is no clear and legal obligation upon the respondent that will
of the registered owner to make such transfer to the indorsee, justify the issuance of a writ to compel the latter to perform a transfer.
or a power of attorney authorizing such transfer. Hager v.
Bryan, 19 Phil. 138 (1911).2 Doctrine: See above.

Hager v. Bryan 1. Period to Enforce. Considering that the law does not prescribe
a period within which the registration of purchase of shares
Facts: Hager files a petition for mandamus to compel the company should be effected, the action to enforce the right does not
secretary to transfer certain shares of stock of the Visayan Electric accrue until there has been a demand and a refusal concerning
Company to a Mr. Levering. The company had refused to do so because the transfer. Ponce v. Alsons Cement Corp., 393 SCRA 602
the stocks in question were in the name of Bryan-Landon Company. (2002).
There was no allegation that Hager holds any power of attorney from o When all the requirements have been complied with,
the duty of the corporate secretary to record the

1
SEC Opinion, 20 February 1995, XXIX SEC QUARTERLY BULLETIN 4 (No. 3, transfer in the books of the corporation is ministerial.
September 1995). A stipulation on the stock certificate that any assignment would
2
Rivera v. Florendo, 144 SCRA 643 (1986); Ponce v. Alsons Cement Corp., 393 not be binding on the corporation unless registered in the
SCRA 602 (2002).


corporate books as required under the by-laws and without
providing when registration should be made, would mean that Section 43. Power to declare dividends.
the cause of action and the determination of prescription period The board of directors of a stock corporation may declare dividends
would begin only when demand for registration is made and not out of the unrestricted retained earnings which shall be payable in
at the time of the assignment of the certificate. Won v. Wack cash, in property, or in stock to all stockholders on the basis of
Wack Golf & Country Club, 104 Phil. 466 (1958). outstanding stock held by them: Provided, That any cash dividends
The claim for damages of what the shares could have sold had due on delinquent stock shall first be applied to the unpaid balance on
the demand for their registration in the name of the buyer been the subscription plus costs and expenses, while stock dividends shall
complied with is deemed to be speculative damage and non- be withheld from the delinquent stockholder until his unpaid
recoverable. Batong Buhay Gold Mines v. CA, 147 SCRA 4 subscription is fully paid: Provided, further, That no stock dividend
(1987). shall be issued without the approval of stockholders representing not
less than two-thirds (2/3) of the outstanding capital stock at a regular
Note on Sale of Shares: or special meeting duly called for the purpose. (16a)
The Corporate Secretary can be held liable for recorded
transfers whose tax clearance have not been paid. Stock corporations are prohibited from retaining surplus profits in
It is only when all these things have been complied that you can excess of one hundred (100%) percent of their paid-in capital stock,
really compel the corporate secretary to record your transaction except: (1) when justified by definite corporate expansion projects or
in accordance with his or her ministerial function. programs approved by the board of directors; or (2) when the
corporation is prohibited under any loan agreement with any financial
Legal Advice for the transferee: institution or creditor, whether local or foreign, from declaring
To get a declaration of trust from the transferor so that the dividends without its/his consent, and such consent has not yet been
transferee will be entitled to the transfer of dividends which the secured; or (3) when it can be clearly shown that such retention is
transferor may receive from the corporation during the period necessary under special circumstances obtaining in the corporation,
after the sale but before the name of the transferee is recorded such as when there is need for special reserve for probable
in the books of the corporation. contingencies. (n)
When there are board of meetings, you can ask the transferor
to give you a proxy who will vote for you in the meeting. The term dividend in its technical sense and ordinary
acceptation is that part of portion of the profits of the
IV. Rights to Dividends (Section 43) enterprise which the corporation, by its governing agents, sets


apart for ratable division among the holders of it capital stock or series of shares, or both, any of which classes or series of shares
it is a payment, and the right thereto is an incident of ownership may have such rights, privileges or restrictions as may be stated in the
of stock. Cojuangco v. Sandiganbayn, 586 SCRA 790 (2009). articles of incorporation: Provided, That no share may be deprived of
Although stock certificates grant the stockholder the right to voting rights except those classified and issued as "preferred" or
receive quarterly dividends of 1%, cumulative and participating, "redeemable" shares, unless otherwise provided in this Code:
the stockholders do not become entitled to the payment Provided, further, That there shall always be a class or series of shares
thereof as a matter of right without necessity of a prior which have complete voting rights. Any or all of the shares or series of
declaration of dividends. Section 43 of Corporation Code shares may have a par value or have no par value as may be provided
prohibits the issuance of any stock dividend without the for in the articles of incorporation: Provided, however, That banks,
approval of stockholders, representing not less than two-thirds trust companies, insurance companies, public utilities, and building
(2/3) of the outstanding capital stock, which underscores the and loan associations shall not be permitted to issue no-par value
fact that payment of dividends to a stockholder is not a matter shares of stock.
of right but a matter of consensus. Furthermore, interest
bearing stocks, on which the corporation agrees absolutely to Preferred shares of stock issued by any corporation may be given
pay interest before dividends are paid to the common preference in the distribution of the assets of the corporation in case
stockholders, is legal only when construed as requiring payment of liquidation and in the distribution of dividends, or such other
of interest as dividends from net earnings or surplus only. preferences as may be stated in the articles of incorporation which are
Republic Planters Bank v. Agana, 269 SCRA 1 (1997). not violative of the provisions of this Code: Provided, That preferred
When the Court directed that a total of 111,415 shares of PLDT shares of stock may be issued only with a stated par value. The board
be reconveyed to the Republic by way of declaring the Republic of directors, where authorized in the articles of incorporation, may fix
to be the rightful owner of said shares, that necessarily included the terms and conditions of preferred shares of stock or any series
the reconveyance to the Republic of the dividends and interest thereof: Provided, That such terms and conditions shall be effective
accruing thereto. Cojuangco v. Sandiganbayn, 586 SCRA 790 upon the filing of a certificate thereof with the Securities and Exchange
(2009). Commission.

V. Right to Vote and to Attend Meetings (Sections 6 and 89) Shares of capital stock issued without par value shall be deemed fully
paid and non-assessable and the holder of such shares shall not be
Section 6. Classification of shares. liable to the corporation or to its creditors in respect thereto:
The shares of stock of stock corporations may be divided into classes Provided; That shares without par value may not be issued for a


consideration less than the value of five (P5.00) pesos per share:
Provided, further, That the entire consideration received by the 7. Investment of corporate funds in another corporation or business in
corporation for its no-par value shares shall be treated as capital and accordance with this Code; and
shall not be available for distribution as dividends.
8. Dissolution of the corporation.
A corporation may, furthermore, classify its shares for the purpose of
insuring compliance with constitutional or legal requirements. Except as provided in the immediately preceding paragraph, the vote
necessary to approve a particular corporate act as provided in this
Except as otherwise provided in the articles of incorporation and Code shall be deemed to refer only to stocks with voting rights.
stated in the certificate of stock, each share shall be equal in all
respects to every other share. Section 89. Right to vote.
The right of the members of any class or classes to vote may be
Where the articles of incorporation provide for non-voting shares in limited, broadened or denied to the extent specified in the articles of
the cases allowed by this Code, the holders of such shares shall incorporation or the by-laws. Unless so limited, broadened or denied,
nevertheless be entitled to vote on the following matters: each member, regardless of class, shall be entitled to one vote.

1. Amendment of the articles of incorporation; Unless otherwise provided in the articles of incorporation or the by-
laws, a member may vote by proxy in accordance with the provisions
2. Adoption and amendment of by-laws; of this Code. (n)

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or Voting by mail or other similar means by members of non-stock
substantially all of the corporate property; corporations may be authorized by the by-laws of non-stock
corporations with the approval of, and under such conditions which
4. Incurring, creating or increasing bonded indebtedness; may be prescribed by, the Securities and Exchange Commission.

5. Increase or decrease of capital stock; A. Who has the right to vote
General Rule: The person registered in the books of the
6. Merger or consolidation of the corporation with another company has owner of the shares is one who is entitled to vote
corporation or other corporations; as shareholder.


o Since the appointment of proxy is purely personal, and corporation that is exercised through his vote. The right
the right to vote is inseparable from the right of to vote is a right inherent in and incidental to the
ownership of stock without the owners consent, and ownership of corporate stock, and as such is a property
therefore a proxy to vote stock, to be valid, must have right. Castillo v. Balinghasay, 440 SCRA 442 (2004).
been given by the person who is the legal owner of the Until challenged successfully in proper proceedings, a registered
stock and entitled to vote the same at the time it is to stockholder has a right to participate in any meeting, and in the
1
be voted. absence of fraud the action of the stockholders meeting cannot
The right to vote is inherent in and incidental to the ownership be collaterally attacked on account of such participation, even if
of corporate stocks. It is settled that unissued stocks may not be it be shown later on that the shares had been previously sold
voted or considered in determining whether a quorum is (but not recorded). Price and Sulu Dev. Co. v. Martin, 58 Phil.
present in a stockholders meeting, or whether a requisite 707 (1933).
proportion of the stock of the corporation is voted to adopt a The sequestration of shares does not entitle the government to
certain measure or act. Only stock actually issued and exercise acts of ownership over the shares; even sequestered
outstanding may be voted. Under Section 6 of the Corporation shares may be voted upon by the registered stockholder.
Code, each share of stock is entitled to vote, unless otherwise Cojuangco Jr. v. Roxas, 195 SCRA 797 (1991).
provided in the articles of incorporation or declared delinquent o The right to vote sequestered shares of stock registered
under Section 67 of the Code. Neither the stockholders nor the in the names of private individuals or entities and
corporation can vote or represent shares that have never alleged to have been acquired with ill-gotten wealth
passed to the ownership of stockholders, or, having so passed, shall, as a rule, be exercised by the registered owner.
have again been purchased by the corporation. These shares are The PCGG may, however, be granted such voting right
not to be taken into consideration in determining majorities. provided it can (1) show prima facie evidence that the
When the law speaks of a given proportion of the stock, it must wealth and/or the shares are indeed ill-gotten; and (2)
be construed to mean shares that have passed from the demonstrate imminent danger of dissipation of the
corporation, and that may be voted. Tan v. Sycip, 499 SCRA 216 assets, thus necessitating their continued sequestration
(2006). and voting by the government until a decision, ruling
o One of the rights of a stockholder is the right to with finality on their ownership, is promulgated by the
participate in the control and management of the proper court. Nevertheless, the foregoing "two-tiered"
test does not apply when the funds that are prima facie
1
SEC Opinion, 3 December 1993, XXVIII SEC QUARTERLY BULLETIN 5 (No. 2, June public in character or, at least, are affected with public
1994).


interest. Inasmuch as the subject UCPB shares in the necessary, unless there is a written proxy, signed by all the co-owners,
present case were undisputably acquired with coco levy authorizing one or some of them or any other person to vote such
funds which are public in character, then the right to share or shares: Provided, That when the shares are owned in an
vote them shall be exercised by the PCGG. In sum, the "and/or" capacity by the holders thereof, any one of the joint owners
"public character" test, not the "two-tiered" one, can vote said shares or appoint a proxy therefor. (n)
applies. Republic v. COCOFED, 372 SCRA 462 (2001);
Trans Middle East (Phils) v. Sandiganbayan, 490 SCRA D. Pledgor, Mortgagors and Administrators (Section 55)
455 (2006).
Section. 55. Right to vote of pledgors, mortgagors, and administrators.
B. Instances When Stockholders Entitled to Vote: In case of pledged or mortgaged shares in stock corporations, the
1. Amendment of articles of incorporation (Section 16) pledgor or mortgagor shall have the right to attend and vote at
2. Election of directors and trustees (Section 24) meetings of stockholders, unless the pledgee or mortgagee is expressly
3. Investment in another business or corporation (Sections 36 and given by the pledgor or mortgagor such right in writing which is
42) recorded on the appropriate corporate books. (n)
4. Increase and Decrease of capital stock (Section 38)
5. Incurring, or increasing bonded indebtedness (Section 38) Executors, administrators, receivers, and other legal representatives
6. Sale, disposition or encumbrance of all or substantially all of the duly appointed by the court may attend and vote in behalf of the
corporate assets (Section 40) stockholders or members without need of any written proxy. (27a)
7. Declaration of stock dividends (Section 43).
8. Management contracts (Section 44) When shares are pledged by means of endorsement in blank
9. Adoption, amendment and repeal of by-laws (Section 48). and delivery of the covering certificates to a loan, the pledgee
10. Fixing of consideration of no par value shares (Section 62) does not become the owner thereof simply by the failure of the
11. Merger and consolidation (Section 72) registered stockholder to pay his loan. Consequently, without
proper foreclosure, the lender cannot demand that the shares
C. Joint Ownership (Section 56) be registered in his name. Lim Tay v. Court of Appeals, 293
SCRA 634 (1998).
Section 56. Voting in case of joint ownership of stock. Although the Rules of Court, while permitting an executor or
In case of shares of stock owned jointly by two or more persons, in administrator to represent or to bring suits on behalf of the
order to vote the same, the consent of all the co-owners shall be deceased, do not prohibit the heirs from representing the


deceased. When no administrator has been appointed, there is o Under the By-Laws of GCHS, membership in the
all the more reason to recognize the heirs as the proper corporation shall, among others, be terminated by the
representatives of the deceased. Gochan v. Young, 354 SCRA death of the member. Section 91 of the Corporation
207 (2001). Code further provides that termination extinguishes all
the rights of a member of the corporation, unless
E. Treasury Share No Voting Rights (Section 57) otherwise provided in the articles of the incorporation
or the bylaws. Applying Section 91 to the present case,
Section 57. Voting right for treasury shares. we hold that dead members who are dropped from the
Treasury shares shall have no voting right as long as such shares membership roster in the manner for the cause
remain in the Treasury. (n) provided for in the By-Law of GCHS are not to be
counted in determining the requisite vote in corporate
Treasury shares cannot be voted upon. Tan v. Sycip, 499 SCRA matters or the requisite quorum for the annual
216 (2006). members meeting. With 11 remaining members, the
quorum in the present case should be 6. therefore,
F. Voting Rights of Members there being a quorum, the annual members meeting,
In stock corporation, shareholders may generally transfer their conducted with six members present, was valid. Tan v.
shares. Thus, on the death of a shareholder, the executor or Sycip, 499 SCRA 216 (2006).
administrator duly appointed by the Court is vested with the
legal title to the stock and entitled to vote it. Until a settlement G. Conduct of Stockholders' Meetings:
and division of the estate is effected, the stocks of the decedent 1. Kinds and Requirements of Meetings (Sections 49 and 50);
are held by the administrator or executor. On the other hand,
membership in and all rights arising from a nonstock Section 49. Kinds of meetings.
corporation are personal and non-transferable, unless the Meetings of directors, trustees, stockholders, or members may be
articles of incorporation or the bylaws of the corporation regular or special. (n)
provide otherwise. In other words, the determination of
whether or not dead members are entitled to exercise their Section 50. Regular and special meetings of stockholders or members.
voting rights (through their executor or administrator) depends Regular meetings of stockholders or members shall be held annually
on those articles of incorporation or by-laws. Tan v. Sycip, 499 on a date fixed in the by-laws, or if not so fixed, on any date in April of
SCRA 216 (2006). every year as determined by the board of directors or trustees:


Provided, That written notice of regular meetings shall be sent to all 2. Place and Time of Meeting (Sections 51 and 93);
stockholders or members of record at least two (2) weeks prior to the
meeting, unless a different period is required by the by-laws. Section 51. Place and time of meetings of stockholders or members.
Stockholders' or members' meetings, whether regular or special, shall
Special meetings of stockholders or members shall be held at any time be held in the city or municipality where the principal office of the
deemed necessary or as provided in the by-laws: Provided, however, corporation is located, and if practicable in the principal office of the
That at least one (1) week written notice shall be sent to all corporation: Provided, That Metro Manila shall, for purposes of this
stockholders or members, unless otherwise provided in the by-laws. section, be considered a city or municipality.

Notice of any meeting may be waived, expressly or impliedly, by any Notice of meetings shall be in writing, and the time and place thereof
stockholder or member. stated therein.

Whenever, for any cause, there is no person authorized to call a All proceedings had and any business transacted at any meeting of the
meeting, the Secretaries and Exchange Commission, upon petition of a stockholders or members, if within the powers or authority of the
stockholder or member on a showing of good cause therefor, may corporation, shall be valid even if the meeting be improperly held or
issue an order to the petitioning stockholder or member directing him called, provided all the stockholders or members of the corporation
to call a meeting of the corporation by giving proper notice required are present or duly represented at the meeting. (24 and 25)
by this Code or by the by-laws. The petitioning stockholder or member
shall preside thereat until at least a majority of the stockholders or Section 93. Place of meetings.
members present have been chosen one of their number as presiding The by-laws may provide that the members of a non-stock corporation
officer. (24, 26) may hold their regular or special meetings at any place even outside
the place where the principal office of the corporation is located:
Regular Meetings Provided, That proper notice is sent to all members indicating the
o Regular meetings may (1) be provided in the by-laws or date, time and place of the meeting: and Provided, further, That the
(2) scheduled by the board in April. place of meeting shall be within the Philippines. (n)
o The by-laws may provide for more than one meeting
annually there is no prohibition to this effect. Stock Corporation Non-Stock Corporation
Special Meetings Principal office or city where it is Any place in the Philippines, even
o Held at any time it is called. located if it is outside the city or place of


the principal office Section 58. Proxies.
Stockholders and members may vote in person or by proxy in all
3. Quorum (Section 52) meetings of stockholders or members. Proxies shall in writing, signed
by the stockholder or member and filed before the scheduled meeting
Section 52. Quorum in meetings. with the corporate secretary. Unless otherwise provided in the proxy,
Unless otherwise provided for in this Code or in the by- laws, a it shall be valid only for the meeting for which it is intended. No proxy
quorum shall consist of the stockholders representing a majority of the shall be valid and effective for a period longer than five (5) years at
outstanding capital stock or a majority of the members in the case of any one time. (n)
non-stock corporations. (n)
Proxy solicitation involves the securing and submission of
Quorum is based on the totality of the shares which have been proxies, while proxy validation concerns the validation of such
subscribed and issued whether it be founders shares or secured and submitted proxies. It is possible that an intra-
common shares. To base the computation of quorum solely on corporate controversy may animate a disgruntled shareholder
the obviously deficient, if not inaccurate stock and transfer to complain to the Securities and Exchange Commission (SEC) a
book, and completely disregarding the issued and outstanding corporations violations of SEC rules and regulations, but that
shares indicated in the articles of incorporation would work motive alone should not be sufficient to deprive the SEC of its
injustice to the owners and/or successors in interest of the said investigatory and regulatory powers, especially so since such
shares. The stock and transfer book cannot be used as the sole powers are exercisable on a motu proprio basis. GSIS v. Court of
basis for determining the quorum as it does not reflect the Appeals, 585 SCRA 679 (2009).
totality of shares which have been subscribed, more so when Nature of Proxy Relationship: A proxy is a special form of
the articles of incorporation show a significantly larger amount agency and governed by the Law on Agency. Consequently,
of shares issued and outstanding as compared to that listed in being a strictly fiduciary relation, a proxy is essentially revocable
the stock and transfer book. Lanuza v. Court of Appeals, 454 in nature; and any attempt or stipulation to render it irrevocably
SCRA 54 (2005). would be to no avail. Generally, proxies, even those with
irrevocable terms, have always been considered as revocable,
VI. Contracts and Agreement Affecting Shareholdings unless coupled with an interest, and their revocation may be by
formal notice, orally, or by conduct as by the appearance of the
A. Proxy (Section 58) stockholder or member giving the proxy, or the issuance of a
subsequent proxy, or the sale of shares.


o The SEC has appropriately observed that a person acting it is to its abrogated jurisdictional powers. The fact that the
as proxy for a stockholder is in the eyes of the law, the jurisdiction of the regular courts under Section 5(c) is confined
latters agent and as such, a mere fiduciary who has the to the voting on election of officers, and not on all matters
duty of acting in strict accord with requirements of a which may be voted upon by stockholders, elucidates that the
fiduciary relation; and that accordingly, the proxy holder power of the Securities and Exchange Commission (SEC) to
must act in accordance with the instructions given to regulate proxies remains extant and could very well be
him/her by the stockholder and any violation of such exercised when stockholders vote on matters other than the
fiduciary duty shall be governed by the pertinent laws election of directors. GSIS v. Court of Appeals, 585 SCRA 679
on Agency, not by the Corporation Code.1 (2009).
1. Requisites for Valid Proxy:
a. The proxy shall in writing B. Voting Trust Agreements (Section 59)
b. Signed by the stockholder or member
c. Filed before the scheduled meeting with the corporate Section 59. Voting trusts.
secretary. One or more stockholders of a stock corporation may create a voting
2. Who May be Appointed Proxy: Section 58 of the Corporation trust for the purpose of conferring upon a trustee or trustees the right
Code imposes no limitation as to the persons who may be to vote and other rights pertaining to the shares for a period not
appointed as proxy and by-law provisions restricting the right of exceeding five (5) years at any time: Provided, That in the case of a
a stockholder to appoint a proxy would be void. However, in the voting trust specifically required as a condition in a loan agreement,
case of non-stock corporation, Section 89 of the Corporation said voting trust may be for a period exceeding five (5) years but shall
Code the articles of incorporation or by-laws may restrict the automatically expire upon full payment of the loan. A voting trust
right of a member to vote by proxy. The SEC has opined that agreement must be in writing and notarized, and shall specify the
under Section 89 the right of members to vote by proxy may be terms and conditions thereof. A certified copy of such agreement shall
denied entirely by appropriate provisions in the articles of be filed with the corporation and with the Securities and Exchange
incorporation or by-laws of a non-stock corporation.2 Commission; otherwise, said agreement is ineffective and
The SECs power to pass upon the validity of proxies in relation unenforceable. The certificate or certificates of stock covered by the
to election controversies has effectively been withdrawn, tied as voting trust agreement shall be canceled and new ones shall be issued
in the name of the trustee or trustees stating that they are issued
1
SEC Opinion, 15 July 197, XXXII SEC QUARTERLY BULLETIN 4 (No. 2, Dec. 1997). pursuant to said agreement. In the books of the corporation, it shall be
2
SEC Opinion, 20 September 1994, XXIX SEC QUARTERLY BULLETIN 20 (No.1, March noted that the transfer in the name of the trustee or trustees is made
1995).


pursuant to said voting trust agreement. The voting trustee or trustees may vote by proxy unless the agreement
provides otherwise. (36a)
The trustee or trustees shall execute and deliver to the transferors
voting trust certificates, which shall be transferable in the same Atty. Hofilea where, pursuant to a voting trust agreement,
manner and with the same effect as certificates of stock. the transferor transfers the right to votes, etc. but not the right
to own, the transferor remains to be the owner. A transfer of
The voting trust agreement filed with the corporation shall be subject the right to own the shares amounts to a disposition/sale of the
to examination by any stockholder of the corporation in the same shares.
manner as any other corporate book or record: Provided, That both o Transferor transfers the certificates of stock.
the transferor and the trustee or trustees may exercise the right of Even where the transferor holds only the voting
inspection of all corporate books and records in accordance with the trust certificate, he may sell his shares. What he
provisions of this Code. delivers to the buyer is the VTC. This kind of
disposition does not terminate the rights of the
Any other stockholder may transfer his shares to the same trustee or trustee.
trustees upon the terms and conditions stated in the voting trust o Transferee/Trustee gives a voting trust certificate
agreement, and thereupon shall be bound by all the provisions of said A VTA separates the voting rights and other rights covered of
agreement. the stock from other attributes of ownership, intended to be
irrevocable for a definite period of time and the purpose of
No voting trust agreement shall be entered into for the purpose of which is to give to the trustee to acquire voting control of the
circumventing the law against monopolies and illegal combinations in corporation. Lee v. CA, 205 SCRA 752 (1992).
restraint of trade or used for purposes of fraud.
Lee v. Court of Appeals
Unless expressly renewed, all rights granted in a voting trust
agreement shall automatically expire at the end of the agreed period, Facts: Herein petitioners were served summons in accordance with a
and the voting trust certificates as well as the certificates of stock in third party complaint filed against Alfa Integrated Textile Mills of which
the name of the trustee or trustees shall thereby be deemed canceled Lee and Lacdao was president and vice president respectively. They
and new certificates of stock shall be reissued in the name of the claim that the summons for Alfa was erroneously served upon them
transferors. considering that the management of Alfa had been transferred to
Development Bank of the Philippines. They claim that the voting trust


agreement between Alfa and DBP vests all management and control of voting rights of a stockholder from his other rights. This may create a
Alfa to the DBP. DBP claimed that it was not authorized to receive dichotomy between the equitable or beneficial ownership of the
summons on behalf of Alfa since DBP had not taken over the company corporate shares of a stockholder, on the one hand, and the legal title
which has a separate and distinct corporate personality and existence. thereto on the other. With the omission of the phrase "in his own right"
[in the new corporation code] the election of trustees and other persons
Issue: Whether or not the 5-year period of the voting trust agreement in who in fact are not the beneficial owners of the shares registered in
question had lapsed in 1986 so that the legal title to the stocks covered their names on the books of the corporation becomes formally
by the said voting trust agreement ipso facto reverted to Lee and legalized. Hence, this is a clear indication that in order to be eligible as a
Lacdao as beneficial owners pursuant to the 6th paragraph of Section 59 director, what is material is the legal title to, not beneficial ownership
of the new corporation code of, the stock as appearing on the books of the corporation.

Held: NO. It is manifestly clear from the terms of the voting trust The trustor has a right to terminate the VTA for breach thereof.
agreement between ALFA and the DBP that the duration of the Everett v. Asia Banking Corporation, 49 Phil. 512 (1926).
agreement is contingent upon the fulfillment of certain obligations of Voting trust agreement as part of a loan arrangement. NIDC v.
ALFA with the DBP. Had the five-year period of the voting trust Aquino, 163 SCRA 153 (1988).
agreement expired in 1986, the DBP would not have transferred all its
rights, titles and interests in ALFA "effective June 30, 1986" to the C. Pooling Agreements or Shareholders Agreements (Section 100)
national government through the Asset Privatization Trust (APT) as
attested to in a Certification dated 24 January 1989 of the Vice Section 100. Agreements by stockholders.
President of the DBP's Special Accounts Department II. In the same 1. Agreements by and among stockholders executed before the
certification, it is stated that the DBP, from 1987 until 1989, had formation and organization of a close corporation, signed by all
handled accounts, which included ALFA's assets pursuant to a stockholders, shall survive the incorporation of such corporation and
management agreement by and between the DBP and APT. Hence, shall continue to be valid and binding between and among such
there is evidence on record that at the time of the service of summons stockholders, if such be their intent, to the extent that such
on ALFA through Lee and Lacdao on 21 August 1987, the voting trust agreements are not inconsistent with the articles of incorporation,
agreement in question was not yet terminated so that the legal title to irrespective of where the provisions of such agreements are
the stocks of ALFA, then, still belonged to the DBP. contained, except those required by this Title to be embodied in said
articles of incorporation.
Doctrine: A voting trust agreement results in the separation of the


2. An agreement between two or more stockholders, if in writing and The stockholders right of inspection of corporate books and
signed by the parties thereto, may provide that in exercising any records is based on his ownership of the assets and property of
voting rights, the shares held by them shall be voted as therein the corporation. It is therefore an incident of ownership of the
provided, or as they may agree, or as determined in accordance with a corporate property, whether this ownership or interest be
procedure agreed upon by them. termed an equitable ownership, a beneficial ownership or a
quasi-ownership. The right of inspection is predicated upon the
3. No provision in any written agreement signed by the stockholders, necessity of self-protection on the part of the stockholder.
relating to any phase of the corporate affairs, shall be invalidated as Gokongwei, Jr. v. SEC, 89 SCRA 336 (1979).
between the parties on the ground that its effect is to make them
partners among themselves. Gokongwei, Jr. v. Securities and Exchange Commission

4. A written agreement among some or all of the stockholders in a Facts: John Gokongwei, a stockholder of San Miguel Corporation (and a
close corporation shall not be invalidated on the ground that it so president and stockholder of Robina Corp. and Consolidated Foods
relates to the conduct of the business and affairs of the corporation as Corp., a competitor of SMC, in various areas, such as Instant Coffee, Ice
to restrict or interfere with the discretion or powers of the board of Cream, Poultry and Hog Feeds and many more), filed a petition for
directors: Provided, That such agreement shall impose on the declaration of nullity of amended by-laws, cancellation of certificate of
stockholders who are parties thereto the liabilities for managerial acts filing of the amended-by laws, injunction and damages against the
imposed by this Code on directors. majority of the members of the Board of Directors of the SMC based on
the following grounds:
5. To the extent that the stockholders are actively engaged in the Corporations have no inherent power to disqualify a
management or operation of the business and affairs of a close stockholder from being elected as director depriving him of his
corporation, the stockholders shall be held to strict fiduciary duties to vested right because he is an officer of a competitor company.
each other and among themselves. Said stockholders shall be The corporation has been investing corporate funds in other
personally liable for corporate torts unless the corporation has corporations and business outside of the primary purpose of the
obtained reasonably adequate liability insurance. corporation (This gave rise to the second issue)
The second issue arose when, Gokongwei filed a motion to inspect the
VII. Rights to Inspect and Copy Corporate Records documents of San Miguel International Inc. (SMI) a subsidiary of, and
wholly controlled by, SMC. GokongweiS motion was denied by the
A. Basis of Right SECTION When SMC invested in SMI, according to Gokongwei, this was


against the primary purpose clause of SMC, which is a violation of the the demand is made in good faith or for a legitimate purpose.
Corporation Law. Africa v. PCGG, 205 SCRA 39 (1992).
Summary of Rulings: The right to inspect corporate books and
Issue: Whether or not the SEC gravely abused its discretion in denying records:
petitioners request for an examination of the records of San Miguel o Is exercisable through agents and representatives,
International Inc., a fully owned subsidiary of San Miguel Corporation otherwise it would often be useless to the stockholder
who does not know corporate intricacies. W.G.
Held: YES. Considering that the foreign subsidiary is wholly owned by Philpotts v. Philippine Manufacturing Co., 40 Phil. 471
respondent San Miguel Corporation and, therefore, under its control, it (1919).
would be more in accord with equity, good faith and fair dealing to o Cannot be denied on the ground that the director is on
construe the statutory right of Gokongwei as stockholder to inspect the unfriendly terms with the officers of the corporation
books and records of the corporation as extending to books and records whose records are sought to be inspected. Veraguth v.
of such wholly subsidiary which are in respondent corporations Isabela Sugar Co., 57 Phil. 266 (1932).
possession and control. o Although it includes the right to make copies, does not
authorize bringing the books or records outside of
Doctrine: See above. corporate premises. Veraguth v. Isabela Sugar Co., 57
Phil. 266 (1932).
The stockholders right of inspection of the corporations books o Does not include the right of access to minutes until
and records is based upon his ownership of shares in the such minutes have been written up and approved by
corporation and the necessity for self-protection. Puno v. Puno the directors. Veraguth v. Isabela Sugar Co., 57 Phil.
Enterprises, 599 SCRA 585 (2009). 266 (1932).
o Cannot be limited to a period of ten days shortly prior
B. Limitations on Right to the annual stockholders meeting, as such would be
The only express limitations on the right of inspection under an unreasonable restriction and violates the legal
Section 74 of Corporation Code are: (a) it should be exercised at provision granting the exercise of such right at
reasonable hours on business days; (b) the person demanding reasonable hours. Pardo v. Hercules Lumber Co., 47
the right to examine and copy excerpts from the corporate Phil. 964 (1924).
records and minutes has not improperly used any information
secured through any previous examination of records; and (c) C. Specified Records (Sections 74, 75 and 141)


Code: Provided, That if such refusal is made pursuant to a resolution
Section 74. Books to be kept; stock transfer agent. or order of the board of directors or trustees, the liability under this
Every corporation shall keep and carefully preserve at its principal section for such action shall be imposed upon the directors or trustees
office a record of all business transactions and minutes of all meetings who voted for such refusal: and Provided, further, That it shall be a
of stockholders or members, or of the board of directors or trustees, in defense to any action under this section that the person demanding to
which shall be set forth in detail the time and place of holding the examine and copy excerpts from the corporation's records and
meeting, how authorized, the notice given, whether the meeting was minutes has improperly used any information secured through any
regular or special, if special its object, those present and absent, and prior examination of the records or minutes of such corporation or of
every act done or ordered done at the meeting. Upon the demand of any other corporation, or was not acting in good faith or for a
any director, trustee, stockholder or member, the time when any legitimate purpose in making his demand.
director, trustee, stockholder or member entered or left the meeting
must be noted in the minutes; and on a similar demand, the yeas and Stock corporations must also keep a book to be known as the "stock
nays must be taken on any motion or proposition, and a record and transfer book", in which must be kept a record of all stocks in the
thereof carefully made. The protest of any director, trustee, names of the stockholders alphabetically arranged; the installments
stockholder or member on any action or proposed action must be paid and unpaid on all stock for which subscription has been made,
recorded in full on his demand. and the date of payment of any installment; a statement of every
alienation, sale or transfer of stock made, the date thereof, and by and
The records of all business transactions of the corporation and the to whom made; and such other entries as the by-laws may prescribe.
minutes of any meetings shall be open to inspection by any director, The stock and transfer book shall be kept in the principal office of the
trustee, stockholder or member of the corporation at reasonable corporation or in the office of its stock transfer agent and shall be
hours on business days and he may demand, writing, for a copy of open for inspection by any director or stockholder of the corporation
excerpts from said records or minutes, at his expense. at reasonable hours on business days.

Any officer or agent of the corporation who shall refuse to allow any No stock transfer agent or one engaged principally in the business of
director, trustees, stockholder or member of the corporation to registering transfers of stocks in behalf of a stock corporation shall be
examine and copy excerpts from its records or minutes, in accordance allowed to operate in the Philippines unless he secures a license from
with the provisions of this Code, shall be liable to such director, the Securities and Exchange Commission and pays a fee as may be
trustee, stockholder or member for damages, and in addition, shall be fixed by the Commission, which shall be renewable annually: Provided,
guilty of an offense which shall be punishable under Section 144 of this That a stock corporation is not precluded from performing or making


transfer of its own stocks, in which case all the rules and regulations may require. Such report shall be submitted within such period as may
imposed on stock transfer agents, except the payment of a license fee be prescribed by the Securities and Exchange Commission. (n)
herein provided, shall be applicable. (51a and 32a; B. P. No. 268.)
The section is worded in broad language, for "record of all
Section 75. Right to financial statements. business transactions" covers practically all matters of import in
Within ten (10) days from receipt of a written request of any a profit-seeking corporation. The corporation is in duty bound to
stockholder or member, the corporation shall furnish to him its most expose its records and book for inspection by the shareholders,
recent financial statement, which shall include a balance sheet as of but it is not always bound to show all of them under all
the end of the last taxable year and a profit or loss statement for said circumstances.1
taxable year, showing in reasonable detail its assets and liabilities and
the result of its operations. Summary of Doctrinal Rulings on Right to Inspect

At the regular meeting of stockholders or members, the board of The right to inspect by a stockholder, member, director or trustee is
directors or trustees shall present to such stockholders or members a subject to the following doctrinal rulings:
financial report of the operations of the corporation for the preceding a. The demand for inspection should cover only reasonable hours
year, which shall include financial statements, duly signed and on business days;
certified by an independent certified public accountant. b. The stockholder, member, director or trustees demanding the
exercise of the right is one who has not improperly used any
However, if the paid-up capital of the corporation is less than information secured through any previous examination of the
P50,000.00, the financial statements may be certified under oath by records of the corporation or any other corporation;
the treasurer or any responsible officer of the corporation. (n) c. The demand must be accompanied with statement of the
purpose of the inspection, which must show good faith or
Section 141. Annual report or corporations. legitimate purpose; and
Every corporation, domestic or foreign, lawfully doing business in the d. If the corporation or its officers contest such purpose or
Philippines shall submit to the Securities and Exchange Commission an contend that there is evil motive behind the inspection, the
annual report of its operations, together with a financial statement of burden of proof is with the corporation or such officer to show
its assets and liabilities, certified by any independent certified public
accountant in appropriate cases, covering the preceding fiscal year and
1
such other requirements as the Securities and Exchange Commission Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.


the same. Provided, That such dissolution shall not preclude the institution of
appropriate action against the director, trustee or officer of the
D. Remedies If Denied: Mandamus corporation responsible for said violation: Provided, further, That
In contrasting the language of the present Corporation Code nothing in this section shall be construed to repeal the other causes
from the old Corporation Law, the law now provides for express for dissolution of a corporation provided in this Code. (190 1/2 a)
limitation on the right to inspect and now requires as a
condition for such examination that one requesting it must not In the recent case of Ang-Abaya v. Ang, 573 SCRA 129 (2008),
have been guilty of using improperly any information secured the Court had the occasion to enumerate the requisites before
through a prior examination, an that the person asking for such the penal provision under Section 144 of the Corporation Code
examination must be acting in good faith and for a legitimate may be applied in a case of violation of a stockholder or
purpose in making his demand. The stockholder seeking to members right to inspect the corporate books/records as
exercise the right of inspection must set forth the reasons and provided for under Section 74 of the Corporation Code. Sy Tiong
the purposes for which he desires such inspection. Gonzales v. Shiou v. Sy Chim, 582 SCRA 517 (2009).
PNB, 122 SCRA 489 (1983).
Burden of proof to show that examination is for improper 1. Who May Be Held Liable: The corporate officer who has in his
purpose is on the part of the corporation. Republic v. custody the books and paper sought to be inspected, and
Sandiganbayan, 199 SCRA 39 (1999). refuses to allow inspection. If the refusal is pursuant to a
resolution or order of the board of directors or trustees, then
E. Criminal Sanction under Section 144 the directors or trustees who voted for such refusal shall be
held liable.1
Section 144. Violations of the Code. 2. Defenses Available to Director, Trustee or Officer Held Liable:
Violations of any of the provisions of this Code or its amendments not The following defenses are expressly recognized under Section
otherwise specifically penalized therein shall be punished by a fine of 74 as defenses available to a director, trustee or officer for
not less than one thousand (P1,000.00) pesos but not more than ten refusing to allow a stockholder or member to exercise his right
thousand (P10,000.00) pesos or by imprisonment for not less than to inspect corporate records:
thirty (30) days but not more than five (5) years, or both, in the a. The person demanding to examine has improperly used
discretion of the court. If the violation is committed by a corporation, any information secured through any prior examination
the same may, after notice and hearing, be dissolved in appropriate
1
proceedings before the Securities and Exchange Commission:


of the records or minutes of such corporation or for any o Atty. Hofilea take notice of the type of documents
other corporation; or Exception:
b. The one requesting to inspect was not taking in good o The law requires the findings to be made public
faith or for a legitimate purpose in making his demand. o The findings must be presented as evidence before a
In a criminal complaint for violation of Section 74 of the court
Corporation Code, the defense of improper use or motive is in
the nature of a justifying circumstance that would exonerate VIII. Appraisal Right (Sections 81 to 86 and 105)
those who raise and are able to prove the same where the
corporation denies inspection on the ground of improper Section 81. Instances of appraisal right.
motive or purpose, the burden of proof is taken from the Any stockholder of a corporation shall have the right to dissent and
shareholder and placed on the corporation. Sy Tiong Shiou v. Sy demand payment of the fair value of his shares in the following
Chim, 582 SCRA 517 (2009). instances:

F. Confidential Nature of SEC Examinations (Section 142) 1. In case any amendment to the articles of incorporation has the
effect of changing or restricting the rights of any stockholder or class
Section 142. Confidential nature of examination results. of shares, or of authorizing preferences in any respect superior to
All interrogatories propounded by the Securities and Exchange those of outstanding shares of any class, or of extending or shortening
Commission and the answers thereto, as well as the results of any the term of corporate existence;
examination made by the Commission or by any other official
authorized by law to make an examination of the operations, books 2. In case of sale, lease, exchange, transfer, mortgage, pledge or other
and records of any corporation, shall be kept strictly confidential, disposition of all or substantially all of the corporate property and
except insofar as the law may require the same to be made public or assets as provided in the Code; and
where such interrogatories, answers or results are necessary to be
presented as evidence before any court. (n) 3. In case of merger or consolidation. (n)

General Rule: The SEC has the authority to inspect all Section 82. How right is exercised.
documents submitted to them, but they must keep their The appraisal right may be exercised by any stockholder who shall
findings confidential. As such the public has no entitlement to have voted against the proposed corporate action, by making a
the findings. written demand on the corporation within thirty (30) days after the


date on which the vote was taken for payment of the fair value of his except the right of such stockholder to receive payment of the fair
shares: Provided, That failure to make the demand within such period value thereof: Provided, That if the dissenting stockholder is not paid
shall be deemed a waiver of the appraisal right. If the proposed the value of his shares within 30 days after the award, his voting and
corporate action is implemented or affected, the corporation shall pay dividend rights shall immediately be restored. (n)
to such stockholder, upon surrender of the certificate or certificates of
stock representing his shares, the fair value thereof as of the day prior Section 84. When right to payment ceases.
to the date on which the vote was taken, excluding any appreciation No demand for payment under this Title may be withdrawn unless the
or depreciation in anticipation of such corporate action. corporation consents thereto. If, however, such demand for payment
is withdrawn with the consent of the corporation, or if the proposed
If within a period of sixty (60) days from the date the corporate action corporate action is abandoned or rescinded by the corporation or
was approved by the stockholders, the withdrawing stockholder and disapproved by the Securities and Exchange Commission where such
the corporation cannot agree on the fair value of the shares, it shall be approval is necessary, or if the Securities and Exchange Commission
determined and appraised by three (3) disinterested persons, one of determines that such stockholder is not entitled to the appraisal right,
whom shall be named by the stockholder, another by the corporation, then the right of said stockholder to be paid the fair value of his shares
and the third by the two thus chosen. The findings of the majority of shall cease, his status as a stockholder shall thereupon be restored,
the appraisers shall be final, and their award shall be paid by the and all dividend distributions which would have accrued on his shares
corporation within thirty (30) days after such award is made: Provided, shall be paid to him. (n)
That no payment shall be made to any dissenting stockholder unless
the corporation has unrestricted retained earnings in its books to Section 85. Who bears costs of appraisal.
cover such payment: and Provided, further, That upon payment by the The costs and expenses of appraisal shall be borne by the corporation,
corporation of the agreed or awarded price, the stockholder shall unless the fair value ascertained by the appraisers is approximately
forthwith transfer his shares to the corporation. (n) the same as the price which the corporation may have offered to pay
the stockholder, in which case they shall be borne by the latter. In the
Section 83. Effect of demand and termination of right. case of an action to recover such fair value, all costs and expenses shall
From the time of demand for payment of the fair value of a be assessed against the corporation, unless the refusal of the
stockholder's shares until either the abandonment of the corporate stockholder to receive payment was unjustified. (n)
action involved or the purchase of the said shares by the corporation,
all rights accruing to such shares, including voting and dividend rights, Section 86. Notation on certificates; rights of transferee.
shall be suspended in accordance with the provisions of this Code, Within ten (10) days after demanding payment for his shares, a


dissenting stockholder shall submit the certificates of stock shares. This right, known as the right of appraisal, is expressly
representing his shares to the corporation for notation thereon that recognized in Section 81 of the Corporation Code. Clearly, the
such shares are dissenting shares. His failure to do so shall, at the right of appraisal may be exercised when there is a fundamental
option of the corporation, terminate his rights under this Title. If change in the charter or articles of incorporation substantially
shares represented by the certificates bearing such notation are prejudicing the rights of the stockholders. It does not vest
transferred, and the certificates consequently canceled, the rights of unless objectionable corporate action is taken. It serves the
the transferor as a dissenting stockholder under this Title shall cease purpose of enabling the dissenting stockholder to, have his
and the transferee shall have all the rights of a regular stockholder; interest purchased and to retire from the corporation. Turner v.
and all dividend distributions which would have accrued on such Lorenzo Shipping Corp., 636 SCRA 13 (2010).
shares shall be paid to the transferee. (n) Appraisal rights ensure the stockholder a way out in certain
instances.
Section 105. Withdrawal of stockholder or dissolution of corporation. o Even in the middle of the process of appraisal rights, a
In addition and without prejudice to other rights and remedies stockholder can decide to just sell his shares to another
available to a stockholder under this Title, any stockholder of a close person rather than to the company.
corporation may, for any reason, compel the said corporation to
purchase his shares at their fair value, which shall not be less than B. Who is Entitled to Exercise
their par or issued value, when the corporation has sufficient assets in A prejudiced stockholder may exercise such right. A prejudiced
its books to cover its debts and liabilities exclusive of capital stock: stockholder is one who dissented in the meeting where the
Provided, That any stockholder of a close corporation may, by written proposal or proposed amendment was approved. The
petition to the Securities and Exchange Commission, compel the stockholder must have voted against the corporation
dissolution of such corporation whenever any of acts of the directors, transaction in order to avail of the appraisal right. Mere silence
officers or those in control of the corporation is illegal, or fraudulent, or abstention does not entitle such stockholder to the exercise
or dishonest, or oppressive or unfairly prejudicial to the corporation or of the right.1
any stockholder, or whenever corporate assets are being misapplied or The stockholder must be present at the meeting and vote
wasted. therein to be able to avail of his appraisal rights.
o Where appraisal rights were availed of on the ground of
A. Nature of Appraisal Right extension of corporate term, and after which such
A stockholder who dissents from certain corporate actions has
1
the right to demand payment of the fair value of his or her Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.


extension was abandoned, the right of the stockholder General Rule: In the absence of a special authority from the
to exercise appraisal rights ceases also. Board of Directors to institute a derivative suit for and in behalf
of the corporation, the president or managing director is
C. Instances When Right is Exercisable: disqualified by law to sue in her own name. The power to sue
Sections 37, 42 and 81 of the Corporation Code enumerate. and be sued in any court by a corporation is lodged in the Board
that exercises its corporate powers and not in the president or
D. Denial of Appraisal Right: May the right be denied in the articles of officer thereof. Bitong v. Court of Appeals, 292 SCRA 503
incorporation? Is a contractual stipulation in the articles of (1998).
incorporation waiving the appraisal right void? Rights granted by law While questions of policy and management are left to the
can be waived individually, unless such waiver would contravene public honest decision of the officers and directors of a corporation,
policy. Therefore, when it is waived without the dissenting stockholder's and the courts are without authority to substitute their
consent, such as when it is defeated by provisions in the articles of judgment for the judgment of the Board of Directors; yet where
incorporation, then it will be violative of public policy. But when an the corporate directors are guilty of breach of trust not of
individual, who is already a stockholder, who is not constrained to waive mere error of judgment or abuse of discretion and
because he is already a stockholder enters into a contract knowingly, intracorporate remedy is futile or useless, a stockholder may
intelligently waiving his appraisal right, such waiver is not void. institute a suit in behalf of himself and other stockholders and
for the benefit of the corporation. However, the corporation is
IX. DERIVATIVE SUITS (Interim Rules of Procedure Governing Intra- the real party in interest in a derivative suit and the suing
Corporate Controversies) stockholder is only a nominal party. Cua, Jr. v. Tan, 607 SCRA
Derivative suits are governed by a special set of procedural rules 645 (2009).
known as the Interim Rules of Procedure Governing Intra- Under Section 36 of the Corporation Code, in relation to Section
Corporate Controversies under Republic Act No. 8799 (A.M. 23, where a corporation is an injured party, its power to sue is
No. 01-2-04-SC; effective 01 April 2001). Section 1, Rule 1 lodged with its board of directors or trustees. An individual
thereof expressly lists derivative suits among the cases covered stockholder is permitted to institute a derivative suit on behalf
by it. Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548, of the corporation wherein he holds stocks in order to protect
556 (2009). or vindicate corporate rights, whenever the officials of the
corporation refuse to sue, or are the ones to be sued, or hold
A. Derivative Suit Must Be Effected When Board Cannot Properly the control of the corporation. In such actions, the suing
Exercise Business Judgment stockholder is regarded as a nominal party, with the corporation


as the real party in interest. Chua v. Court of Appeals, 443 SCRA is a remedy designed by equity and has been the principal
259 (2004).1 defense of the minority shareholders against abuses by the
majority. Western Institute of Technology, Inc. v. Salas, 278
Chua v. Court of Appeals SCRA 216 (1997).
The whole purpose of the law authorizing a derivative suit is to
Issue: Whether or not the criminal complaint is in the nature of a allow the stockholders/member to enforce rights which are
derivative suit derivative (secondary) in nature, i.e., to enforce a corporate
cause of action. R.N. Symaco Trading Corp v. Santos, 467 SCRA
Held: NO. It was not stated that the criminal complaint was filed by Hao 312 (2005).2
in behalf and for the benefit of the corporation. An individual stockholder is permitted to institute a derivative
suit on behalf of the corporation wherein he holds stocks in
Doctrine: In a derivative suit, the plaintiff must allege that he is suing in order to protect or vindicate corporate rights, whenever
behalf and for the benefit of the corporation and all other stockholders officials of the corporation refuse to sue or are the ones to be
who may wish to join him. The corporation must be impleaded as a sued or hold the control of the corporation-in such actions, the
party and must be served with process. suing stockholder is regarded as the nominal party, with the
corporation as the party in interest. Majority Stockholders of
B. Nature of the Power to File Derivative Suit Ruby Industrial Corp. v. Lim, 650 SCRA 461 (2011).
A stockholders right to institute a derivative suit is not based on
any express provision of the Corporation Code, or even the C. Requisites of Derivative Suit
Securities Regulation Code, but is impliedly recognized when In the case of, we enumerated the foregoing requisites before a
the said laws make corporate directors or officers liable for stockholder can file a derivative suit: (a) the party bringing suit
damages suffered by the corporation and its stockholders for should be a shareholder during the time of the act or
violation of their fiduciary duties. Yu v. Yukayguan, 589 SCRA transaction complained of, the number of shares not being
588 (2009). material; (b) the party has tried to exhaust intra-corporate
A derivative suit is an action brought by minority shareholders remedies, relief, but the latter has failed or refused to heed his
in the name of the corporation to redress wrongs committed plea; and (c) the cause of action actually devolves on the
against the corporation, for which the directors refuse to sue. It corporation; the wrongdoing or harm having been or being

1 2
Filipinas Port Services, Inc. v. Go, 518 SCRA 453 (2007); Yu v. Yukayguan, 589 Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548, 556 (2009); Strategic
SCRA 588 (2009); Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548 (2009). Alliance Dev. Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2009).


caused to the corporation and not to the particular stockholder the institution by a stockholder of a derivative suit. Yu v.
bringing the suit. San Miguel Corp. v. Kahn, 176 SCRA 447 Yukayguan, 589 SCRA 588 (2009).
(1989).1
Section 1, Rule 8 of the Interim Rules of Procedure Governing D. Who May Bring the Suit
Intra-Corporate Controversies lays down the following The relators must be stockholders both at time of occurrence of
requirements which a stockholder must comply with in filing a the events constituting the cause of action and at the time of
derivative suit: A stockholder or member may bring an action in the filing of the derivative suit. Pascual v. Orozco, 19 Phil. 83
the name of a corporation or association, as the case may be, (1911); Gochan v. Young, 354 SCRA 207 (2001).
provided, that: (1) He was a stockholder or member at the time o Atty. Hofilea Once you file an action, any disposition
the acts or transactions subject of the action occurred and at of your shares may only be made under permission of
the time the action was filed; (2) He exerted all reasonable the Court.
efforts, and alleges the same with particularity in the complaint, A derivative action is a suit by a shareholder to enforce a
to exhaust all remedies available under the articles of corporate cause of action. The corporation is a necessary party
incorporation, by-laws, laws or rules governing the corporation to the suit. And the relief which is granted is a judgment against
or partnership to obtain the relief he desires; (3) No appraisal a third person in favor of the corporation. Similarly, if a
rights are available for the act or acts complained of; and (4) corporation has a defense to an action against it and is not
The suit is not a nuisance or harassment suit. Yu v. Yukayguan, asserting it, a stockholder may intervene and defend on behalf
589 SCRA 588 (2009).2 of the corporation. Chua v. Court of Appeals, 443 SCRA 259
The fact that it is a family corporation does not in any way (2004).3
exempt a stockholder from complying with the clear o Since the ones to be sued are the directors/officers of
requirements and formalities of the rules for filing derivative the corporation itself, a stockholder, like petitioner
suit there is nothing in the pertinent laws or rules supporting Cruz, may validly institute a derivative suit to vindicate
the distinction between, and the difference in the requirements the alleged corporate injury, in which case Cruz is only a
for, family corporations vis-a-vis other types of corporations, in nominal party while Filport is the real party-in-interest.
Filipinas Port Services, Inc. v. Go, 518 SCRA 453 (2007).
1
Filipinas Port Services, Inc. v. Go, 518 SCRA 453 (2007)Reyes v. Regional Trial A minority stockholder and member of the board has no power
Court of Makati, Br. 142, 561 SCRA 593 (2008); Hi-Yield Realty, Inc. v. Court of
Appeals, 590 SCRA 548 (2009). or authority to sue on the corporations behalf. Nor can we
2
Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548, 556 (2009); Strategic
Alliance Dev. Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2009); Cua, Jr. v.
3
Tan, 607 SCRA 645 (2009). Go v. Distinction Properties Dev. and Construction, Inc., 671 SCRA 461 (2012).


uphold this as a derivative suit, since it is required that the Violation of Laws Reyes v. Tan 3 SCRA 198 (1961) also gave a
minority stockholder suing for and on behalf of the corporation valid basis the violation of laws allowed by the board as basis for
must allege in his complaint that he is suing on a derivative a derivative suit. The Court held that where the director of the
cause of action on behalf of the corporation and all other corporation permitted the fraudulent transaction to go
stockholders similarly situated who may wish to join him in the unpunished by allowing the importation of finished textile
suit. There is now showing that petitioner has complied with the instead of raw cotton for the textile mill, and nothing appears to
foregoing requisites. Tam Wing Tak v. Makasiar, 350 SCRA 475 have been done to remove the erring purchasing managers, the
(2001); Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548, appointment of receiver may have been thought of by the court
556 (2009). so that the dollar allocation for raw material may be reviewed
o A minority stockholder can file a derivative suit against and the textile mill placed on an operating basis, because it is
the president for diverting corporate income to his possible that a receiver in which the Central Bank may have
personal accounts. Commart (Phils.) Inc. v. SEC, 198 confidence is appointed, the dollar allocation for raw material
SCRA 73 (1991). may be restored.
The status of heirs as co-owners of shares of stocks prior to the Wastage and Diversion of Corporate Funds It may be
partition of the decedents estate does not immediately and considered a wastage or diversion of corporate funds to hire
necessarily make them stockholders of the corporation unless officers and appoint directors whose main purpose is to shield
and until there is compliance with the Section 63 of the the chairman from criminal prosecution.
Corporation Code on the manner of transferring shares, the
heirs do not become registered stockholders of the corporation. F. Exhaustion of Intra-Corporate Remedies:
Reyes v. Regional Trial Court of Makati, Br. 142, 561 SCRA 593 A condition precedent to the filing of a derivative suit is that the
(2008); Puno and Puno Enterprises, Inc., 599 SCRA 585 (2009). party has tried to exhaust inta-corporate remedies, i.e., has
A lawyer engaged as counsel for a corporation cannot represent made a demand on the Board of Directors for the appropriate
members of the same corporations board of directors in a relief, but the latter has failed to or refused to heed his plea.
derivative suit brought against them. To do so would be Everett v. Asia Banking Corp., 49 Phil. 512 (1927); Angeles v.
tantamount to representing conflicting interests, which is Santos, 64 Phil. 697 (1937).
prohibited by the Code of Professional Responsibility. Hornilla A derivative suit to question the validity of the foreclosure of
v. Salunat, 405 SCRA 220 (2003). the mortgage on corporate assets can be filed without prior
E. Grounds for Derivative Suit demand upon the Board of Directors where the legality of the


constitution of the Board lies at the center of the issues. DBP v. benefit or interest of the corporation. When the relief prayed
Pundogar, 218 SCRA 118 (1993). for do not pertain to the corporation, then it is an improper
Further, while it is true that the complaining stockholder must derivative suit. Legaspi Towers 300, Inc. v. Muer, 673 SCRA 453
satisfactorily show that he has exhausted all means to redress (2012), 1 citing VILLANUEVA, PHILIPPINE CORPORATE LAW,
his grievances within the corporation, except when such remedy 1998 ed., p. 375.
is complete control of the person against whom the suit is being The allegations of injury to the relators can co-exist with those
filed. The reason is obvious: a demand upon the board to pertaining to the corporation, and does not disqualify them
institute an action and prosecute the same effectively would from filing a derivative suit on behalf of the corporation. It
have been useless and an exercise in futility. Hi-Yield Realty, merely gives rise to an additional cause of action for damages
Inc. v. Court of Appeals, 590 SCRA 548, 557 (2009). against the erring directors. Gochan v. Young, 354 SCRA 207
The obvious intent behind the rule requiring the stockholder (2001).
filing a derivative suit to first exert all reasonable efforts to In a derivative action, the real party in interest is the
exhaust all remedies available under the articles of corporation itself, not the shareholders who actually instituted
incorporation, by laws, laws or rules governing the corporation it. A suit to enforce preemptive rights in a corporation is not a
or partnership to obtain relief he desires is to make the derivative suit, and therefore a temporary restraining order
derivative suit the final recourse of the stockholders, after all enjoining a person from representing the corporation will not
other remedies to obtain the relief sought had failed. Yu v. bar such action, because it is instituted on behalf and for the
Yukayguan, 589 SCRA 588 (2009). benefit of the shareholder, not the corporation. Lim v. Lim-Yu,
352 SCRA 216 (2001).
G. Nature of Relief or Remedies Prayed For: Appointment of receiver can be an ancillary remedy in a
The complaint cannot demand for the defendants to pay the derivative suit. Chase v. CFI of Manila, 18 SCRA 602 (1966).
suing stockholders the value of their respective participation in Where corporate directors have committed a breach of trust
the assets that have been damaged, for a derivative suit must either by their frauds, ultra vires acts, or negligence, and the
have cause of action for the benefit of the corporation. corporation is unable or unwilling to institute suit to remedy the
Evangelista v. Santos, 86 Phil. 387 [1950]; Republic Bank v. wrong, a stockholder may sue on behalf of himself and other
Cuaderno, 19 SCRA 671 (1967); Reyes v. Tan, 3 SCRA 198 stockholders and for the benefit of the corporation, to bring
(1961). about a redress of the wrong done directly to the corporation
Since it is the corporation that is the real party-in-interest in a
derivative suit, then the reliefs prayed for must be for the
1
Also R.N. Symaco Trading Corp. v. Santos, 467 SCRA 312 (2005).


and indirectly to the stockholders. This is what is known as a It is only when the board itself has the be author of the wrong
derivative suit, and settled is the doctrine that in a derivative being done or having been done to the corporation, where
suit, the corporation is the real party in interest while the business judgment consideration are not applicable since in
stockholder filing suit for the corporations behalf is only such a conflict situation it can hardly be expected that the board
nominal party. The corporation should be included as a party in or its culprit members would be in a position to exercise proper
the suit. Hornilla v. Salunat, 405 SCRA 220 (2003). business judgment to protect the interest of the corporation. In
such situation, not even the exhaustion of intra-corporate
H. Venue for Derivative Suit remedy is necessary for a stockholder to bring a derivative suit
Under Section 5, Rule 1 of the Interim Rules, the proper venue in behalf of the corporation.
for derivative suit would be in the RTC which has jurisdiction
over the principal office of the corporation. Hi-Yield Realty, Inc. J. Nuisance Suits2
v. Court of Appeals, 590 SCRA 548 (2009). Under Section 1, Rule 8 of the Interim Rules of Procedure
Governing Intra-Corporate Controversies, one of the conditions
I. Business Judgment Rule1 for filing a derivative suit is that the suit is not a nuisance or
Sometimes in may be better for the corporation not to seek harassment suit; otherwise, the court is authorized to
relief for a wrong done to it. Since the primary duty of the forthwith dismiss the case.
directors is to increase the net asset value of the corporation, by Under Section 1(b)(4), Rule 1 of the said Interim Rules, the
deriving profits, certain remedies may actually cost the availability of appraisal right for the act or acts complained of is
corporation more in terms of future profits. Therefore, when an important factor in intra-corporate suits for the courts to
wrong is committed against the corporation, whether to bring a determine whether the suit is a nuisance suit or one brought for
suit for the corporation or not primarily lies within the harassment.
discretion and exercise of business judgment of the board. And
consequently, when the board has in the exercise of its business X. Right to Proportionate Share of Remaining Assets Upon Dissolution
judgment, decided in good faith that it will not pursue remedies (Section 122)
on behalf of the corporation, then the use of the derivative suit
mechanism by the stockholder would be improper. Section 122. Corporate liquidation.

1 2


Every corporation whose charter expires by its own limitation or is
annulled by forfeiture or otherwise, or whose corporate existence for In the liquidation of a corporation, after the payment of all
other purposes is terminated in any other manner, shall nevertheless corporate debts and liabilities, the remaining assets, if any, must
be continued as a body corporate for three (3) years after the time be distributed to the stockholders in proportion to their
when it would have been so dissolved, for the purpose of prosecuting interests in the corporation. The share of each stockholder in
and defending suits by or against it and enabling it to settle and close the assets upon liquidation is what is known as liquidating
its affairs, to dispose of and convey its property and to distribute its dividend. President of PDIC v. Reyes, 460 SCRA 473 (2005).
assets, but not for the purpose of continuing the business for which it
was established.

At any time during said three (3) years, the corporation is authorized
and empowered to convey all of its property to trustees for the benefit
of stockholders, members, creditors, and other persons in interest.
From and after any such conveyance by the corporation of its property
in trust for the benefit of its stockholders, members, creditors and
others in interest, all interest which the corporation had in the
property terminates, the legal interest vests in the trustees, and the
beneficial interest in the stockholders, members, creditors or other
persons in interest.

Upon the winding up of the corporate affairs, any asset distributable
to any creditor or stockholder or member who is unknown or cannot
be found shall be escheated to the city or municipality where such
assets are located.

Except by decrease of capital stock and as otherwise allowed by this
Code, no corporation shall distribute any of its assets or property
except upon lawful dissolution and after payment of all its debts and
liabilities. (77a, 89a, 16a)


CAPITAL STOCK & SHARES OF STOCK treasury shares. Thus, quorum is based on the totality of the
shares which have been subscribed and issued, whether it be

founders shares or common shares. Lanuza v. Court of
I. Power of the Corporation to Issue Shares of Stock
Appeals, 454 SCRA 54 (2005).
The power to issue shares of stock in a corporation is lodged in
By express provision of Section 13 of Corporation Code, paid-up
the board of directors and no stockholders meeting is required
capital is that portion of the authorized capital stock which has
to consider it because additional issuances of shares of stock
been both subscribed and paidNot all funds or assets received
does not need approval of the stockholders what is only
by the corporation can be considered paid-up capital, for this
required is the board resolution approving the additional
term has a technical signification in Corporation Law. Such must
issuance of shares. Majority Stockholders of Ruby Industrial
form part of the authorized capital stock of the corporation,
Corp. v. Lim, 650 SCRA 461 (2011).
subscribed and then actually paid up. MSCI-NACUSIP v.
Recall: Pre-emptive rights
National Wages and Productivity Comm., 269 SCRA 173 (1997).
o The board has the discretion to decide to issue new
The definition of capital stock clearly shows that its composed
shares, but the shares must be offered to the current
of two items, namely:1
stockholders first in accordance with their pre-emptive
o The portion which have been paid by the stockholders,
rights, UNLESS such has been denied from the
represented by the account "Paid-up Capital"; and
stockholders in the articles of incorporation.
o The portion which is to be paid on the subscriptions,

represented by the account "Subscription Receivables."
II. Concept of Capital Stock (Section 137)
The capital stock of a corporation cannot be subject to levy by

corporate creditors as to allow them to operate the affairs of
Section 137. Outstanding capital stock defined.
the corporation. The capital stock of the corporation represents
The term "outstanding capital stock", as used in this Code, means the
the interest and is the property of stockholders in the
total shares of stock issued under binding subscription agreements to
corporation, who can only be deprived thereof in the manner
subscribers or stockholders, whether or not fully or partially paid,
provided by law.2
except treasury shares. (n)

1
The outstanding capital stock is defined under Section 137 of Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.
the Corporation Code as the total shares of stock issued to (2013 ed.). Manila, Philippines: Rex Book Store.
2
J.R.S. Business Corp. v. Imperial Insurance, Inc., 11 SCRA 634, 639 (1964),
subscribers or stockholders whether or not fully or partially paid citing Therebee v. Baker, 35 N.E. Eq. [8 Stew.] 501, 505; In re Wells' Estate, 144
(as long as there is binding subscription agreement) except N.W. 174, 177, Wis. 294, cited in 6 WORDS AND PHRASES, 109.


The term capital and other terms used to describe the capital Revenue v. First Express Pawnshop Co., Inc., 589 SCRA 253
structure of a corporation are of universal acceptance, and their (2009).
usages have long been established in jurisprudence. Briefly,
capital refers to the value of the property or assets of a III. Classification of Shares (Section 6)
corporation. The capital subscribed is the total amount of the
capital that persons (subscribers or shareholders) have agreed Section 6. Classification of shares.
to take and pay for, which need not necessarily be, and can be The shares of stock of stock corporations may be divided into classes
more than, the par value of the shares. In fine, it is the amount or series of shares, or both, any of which classes or series of shares
that the corporation receives, inclusive of the premium if any, in may have such rights, privileges or restrictions as may be stated in the
consideration of the original issuance of the shares. NTC v. articles of incorporation: Provided, That no share may be deprived of
Court of Appeals, 311 SCRA 508 (1999). voting rights except those classified and issued as "preferred" or
An investment, being in the nature of equity, is an "redeemable" shares, unless otherwise provided in this Code:
expenditure to acquire property or other assets in order to Provided, further, That there shall always be a class or series of shares
produce revenue. It is the placing of capital or laying out of which have complete voting rights. Any or all of the shares or series of
money in a way intended to secure income or profit from its shares may have a par value or have no par value as may be provided
employment. Unlike a deposit of money or a loan that earns for in the articles of incorporation: Provided, however, That banks,
interest, cannot be assured of a dividend or an interest on the trust companies, insurance companies, public utilities, and building
amount invested, for dividends on investments are granted only and loan associations shall not be permitted to issue no-par value
after profits or gains are generated. President of PDIC v. Reyes, shares of stock.
460 SCRA 473 (2005).
Advances for Future Subscription is a receivable account and Preferred shares of stock issued by any corporation may be given
does not form part of the capital stock of the corporation since preference in the distribution of the assets of the corporation in case
it does not correspond to any particular issuance of shares of of liquidation and in the distribution of dividends, or such other
stock. Central Textile Mills v. National Wage and Productivity preferences as may be stated in the articles of incorporation which are
Comm., 260 SCRA 368 (1996). Consequently there is no liability not violative of the provisions of this Code: Provided, That preferred
for the payment of the documentary stamp tax on such deposit shares of stock may be issued only with a stated par value. The board
for future subscription for the reason that there is yet no of directors, where authorized in the articles of incorporation, may fix
subscription that creates rights and obligations between the the terms and conditions of preferred shares of stock or any series
subscriber and the corporation. Commissioner of Internal thereof: Provided, That such terms and conditions shall be effective


upon the filing of a certificate thereof with the Securities and Exchange
Commission. 4. Incurring, creating or increasing bonded indebtedness;

Shares of capital stock issued without par value shall be deemed fully 5. Increase or decrease of capital stock;
paid and non-assessable and the holder of such shares shall not be
liable to the corporation or to its creditors in respect thereto: 6. Merger or consolidation of the corporation with another
Provided; That shares without par value may not be issued for a corporation or other corporations;
consideration less than the value of five (P5.00) pesos per share:
Provided, further, That the entire consideration received by the 7. Investment of corporate funds in another corporation or business in
corporation for its no-par value shares shall be treated as capital and accordance with this Code; and
shall not be available for distribution as dividends.
8. Dissolution of the corporation.
A corporation may, furthermore, classify its shares for the purpose of
insuring compliance with constitutional or legal requirements. Except as provided in the immediately preceding paragraph, the vote
necessary to approve a particular corporate act as provided in this
Except as otherwise provided in the articles of incorporation and Code shall be deemed to refer only to stocks with voting rights.
stated in the certificate of stock, each share shall be equal in all
respects to every other share. It is not correct to say that holders of the preferred shares lose
all their voting rights, since Section 6 of the Corporation Code
Where the articles of incorporation provide for non-voting shares in provides for the situations where non-voting shares like
the cases allowed by this Code, the holders of such shares shall preferred shares are granted voting rights. Philippine Coconut
nevertheless be entitled to vote on the following matters: Producers Federation. v. Republic, 600 SCRA 102 (2009).

1. Amendment of the articles of incorporation; A. Policies on Classification of Shares:
The Corporation Code provides three (3) basic policies on share
2. Adoption and amendment of by-laws; classification:
1. Firstly, it expressly recognizes the freedom and power of a
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or corporation to classify shares.
substantially all of the corporate property;


2. Secondly, the Code expressly adopts the presumption of Section 6, there shall always be a class or series of shares which
equality of the rights and features of shares when nothing is have complete voting rights.
expressly provided to the contrary.
o Although a corporation has the power to classify its B. Common Shares
shares of stock, provide for preferences and other A common stock represents the residual ownership interest in
conditions, when nothing has been provided for in the the corporation. It is a basic class of stock ordinarily and usually
articles of incorporation, no presumption should exist to issued without extraordinary rights or privileges and entitles the
distinguish one share from another. shareholder to a pro rata division of profits. Commissioner of
o The Securities and Exchange Commission has ruled that Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999).
the mere classification of shares into preferred shares
does not necessarily deprive them of voting rights. In C. Preferred Shares: Republic Planters Bank v. Agana, 269 SCRA 1
the absence of any restrictions in the articles of (1997):
incorporation or by-laws of the corporation, preferred
shares would be voting shares having the same rights as Republic Planters Bank v. Agana
common shares, since under Section 6 of the
Corporation Code, all shares shall equal rights except Facts: Robes-Francisco Realty & Development Corporation (RFRDC)
when otherwise provided in the articles of secured a loan from the Republic Planters Bank which were partly in the
incorporation and state in the certificate of stock. form of cash and partly in the form of stock certificates. The stock
Consequently, where the articles of incorporation and certificates were preferred shares in the names of Adalia F. Robes and
the certificates of stock are silent on the matter of Carlos F. Robes who subsequently, however, endorsed his shares in
voting rights, all issued shares, regardless of their class favor of Adalia. The terms for certificates of stocks include the right to
nomenclature, shall be considered to have equal voting receive quarterly dividends and such shares may be redeemed at the
rights.1 option of the Corporation 2 years from date of issue. RFRDC and Robes
3. Thirdly, the Code provides for voting rights for all types of proceeded against the Bank and filed a Complaint anchored on their
shares on matters it considers as fundamental measures. Under alleged rights to collect dividends under the preferred shares in
question and to have petitioner redeem the same under the terms and
conditions of the stock certificates.
1
SECURITIES AND EXCHANGE COMMISSION Opinion, 16 July 1996, XXX
SECURITIES AND EXCHANGE COMMISSION QUARTERLY BULLETIN 22 (No. 2, Dec. Issue: Whether the bank can be compelled to redeem the preferred
1996).


shares issued to RFRDC and Robes.
1. Participating and Non-participating1
Held: NO. While the stock certificate does allow redemption, the option a. Participating preferred shares that entitle the holders
to do so was clearly vested in the bank. The redemption therefore is to participate with the holders of common shares in the
clearly the type known as "optional". Thus, except as otherwise retained earnings after the amount of stipulated
provided in the stock certificate, the redemption rests entirely with the dividend has been paid to the preferred shares.
corporation and the stockholder is without right to either compel or b. Non-participating preferred shares are those that
refuse the redemption of its stock. Furthermore, payment of dividends entitle holders of preferred shares only to the stipulated
to a stockholder is not a matter of right but a matter of consensus as the preferred dividends and no more.
Corporation Code prohibits the issuance of any stock dividend without 2. Cumulative and Non-cumulative2
the prior approval of the stockholders. a. Cumulative preferred shares entitle the holders
thereof to payment not only of current dividends but
Doctrine: A preferred share of stock, on one hand, is one which entitles also of back dividends not previously paid, when and if
the holder thereof to certain preferences over the holders of common dividends are declared, to the extent agreed upon,
stock. These are designed to induce persons to subscribe for shares of a before holders of common shares are paid. The
corporation. The most common forms may be classified into two: (1) fundamental characteristic of cumulative stock is that if
preferred shares as to assets; and (2) preferred shares as to dividends. the preferred dividend is not paid in full in any year,
There is no guaranty, however, that the share will receive any dividends. whether or not earned, the deficiency must be made up
The present Corporation Code provides that the board of directors of a before any dividend may be paid on the common stock.
stock corporation may declare dividends only out of unrestricted b. Non-cumulative preferred shares entitle the holders
retained earnings. Thus, the declaration of dividends is dependent upon merely to the payment of current dividends that are
the availability of surplus profit or unrestricted retained earnings, as the paid, to the extent agreed upon before the holders of
case may be. Preferences granted to preferred stockholders, moreover, common shares are paid.
do not give them a lien upon the property of the corporation nor make 3. Par Value and No Par Value
them creditors of the corporation, the right of the former being always
subordinate to the latter. Dividends are thus payable only when there

are profits earned by the corporation and as a general rule, even if there 1
are existing profits, the board of directors has the discretion to (2013 ed.). Manila, Philippines: Rex Book Store.
2
determine whether or not dividends are to be declared. Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.


a. The Supreme Court characterized no-par value shares o Preferred shares as to assets gives the holder thereof
thus: "[a] no-par value share does not purport to preference in the distribution of the assets of the
represent any stated proportionate interest in the corporation in case of liquidation.2
capital stock measured by value, but only an aliquot o Preferred shares as to dividends give the holder the
part of the whole number of such shares of the issuing right to receive dividends on said shares to the extent
corporation. The holder of no-par shares may see from agreed upon before any dividends at all are paid to the
the certificate itself that he is only an aliquot sharer in holders of common stock.3
the assets of the corporation. But this character of The contractual rights and preferences of an issue of preferred
proportionate interest is not hidden beneath a false stock must be provided for in the articles of incorporation.4
appearance of a given sum of in money, as in the case of o Under Section 6 of the Corporation Code, preferred
par value shares. The capital stock of a corporation shares issued by any corporation may be given
issuing only no-par value shares is not set forth by a preference in the distribution of the assets of the
stated amount of money, but instead is expressed to be corporation in case of liquidation and in the distribution
divided into a stated number of shares, such as 1,0000 of dividends, or such other preferences as may be
shares. This indicates that a shareholder of 100 such stated in the articles of incorporation which are not
shares is an aliquot sharer in the assets of the violative of the provisions of the Corporation Code.5
corporation, no matter what value they may have, to o Under the policy of the Corporation Code that does not
the extent of 100/1,000 or 1/10. Thus, by removing the grant benefits to a share unless expressly provided for
par value of shares, the attention of persons interested in the articles of incorporation, the naming of shares as
in the financial condition of a corporation is focused "preferred" without indicating what preferential rights
upon the value of assets and the amount of its debts."1 they are accorded, would not give such preferred shares
Preferred stocks are those which entitle the shareholder to
some priority on dividends and asset distribution. CIR v. Court
of Appeals, 301 SCRA 152 (1999).

2
Republic Planters Bank v. Agana, 269 SCRA 1, 80 SCAD 1 (1997).
3
Republic Planters Bank v. Agana, 269 SCRA 1, 80 SCAD 1 (1997).
4
1
Delpher Trades Corp. v. Intermediate Appellate Court, 157 SCRA 349, 353-354 (2013 ed.). Manila, Philippines: Rex Book Store.
5
[1988], quoting directly from AGBAYANI, COMMENTARIES AND JURISPRUDENCE ON THE Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.
COMMERCIAL LAWS OF THE PHILIPPINES, Vol. III, 1980 Ed., p. 107). (2013 ed.). Manila, Philippines: Rex Book Store.


any right in addition to those enjoyed by common Company Limited (First Pacific), a Hong Kong-based investment
shares.1 management and holding company and a shareholder of the Philippine
In the absence of provisions in the articles of incorporation Long Distance Telephone Company (PLDT). (Note: First Pacific had a
denying voting rights to preferred shares, preferred shares have right of first refusal in accordance with the Articles of Incorporation of
the same voting rights as common shares. However, preferred PTIC thats why the shares were sold to their affiliate company).
shareholders are often excluded from any control, that is,
deprived of the right to vote in the election of directors and on The petitioner questioned the sale on the ground that it also involved an
other matters, on the theory that the preferred shareholders indirect sale of 12 million shares (or about 6.3 percent of the
are merely investors in the corporation for income in the same outstanding common shares) of PLDT owned by PTIC to First Pacific.
manner as bondholders. In fact, under the Corporation Code With the this sale, First Pacifics common shareholdings in PLDT
only preferred or redeemable shares can be deprived of the increased from 30.7 percent to 37 percent, thereby increasing the total
right to vote. Common shares cannot be deprived of the right to common shareholdings of foreigners in PLDT to about 81.47%. This,
vote in any corporate meeting, and any provision in the articles according to the petitioner, violates Section 11, Article XII of the 1987
of incorporation restricting the right of common shareholders to Philippine Constitution which limits foreign ownership of the capital of a
vote is invalid. Gamboa v. Teves, 652 SCRA 690 (2011); affirmed public utility to not more than 40%.
in Heirs of Gamboa v. Teves, 682 SCRA 397 (2012).
Issue: Whether or not the term capital in Section 11, Article XII of the
Gamboa v. Teves Constitution refers to the total common shares only, or to the total
outstanding capital stock (combined total of common and non-voting
Facts: Prime Holdings Inc. (PHI) owned 46% of the outstanding capital preferred shares) of PLDT, a public utility.
stock of the Philippine Telecommunications Investment Corporation
(PTIC). PTIC owned 26% of the outstanding common shares of PLDT. The Held: YES. The Court partly granted the petition and held that the term
shares held by PHI were sequestered by the PCGG and declared to be ill- capital in Section 11, Article XII of the Constitution refers only to
gotten wealth of the Marcos. This being the case, the Inter-Agency shares of stock entitled to vote in the election of directors of a public
Privatization Council (IPC) of the Philippine Government sold the shares utility, i.e., to the total common shares in PLDT.
to Metro Pacific Assets Holdings, Inc. (MPAH), an affiliate of First Pacific
Holders of PLDT preferred shares are explicitly denied of the right to
vote in the election of directors. On the other hand, holders of common
1
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. shares are granted the exclusive right to vote in the election of


directors. To summarize, (1) foreigners own 64.27% of the common voting or not, and claims that the term capital in section 11, article XII
shares of PLDT, which class of shares exercises the sole right to vote in of the constitution has long been settled and defined to refer to the
the election of directors, and thus exercise control over PLDT; (2) total outstanding shares of stock, whether voting or non-voting.
Filipinos own only 35.73% of PLDTs common shares, constituting a
minority of the voting stock, and thus do not exercise control over PLDT; Issue: Whether or not the contention of Pangilinan et al. is correct.
(3) preferred shares, 99.44% owned by Filipinos, have no voting rights;
(4) preferred shares earn only 1/70 of the dividends that common Held: NO. The Supreme Court has never yet interpreted the meaning of
shares earn; (5) preferred shares have twice the par value of common capital in the context of section 11, article XII of the Constitution. For
shares; and (6) preferred shares constitute 77.85% of the authorized more than 75 years since the 1935 Constitution, the court has not
capital stock of PLDT and common shares only 22.15%. This kind of interpreted or defined the term capital found in various economic
ownership and control of a public utility is a mockery of the provisions of the 1935, 1973 and 1987 constitutions. There has never
Constitution. been a judicial precedent interpreting the term capital in the 1935,
1973 and 1987 constitutions, until now. Hence, it is patently wrong and
Doctrine: Considering that common shares have voting rights which utterly baseless to claim that the court in defining the term capital in
translate to control, as opposed to preferred shares which usually have its 28 June 2011 decision modified, reversed, or set aside the purported
no voting rights, the term capital in Section 11, Article XII of the long-standing definition of the term capital, which supposedly refers
Constitution refers only to common shares. However, if the preferred to the total outstanding shares of stock, whether voting or non-voting.
shares also have the right to vote in the election of directors, then the
term capital shall include such preferred shares because the right to Doctrine: Capital refers only to those shares which have voting rights,
participate in the control or management of the corporation is exercised and not the total outstanding shares of stock.
through the right to vote in the election of directors. In short, the term
capital in Section 11, Article XII of the Constitution refers only to D. Redeemable Shares (Section 8; Republic Planters Bank v. Agana,
shares of stock that can vote in the election of directors. 269 SCRA 1 [1997])

Heirs of Gamboa v. Teves Section 8. Redeemable shares.
Redeemable shares may be issued by the corporation when expressly
Facts: Contesting the ruling in Gamboa v. Teves (2011), Pangilinan et al. so provided in the articles of incorporation. They may be purchased or
claims that Securities and Exchange Commission and DOJ have always taken up by the corporation upon the expiration of a fixed period,
interpreted capital to refer to total outstanding shares of stock whether regardless of the existence of unrestricted retained earnings in the


books of the corporation, and upon such other terms and conditions as would now constitute a clear exception to the trust fund
may be stated in the articles of incorporation, which terms and doctrine.2
conditions must also be stated in the certificate of stock representing o Nevertheless, the consistency of policy of protecting
said shares. corporate creditors is still there in the sense that
creditors will not be misled since it is required that the
Redemption is repurchase, a reacquisition of stock by a redemption feature must be stated both in the articles
corporation which issued the stock in exchange for property, of incorporation and the certificates of stock.
whether or not the acquired stock is cancelled, retired or held in o The Rules provide that all corporations which have
the treasury. Essentially, the corporation gets back some of its issued redeemable shares with mandatory redemption
stock, distributes cash or property to the shareholder in features are required to set up and maintain a sinking
payment for the stock, and continues in business as before. The fund, which shall be deposited with a trustee bank and
redemption of stock dividends previously issued is used as a veil not be invested in risky or speculative ventures. The
for the constructive distribution of cash dividends. Rules also provide that redeemable shares may be
Commissioner of Internal Revenue v. Court of Appeals, 301 redeemed, regardless of the existence of unrestricted
SCRA 152 (1999). retained earnings, "provided that the corporation has,
o The Securities and Exchange Commission Rules after such redemption, sufficient assets in its books to
Governing Redeemable and Treasury Shares,1 expressly cover debts and liabilities inclusive of capital stock."
define "redeemable shares" as shares of stock issued by o In addition, the Securities and Exchange Commission
a corporation which the corporation can purchase or Rules provide that redeemable shares reacquired shall
take up from their holders as expressly provided for in be considered retired and no longer issuable, unless
its articles of incorporation and certificates of stock otherwise provided in the articles of incorporation of
representing said shares. the redeeming corporation.
The express provisions of Section 8 which allows redemption It has been held that when the certificates of stock recognizes
"regardless of the existence of unrestricted retained earnings" redemption, but the option to do so is clearly vested in the
corporation, the redemption is clearly the type known as
optional and rest entirely with the corporation and the

1
Issued by the SECURITIES AND EXCHANGE COMMISSION on 26 April 1982. See
2
SECURITIES AND EXCHANGE COMMISSION Rules and Regulations (1986 ed.), at Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.
p. 256. (2013 ed.). Manila, Philippines: Rex Book Store.


stockholder is without right to either compel or refuse the not enjoy such rights, and would necessarily include the
redemption of its stock.1 existence of common shares, which ordinarily would have the
right to vote and be voted into the board of directors. That
E. Founder Shares (Section 7)2 would have to be the rationale basis for the restriction provided
in Section 7 that such exclusive rights shall not exceed five (5)
Section 7. Founders' shares. years and subject to the approval of the Securities and Exchange
Founders' shares classified as such in the articles of incorporation may Commission. It would then also be reasonable to conclude that
be given certain rights and privileges not enjoyed by the owners of a class of shares, even when not given the nomenclature of
other stocks, provided that where the exclusive right to vote and be founders share, would necessarily fall within the provision of
voted for in the election of directors is granted, it must be for a limited Section 7 (and therefore be classified as founders share)
period not to exceed five (5) years subject to the approval of the whenever such class of shares are given the exclusive right to
Securities and Exchange Commission. The five-year period shall vote and be voted for in the election of directors, and
commence from the date of the aforesaid approval by the Securities necessarily such exclusive rights shall have a limited period of
and Exchange Commission. five (5) years.3
Effect When Exclusivity Period Expires: The Securities and
What Constitutes Founders Share? Perhaps the most obvious Exchange Commission has opined that upon the expiration of
feature of founders share is that they are issued basically to the the period within which the founders shares can exercise their
founders or initial organizers of the corporation, but nothing in exclusive right to vote and be voted for in the election of
the language of Section 7 expressly so provides. We must directors, such exclusive right would only be transferred to
presume that what makes shares as founders shares would be common shareholders who are supposed to exercise such right
that they are given the exclusive rights not given to other had there been no founders share. Other classes of shares, such
stockholders, and specially the right to vote and be voted for in as preferred shares, are not affected.4
the election of directors. The existence of founders shares must
necessarily include the fact that there are other shares that do
3
1
Republic Planters Bank v. Agana, 269 SCRA 1, 80 SCAD 1 (1997). (2013 ed.). Manila, Philippines: Rex Book Store.
2 4
In Castillo v. Balinghasay, 440 SCRA 442 (2004), the position that when the SECURITIES AND EXCHANGE COMMISSION Opinion, 10 August 1995, XXX
articles of incorporation provide expressly a class of shares to have the SECURITIES AND EXCHANGE COMMISSION QUARTERLY BULLETIN 5 (No. 1, June
exclusive right to vote and be voted for into the Board of Directors, that such 1996); SECURITIES AND EXCHANGE COMMISSION Opinion, 27 September 1989,
shares would essentially be founders share was raised but not resolved by the XXIV SECURITIES AND EXCHANGE COMMISSION QUARTERLY BULLETIN 23 (No. 1,
Court. March 1990).


F. Treasury Shares (Section 9; Commissioner v. Manning, 66 SCRA 14 the number of issues shares or the amount of the stated
[1975]). capital.1
Treasury shares may be declared as property dividend to be
Section 9. Treasury shares. issued out of the retained earnings previously used to support
Treasury shares are shares of stock which have been issued and fully their acquisition, provided that the amount of the said retained
paid for, but subsequently reacquired by the issuing corporation by earnings has not been subsequently impaired by losses.2 Any
purchase, redemption, donation or through some other lawful means. declaration and issuance of treasury shares as property dividend
Such shares may again be disposed of for a reasonable price fixed by shall be disclosed and properly designated as property dividend
the board of directors. in the books of the corporation and in its financial statements.3
Rule on Treasury Shares for Banks No bank shall purchase or
A treasury share, which may be common or preferred, may be acquire shares of its own capital stock or accept its own shares
used for a variety of corporate purposes, such as for a stock as a security for a loan, except when authorized by the
bonus plan for management and employees, or for acquiring Monetary Board; and in every case the stock so purchase or
another company. It may be held indefinitely, resold or retired. acquired shall, within six (6) months from the time of its
While held in the companys treasury, the stock earns no purchase or acquisition, be sold or disposed of at a public or
dividends and has no vote in company affairs. Philippine private sale.4
Coconut Producers Federation, Inc. v. Republic, 600 SCRA 102
(2009). G. Stock Warrants
The Securities and Exchange Commission has opined that Under the Securities and Exchange Commission Amended Rules
treasury shares have no effect on the stated capital of the Governing Warrants, 5 a "warrant" is defined as "a type of
corporation unless and until they are cancelled or retired, in security which entitles the holder the right to subscribe to, the
which event the stated capital is reduced by the amount then
1
SECURITIES AND EXCHANGE COMMISSION Opinion, 18 March 1987, Securities
representing the shares. Treasury shares must be distinguished
and Exchange Commission QUARTERLY BULLETIN (No. 1, March 1987), at pp. 19-20.
from the authorized but unissued shares: the acquisition of 2
Securities and Exchange Commission. 5(3), SECURITIES AND EXCHANGE
treasury shares does not reduce the number of issued shares or COMMISSION Rules Governing Redeemable and Treasury Shares (1982).
3
Securities and Exchange Commission. 5(3), SECURITIES AND EXCHANGE
the amount of stated capital and their sale does not increase
COMMISSION Rules Governing Redeemable and Treasury Shares (1982).
4
Securities and Exchange Commission. 10, The General Banking Law of 2000
[RA 8791].
5
XXVIII SECURITIES AND EXCHANGE COMMISSION QUARTERLY BULLETIN 78 (No. 2,
June 1994).


unissued capital stock of a corporation or to purchase issued the Issuer to the warrantholder.4 There are therefore two (2)
shares in the future, evidenced by a Warrant Certificate, types of warrant certificates, namely:
whether detachable or not, which may be sold or offered for a. Detachable warrant which may be sold, transferred or
sale to the public but does not apply to a right granted under an assigned to any person by the warrantholder separate
Option Plan duly approved by the [Securities and Exchange from, and independent of, the corresponding
Commission] for the benefit of employees, officers and/or Beneficiary Securities;5 and
directors of the issuing corporation."1 b. Non-detachable warrant which cannot be sold,
The Securities and Exchange Commission Amended Rules now transferred or assigned to any person by the
recognize two (2) types of Issuers of warrants, namely:2 warrantholder separate from, or independent of the
a. A duly registered domestic corporation which issues or Beneficiary Securities.6
proposes to issue Subscription Warrants; or Warrantholders may exercise their right granted under a
b. A person or a group of persons who issue(s) or warrant within the period approved by the Securities and
propose(s) to issue Covered Warrants. Exchange Commission which shall not be less than one (1) year,
The Rules allow for two (2) types of warrants, namely:3 nor more than five (5) years from the date of the issue of the
a. "Subscription Warrant" which entitles the holder warrants.7 An Issuer of warrants must provide for a Warrants
thereof the right to subscribe to a pre-determined Registry Book maintained by the warrants registrar independent
number of shares out of the unissued capital stock of
the Issuer;
b. "Covered Warrant" which entitles the holder thereof
4
Securities and Exchange Commission. 1(3), XXVIII SECURITIES AND EXCHANGE
the right to purchase from the Issuer a pre-determined
COMMISSION QUARTERLY BULLETIN 78 (No. 2, June 1994).
number of existing shares. 5
Securities and Exchange Commission. 1(8), XXVIII SECURITIES AND EXCHANGE
The Securities and Exchange Commission Amended Rules define COMMISSION QUARTERLY BULLETIN 78 (No. 2, June 1994). In case of detachable
warrants, the Covered Warrant Certificate must state on its face that the
a warrant certificate as the certificate representing the right
Covered Warrant does NOT represent shares of stock, but a mere right to
to a warrant which may be detachable or not, duly issued by purchase an indicated class or type of stock owned by the Issuer under the
terms and condition stated therein. Securities and Exchange Commission. 7,
1
Securities and Exchange Commission. 1(1), XXVIII SECURITIES AND EXCHANGE XXVIII SECURITIES AND EXCHANGE COMMISSION QUARTERLY BULLETIN 78 (No. 2,
COMMISSION QUARTERLY BULLETIN 78 (No. 2, June 1994). June 1994).
2 6
Securities and Exchange Commission. 1(11), XXVIII SECURITIES AND Secs. 1(9) and 12, XXVIII SECURITIES AND EXCHANGE COMMISSION QUARTERLY
EXCHANGE COMMISSION QUARTERLY BULLETIN 78 (No. 2, June 1994). BULLETIN 78 (No. 2, June 1994).
3 7
Securities and Exchange Commission. 1(2), XXVIII SECURITIES AND EXCHANGE Securities and Exchange Commission. 1(12), XXVIII SECURITIES AND
COMMISSION QUARTERLY BULLETIN 78 (No. 2, June 1994). EXCHANGE COMMISSION QUARTERLY BULLETIN 78 (No. 2, June 1994).


of the Issuer.1 Any sale, transfer, or assignment of a warrant price of the shares so purchased, which payment shall be
must be duly recorded in the Warrants Registry Book, and properly receipted for by the corporate treasurer, except where
unless recorded in therein, the transfer of warrants shall not be the grantee is an employee or officer who is not a director of
binding on the Issuer.2 the corporation in which case only 25% of the total price shall
be required, or allow a planned payroll deduction scheme.5 If
H. Stock Options the option shall be for compensation or payment of services
The Securities and Exchange Commission has issued the Rules already rendered, then the initial payment shall not be
Governing the Grants of Stock Options, which defines a stock required.6
option as "a privilege granted to a party to subscribe to a certain The Rules also provide for the following guidelines:
portion of the unissued capital stock of a corporation within a a. Stock options may be granted on the basis of
specified period and under the terms and conditions of the proportionate interests of stockholders in the capital
grant, exercisable by the grantee at any time within the period stock;
granted."3 b. Stock options granted to employees or officers who are
The Rules provide that no corporation shall grant any stock not members of the board may also be allowed after a
option unless approval by the Securities and Exchange review of the scheme since it would be in consonance
Commission is first obtained. 4 Aside from a formal board with the policy of the government to widen corporate
resolution authorizing the grant of the option, the Rules require base and to distribute corporate profits wider and more
that the application with Securities and Exchange Commission equitably;
should contain a detailed statement as to the plan or scheme by c. Stock options granted to non-stockholders may be
which the option shall be exercised. granted only upon showing that the board has been
No exercise of the right of the option shall be valid unless duly authorized to grant same by its charter or by a
accompanied by the payment of not less than 40% of the total resolution of the stockholders owning at least two-
thirds (2/3) of the outstanding capital stock of the

1
Securities and Exchange Commission. 11, XXVIII SECURITIES AND EXCHANGE corporation, both voting and non-voting;
2
Securities and Exchange Commission. 12, XXVIII SECURITIES AND EXCHANGE
3 5
Securities and Exchange Commission. 1, Rules Governing the Grants of Stock Securities and Exchange Commission. 2(g), Rules Governing the Grants of
Options (1977). Stock Options (1997).
4 6
Securities and Exchange Commission. 1, Rules Governing the Grants of Stock Securities and Exchange Commission. 2(g), Rules Governing the Grants of
Options (1977). Stock Options (1997).


d. Options granted to directors, managing groups and price should not be lower than par or less than 80% of the
corporate officers must be approved in a stockholders' market price at the time of the exercise, or if there is no
meeting by stockholders owning at least two-thirds transaction at the time of exercise, then the last asked price
(2/3) of all the outstanding capital stock, voting or non- whichever is higher; provided that if the shares are not listed,
voting; the 80% referred to shall be based on book value.3
e. The options must be exercised within a period of three
(3) years from the approval thereof by the Securities I. Re-Classification of Shares
and Exchange Commission, or upon extension thereof Reclassification of shares does not always bring any substantial
duly approved by the Securities and Exchange alteration in the subscribers proportional interest. But the
Commission; and exchange is differentthere would be a shifting of the balance
f. No transfer of the right to an option shall be made of stock features like priority in dividend declarations or
without the approval of the Securities and Exchange absence of voting rights. Yet neither the reclassification nor
Commission.1 exchange per se yields income for tax purposes. . . In this case,
The Rules anticipates circumvention thereof through favorable the exchange of shares, without more, produces no realized
subscriptions which really are stock options. Therefore the Rules income to the subscriber. There is only a modification of the
provide that when a person has been allowed to subscribe to so subscribers rights and privilegeswhich is not a flow of wealth
many shares as would make him a stockholder to at least 5% of for tax purposes. The issue of taxable dividend may arise only
the total subscribed capital stock of the corporation at a price once a subscriber disposes of his entire interests and not when
below the current market price, even when the subscription is there is still maintenance of proprietary interest. CIR v. Court
above par, such subscription shall be considered and treated as of Appeals, 301 SCRA 152 (1999).
stock option and the subscriber must be required to tender The conversion of common shares into preferred shares,
payment thereof to the corporation of at least 75% of the total pursued to the amendment of the SMC articles of incorporation,
price of the subscription.2 is a legitimate exercise of corporate powers under the
Such subscriptions shall not also be transferable until full Corporation Code. The conversion does not amount to SMC
payment thereof. If the shares are to be disposed of or sold, the using its funds to effect conversion, but would amount merely
to a reconfiguration of said (common) shares into preferred

1
Securities and Exchange Commission. 3, Rules Governing the Grants of Stock
Options (1997).
2 3
Securities and Exchange Commission. 6, Rules Governing the Grants of Stock Securities and Exchange Commission. 6, Rules Governing the Grants of Stock
Options (1997). Options (1997).


shares. Philippine Coconut Producers Federation, Inc. v. Tayabas Land Company, without any findings to costs.
Republic, 600 SCRA 102 (2009).
Doctrine:
IV. Hybrid Securities: Government v. Phil. Sugar Estates, 38 Phil. 15
(1918). In Government v. Philippine Sugar Estates Co. 38 Phil. 15 (1918),
the Supreme Court, in determining whether the arrangement
Government v. Phil. Sugar Estates between two corporations was a contract of partnership or a
loan arrangement,1 noted the following features in the contract
Facts: An action of quo warrant was brought by the Attorney-General in in ruling that it is partnership (i.e., equity) arrangement:
behalf of the Republic of the Philippines against Philippine Sugar for its a. There was no period fixed in the contract for the
dissolution on the ground that the latter had misused its corporate repayment of the money, except that the first return
authority and had engaged in the business of buying and selling real from sale of the land was to be devoted to the payment
estate which was not part of its franchise. of the capital, and there was no date fixed for such
Philippine Sugar entered into a contract with the Tayabas Land payment;
Company for the purpose of engaging in the business of b. The entire amount of the "credit" was not to be turned
purchasing lands along the right of way of the Manila Railroad over at once but was to be used by the "borrowing"
Company through the Province of Tayabas with a view to company as it was needed;
reselling the same to the Manila Railroad Company at a profit. c. The return on the capital was not by a fixed rate of
interest but 25% of the profits earned by the
Issue: Whether or not Philippine Sugar should be dissolved. "borrowing" company in "todos los negocios;"
d. The "lending" company agreed to pay 25% of all general
Held: YES. The judgment of the lower court should be modified. It is expenditures true and necessary that the "borrowing"
hereby ordered and decreed that the franchise heretofore granted to

the defendant by which it was permitted to exist and do business as a 1
The issue arose from an alleged violation of then Section 13 of the old
corporation in the Philippine Islands, be withdrawn and annulled and Corporation Law which provided that no corporation shall be authorized to
that it be disallowed to do and to continue doing business in the conduct the business of buying and selling real estate or be permitted to hold
or own real estate except such as may reasonably necessary to enable it to
Philippine Islands, unless it shall within a period of six months after final carry out the purposes for which it has been created; however, the section
decision, liquidate, dissolve and separate absolutely in every respect authorized a corporation to loan funds upon real estate, security, and purchase
and in all of its relations, complained of in the petition, with The of real estate when necessary for the collection of loans, but it shall dispose of
real estate so obtained within five years after receiving the title.


company must make for the development of its investments are taxable to the lending company, whereas
business; dividend returns on equity investments are subject to zero rate
e. The consent of the "lending" company was necessary of income tax.1
when the "borrowing" company desired to sell the land
at below an agreed market price, but was not required V. Quasi-Reorganization
if the selling price was over the benchmark figure; and
f. The "lending" company acted as treasurer of the entire A. Reduction of Capital Stock (Section 38)
enterprise.
The foregoing terms and conditions of the contract between the Section 38. Power to increase or decrease capital stock; incur, create
two corporations indicated that although denominated as a loan or increase bonded indebtedness.
agreement, the arrangement between the companies was No corporation shall increase or decrease its capital stock or incur,
actually one of partnership, with the amount "loaned" create or increase any bonded indebtedness unless approved by a
constituting actual equity investment in the venture. The Court majority vote of the board of directors and, at a stockholder's meeting
held: "It is difficult to understand how this contract can be duly called for the purpose, two-thirds (2/3) of the outstanding capital
considered a loan. There was no date fixed for the return of the stock shall favor the increase or diminution of the capital stock, or the
money and there was no fixed return to be made for the use of incurring, creating or increasing of any bonded indebtedness. Written
the money. The return was dependent solely upon the profits of notice of the proposed increase or diminution of the capital stock or of
the business. It is possible for the defendant to receive a return the incurring, creating, or increasing of any bonded indebtedness and
from the business even after all of the `capital' has been of the time and place of the stockholder's meeting at which the
returned. The capital was to be returned as soon as the land proposed increase or diminution of the capital stock or the incurring or
was sold and apparentlythere were to be no profits until this increasing of any bonded indebtedness is to be considered, must be
capital was returned. The defendant was not to receive addressed to each stockholder at his place of residence as shown on
anything for the use of said sum until after the capital had been the books of the corporation and deposited to the addressee in the
fully repaid, which is not consistent with the idea of loan. It is
not impossible to provide that the capital be repaid first but the
1
usual method is to pay the interest first. . ." Under the 1997 National Internal Revenue Code, although dividends received
by a domestic corporation from another domestic corporation are exempt from
The other practical consideration for investors in choosing income tax (Securities and Exchange Commission. 27[D][4]), beginning 1
between equity or loan investments in a corporation boils down January 1998, dividends declared from profits earned from that date to
to tax considerations: the interests returns on loans or credit individuals are subject to a final tax of 10% (Securities and Exchange
Commission. 24[B][2]).


post office with postage prepaid, or served personally. Any increase or decrease in the capital stock or the incurring, creating
or increasing of any bonded indebtedness shall require prior approval
A certificate in duplicate must be signed by a majority of the directors of the Securities and Exchange Commission.
of the corporation and countersigned by the chairman and the
secretary of the stockholders' meeting, setting forth: One of the duplicate certificates shall be kept on file in the office of
the corporation and the other shall be filed with the Securities and
1. That the requirements of this section have been complied with; Exchange Commission and attached to the original articles of
incorporation. From and after approval by the Securities and Exchange
2. The amount of the increase or diminution of the capital stock; Commission and the issuance by the Commission of its certificate of
filing, the capital stock shall stand increased or decreased and the
3. If an increase of the capital stock, the amount of capital stock or incurring, creating or increasing of any bonded indebtedness
number of shares of no-par stock thereof actually subscribed, the authorized, as the certificate of filing may declare: Provided, That the
names, nationalities and residences of the persons subscribing, the Securities and Exchange Commission shall not accept for filing any
amount of capital stock or number of no-par stock subscribed by each, certificate of increase of capital stock unless accompanied by the
and the amount paid by each on his subscription in cash or property, sworn statement of the treasurer of the corporation lawfully holding
or the amount of capital stock or number of shares of no-par stock office at the time of the filing of the certificate, showing that at least
allotted to each stock-holder if such increase is for the purpose of twenty-five (25%) percent of such increased capital stock has been
making effective stock dividend therefor authorized; subscribed and that at least twenty-five (25%) percent of the amount
subscribed has been paid either in actual cash to the corporation or
4. Any bonded indebtedness to be incurred, created or increased; that there has been transferred to the corporation property the
valuation of which is equal to twenty-five (25%) percent of the
5. The actual indebtedness of the corporation on the day of the subscription: Provided, further, That no decrease of the capital stock
meeting; shall be approved by the Commission if its effect shall prejudice the
rights of corporate creditors.
6. The amount of stock represented at the meeting; and
Non-stock corporations may incur or create bonded indebtedness, or
7. The vote authorizing the increase or diminution of the capital stock, increase the same, with the approval by a majority vote of the board
or the incurring, creating or increasing of any bonded indebtedness. of trustees and of at least two-thirds (2/3) of the members in a
meeting duly called for the purpose.


On the other hand, in stock consolidations, new shares are
Bonds issued by a corporation shall be registered with the Securities issued in replacement of old shares with a higher par or issued
and Exchange Commission, which shall have the authority to value, without affecting the total value of the issued shares.
determine the sufficiency of the terms thereof. (17a) Stock consolidations are resorted to make each share have a
higher par or issued value and thereby make them more
Reduction of capital stock cannot be employed to avoid the expensive in acquiring and to bring the stock within higher end
corporations obligations under the Labor Code. Madrigal & Co. of the market.3
v. Zamora, 151 SCRA 355 (1987).
VI. Shareholders Not Corporate Creditors. Garcia v. Lim Chu Sing, 59
B. Stock Splits Phil. 562 (1934).
In a stock split, each of the issued and outstanding shares is
simply broken up into a greater number of shares, each Garcia v. Lim Chu Sing
representing a proportionately smaller interest in the
corporation. The usual purpose of a stock split is to lower the Facts: Lim Cuan Sy delivered to Mercantile Bank of China a promissory
price per share to a more marketable price and thus increase note guaranteed by Lim Chu Sing as surety and also secured by a chattel
the number of the potential shareholders. They encourage mortgage. It also has a stipulation that in case of default, the whole
investment.1 amount will become due and demandable. Lim Cuan Sy failed to comply
Under Accounting Standards, when the number of additional with his obligation and so the bank required Lim Chu Sing as surety to
shares issued as a stock dividend is so great that it has, or may deliver the promissory note (P19, 605.17) with interest at 6% p.a.
reasonably be expected to have, the effect of materially
reducing the share market value, the transaction partakes of the Lim Chu Sing had been paying the monthly installments with interest on
nature of a stock split. An issuance of additional shares of 20% thereon, leaving a balance of P9,105.17, after which he defaulted in the
or more of the number of previously outstanding shares is payment of the installments which made the promissory note due and
regarded as a stock split.2 demandable. The Mercantile Bank of China then foreclosed the chattel
mortgage and privately sold the property without the knowledge of Lim
C. Stock Consolidations Chu Sing. Lim Chu Sing is also the owner of shares of stock at the

1
3
2
Statement of Financial Accounting Standards No. 18, par. 10. (2013 ed.). Manila, Philippines: Rex Book Store.


Mercantile Bank amounting to P10,000. Mercantile Bank seeks to apply corporation's capital, or the right to share in the proceeds when
the amount of P10,000 representing the value of his shares of stock to the remaining assets of the corporation are distributed
defendants indebtedness of P9,105.17. according to law and equity, its holders do not own any part of
the assets represented by the capital of the corporation; nor are
Issue: Whether or not it is proper to compensate the indebtedness with the stockholders entitled to the possession of any definite
the value of the shares of stock portion of the corporation's assets or properties. 2 Shares of
stock do not legally represent a proprietary claim of co-
Held: NO. The defendant-appellant Lim Chu Sing not being a creditor of ownership or tenancy-in-common in the assets and properties
the Mercantile Bank of China, although the latter is a creditor of the of the corporation.3
former, there is no sufficient ground to justify a compensation. The Supreme Court in Magsaysay-Labrador v. Court of Appeals,4
has characterized a stockholder's interest in corporate
Doctrine: The shares of a banking corporation do not constitute an contracts, transactions and properties, "if it exists at all, . . . is
indebtedness of the corporation to the stockholder and, therefore, the indirect, contingent, remote, conjectural, consequential and
latter is not a creditor of the former for such shares. The indebtedness collateral. At the very least, their interest is purely inchoate, or
of a shareholder to a banking corporation cannot be compensated with in sheer expectancy of a right in the management of the
the amount of his shares therein, there being no relation of creditor and corporation and to share in the profits thereof and in the
debtor with respect to such shares. properties and assets thereof on dissolution, after payment of
the corporate debts and obligations."
Shares of stock in a corporation constitute personal property of
the stockholder, which he can contract with as in any other VII. Subscription Contract (Sections. 60 and 72; overturned Trillana v.
form of property, like assignment by way of disposition, or Quezon Colegialla, 93 Phil. 383 [1953]).
pledge by way of encumbrance. Shares of stock therefore are
properties and have intrinsic pecuniary value to the The subscription agreement underpins the relationship between
1
stockholders. the stockholder and the corporation. The subscription
Shares of stock, however, do not represent proprietary rights of
stockholders to the assets or properties of the corporation.
2
Boyer-Roxas v. Court of Appeals, 211 SCRA 470 (1992).
Although shares of stock represent aliquot parts of the 3
Magsaysay-Labrador v. Court of Appeals, 180 SCRA 266, 271-272 (1989);
Stockholders of F. Guanzon and Sons, Inc. v. Register of Deeds of Manila, 6
1
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. SCRA 373 (1962); Pascual v. Del Sanz Orozco, 19 Phil. 82, 86 (1911).
4
(2013 ed.). Manila, Philippines: Rex Book Store. 180 SCRA 266, 271 (1989).


agreement therefore is a special contract in Corporate Law; subscription agreement shall exist upon meeting of the minds,
although it is governed by the Law on Contracts, specifically as a i.e., consent, it would necessarily mean that the covered shares
species of sale contracts, a subscription agreement has special have therefore been issued by the corporation at that point in
features that go beyond such discipline, and delve into the very time, since subscription and issuance as to a particular share of
heart of Corporate Law. stock happen exactly at same point in time, being merely
opposite sides of the same coin.
Section 60. Subscription contract. What can be drawn from the provisions of Sections 60, 63, and
Any contract for the acquisition of unissued stock in an existing 72 is that the entering into any contract for the acquisition of
corporation or a corporation still to be formed shall be deemed a unissued stock, which shall be deemed as subscription
subscription within the meaning of this Title, notwithstanding the fact agreement, would constitute itself the tradition by which the
that the parties refer to it as a purchase or some other contract. (n) subscriber becomes a stockholder of the corporation, and
through which he becomes the owners of the shares of stock
Section 72. Rights of unpaid shares. subscribed and exercise acts of ownership, subject to the
Holders of subscribed shares not fully paid which are not delinquent limiting provisions under the Corporation Code, such as the lien
shall have all the rights of a stockholder. (n) which the corporation has over not fully paid shares under the
second paragraph of Section 63. In other words, unlike the
It is subscription to shares of stock that creates the legal species sale, which constitutes merely a title and not a mode by
relationship between the stockholder and the corporation; it is which ownership of the subject matter is transferred, a
subscription, and not the payment of such subscription, that subscription agreement constitutes the very mode by which the
grants to the stockholder the statutory and common rights covered shares are thereby issued and then owned by the
granted to stockholders.1 subscriber.

A. When Shares Deemed Subscribed2 B. Purchase Agreement: Bayla v. Silang Traffic Co., Inc., 73 Phil. 557
Therefore, a subscription agreement exists upon the meeting of (1942).
the minds of the corporation and the subscriber as to the
number and subscription value of shares. And since a Bayla v. Silang Traffic Co., Inc.

1
Fua Cun v. Summers, 44 Phil. 705 (1923). Facts: Sofronio Bayla and other petitioners instituted this action in the
2
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. CFI of Cavite against Silang Traffic Corporation in order to recover a sum


of money they paid to the corporation on account of shares of stock contract over unissued shares of stocks. Section 60 of the present code
they each agreed to take and pay for under the condition that if the removed said distinctions and presently provides all agreements
subscriber fails to pay any of the installments when due, or if they are pertaining to the purchase of unissued shares would be considered as
levied upon by the creditors of the said subscriber, the shares were to subscription agreements.
revert to the seller and the payments already made will also be forfeited
to the seller, and that the latter may take possession without court Characteristics of Subscription Agreements. There can be a
proceedings. The agreement was later rescinded, although the Board of subscription only with reference to shares of stock which have
Directors claim that such rescission is not applicable to Bayla and the never been issued, in the following cases:
others because their failure to pay installments thereon had already o The original issuance from authorized capital stock at
caused their shares and previous installments to be forfeited. the time of incorporation;
o The opening, during the life of the corporation, of the
Issue: Whether or not the contract is a contract of subscription portion of the original authorized capital stock
previously unissued; or
Held: NO. The said agreement is entitled Agreement for Installment o The increase of authorized capital stock achieved
Sale of Shares in the Silang Traffic Co, and while the purchaser is through a formal amendment of the articles of
designated as the subscriber and the corporation seller, the incorporation and registration thereof with the
agreement was entered into in 1935 long after the incorporation and Securities and Exchange Commission.
organization of the corporation which took place in 1927. The purchase Any transaction covering issued shares of stock is not a
was to be payable in quarterly installments for five years. The lower subscription agreement, and therefore is governed by the Law
court failed to see the distinction between a subscription and a on Sales on assignment.1
purchase. Given that this is a sale, the rescission of such is valid. o Bayla v. Silang Traffic Co., Inc., which was decided under
the Corporation Law, laid down the distinctions
Doctrine: A subscription, properly speaking, is the mutual agreement between a subscription contract and a purchase
of the subscribers to take and pay for the stock of a corporation, while a agreement. However, since the distinctions between a
purchase is an independent agreement between the individual and the subscription agreement and purchase of stock led to
corporation to buy shares of stock from it at stipulated price. various frauds being committed against stockholders

NOTE: This case was decided under the old corporation law thats why 1
See Chapter XIV of the CLBs book LAW ON SALES (Rex Book Store, 1998 ed.),
there were distinctions between a subscription contract and a purchase on the characteristics of assignment of intangibles, like shares of stock, as a
species of sale.


and creditors of the corporation, Section 60 of the incorporation agreement is replaced by the promoter's
Corporation Code removed such distinctions and now contract, although this is merely an expectancy.1
provides that all agreements pertaining to the purchase It also recognizes the contractual relationship among all the
of unissued shares of stock of a corporation would be subscribers. Whether it is a pre-incorporation agreement or an
considered as subscription agreements and governed by ordinary subscription agreement, a subscription is essentially an
the principles of Corporate Law. agreement among the stockholders. This is the second
relationship and the reason why it is provided in Section 61 that
C. Pre-Incorporation Subscription (Section 61) a subscriber can only withdraw from the contract or agreement
when there is consent of all subscribers. Under this concept, a
Section 61. Pre-incorporation subscription. subscription agreement is in a sense a contract among the
A subscription for shares of stock of a corporation still to be formed several subscribers, and no one of the subscribers can thus
shall be irrevocable for a period of at least six (6) months from the withdraw from the contract without the consent of all the
date of subscription, unless all of the other subscribers consent to the others and thereby diminish, without the universal consent of
revocation, or unless the incorporation of said corporation fails to all the others, the common fund in which all have acquired an
materialize within said period or within a longer period as may be interest.2
stipulated in the contract of subscription: Provided, That no pre- When properties were assigned pursuant to a pre-incorporation
incorporation subscription may be revoked after the submission of the subscription agreement, but the corporation fails to issue the
articles of incorporation to the Securities and Exchange Commission. covered shares, the return of such properties to the subscriber
(n) is a direct consequence of rescission and does not amount to
corporate distribution of assets prior to dissolution. On Yong v.
Section 61 of the Corporation Code recognized that the Tiu, 375 SCRA 614 (2002).
subscription agreement is a contract between the subscriber
and the corporation. Although the corporation is still non- On Yong v. Tiu
existent since it is still in the process of incorporation, it is still
bound, under the pre-incorporation agreement. The pre- Facts: The Tiu family members are the owners of First Landlink Asia

1
2
SECURITIES AND EXCHANGE COMMISSION Opinion, 30 Oct. 1989, SECURITIES
AND EXCHANGE COMMISSION QUARTERLY BULLETIN 50-52 (1 March 1990).


Development Corporation (FLADC). One of the corporations projects is mean its dissolution as provided in the Corporation Code." The
the construction of Masagana Citimall in Pasay City. However, due to prohibition, therefore, under Section 122 against distribution of assets
financial difficulties (they were indebted to PNB for P190 million), the or properties of the corporation does not apply.
Tius feared that the construction would not be finished. So to prevent
the foreclosure of the mortgage on the two lots where the mall was The Court of Appeals correctly confirmed the rescission of the Pre-
being built, they invited the Ongs to invest in FLADC. The two parties Subscription Agreement on the basis of Art. 1191 of the Civil Code. Art.
entered into a Presubscription Agreement whereby each of them would 1191. The power to rescind obligations is implied in reciprocal ones, in
hold 1,000,000 shares each and be entitled to nominate certain officers. case one of the obligors should not comply with what is incumbent
The Tius contributed a building and two lots, while the Ongs upon him. As a legal consequence of rescission, the order of the Court
contributed P100M. of Appeals to return the cash and property contribution of the parties is
based on law, hence, cannot be considered an act of misappropriation.
Two years later, the Tuis filed for rescission of the Presubscription
Agremement because the Ongs refused to issue them their shares of Doctrine: When properties were assigned pursuant to a pre-
stock and from assuming positions of VP and Treasurer to which they incorporation agreement, but the corporation fails to issue the covered
were entitled to nominate. The Ongs contended that they could not shares, the return of such properties to the subscriber is a direct
issue the new shares to the Tius because the latter did not pay the consequence of rescission and does not amount to corporate
capital gains tax and the documentary stamp tax of the lots. And distribution of assets prior to dissolution.
because of this, the Securities and Exchange Commission would not
approve the valuation of the property contribution of the Tius. The NOTE: On 2003, The SC reversed itself on motion for reconsideration by
Court of Appeals ordered liquidation of FLADC to enforce rescission of the Ongs which held: The rescission of the Pre-Subscription Agreement
the contract which was granted only to prevent squabbles and will effectively result in the unauthorized distribution of the capital
numerous litigations between the parties. assets and property of the corporation, thereby violating the Trust Fund
Doctrine and the Corporation Code, since rescission of a subscription
Issue: Whether or not the order of the Court of Appeals for the return agreement is not one of the instances when distribution of capital assets
of the parties' contribution (distribution of FLADC assets, in the words of and property of the corporation is allowed. Rescission will, in the final
the Ongs) violates Section 122 of the Corporation Code. analysis, result in the premature liquidation of the corporation without
the benefit of prior dissolution in accordance with Sections 117, 118,
Held: NO. The Court of Appeals clarified in its Resolution promulgated 119 and 120 of the Corporation Code.
on August 17, 2000 that "in ordering liquidation, the Court does not


D. Release from Subscription Obligation: Tan v. Sycip, 499 SCRA 216 members, the quorum in the present case should be 6. Therefore, there
(2006).1 being a quorum, the annual members meeting, conducted with six
members present, was valid (as to other resolutions).
Tan v. Sycip
HOWEVER, the election of the four trustees cannot be legally upheld
Facts: Grace Christian High School (GCHS) is a nonstock, non-profit for the obvious reason that it was held in an annual meeting of the
educational corporation with fifteen (15) regular members, who also members (where a majority of the Board were present), not of the
constitute the board of trustees. During the annual members meeting board of trustees. We cannot ignore the GCHS bylaw provision, which
held on April 6, 1998, there were only eleven (11) living member- specifically prescribes that vacancies in the board must be filled up by
trustees, as four (4) had already died. Out of the eleven, seven (7) the remaining trustees who must sit as a board in order to validly elect
attended the meeting through their respective proxies. The meeting the new ones.
was convened and chaired by Atty. Sabino Padilla Jr. over the objection
of Atty. Antonio C. Pacis, who argued that there was no quorum. In the Doctrine: Membership in and all rights arising from a non-stock
meeting, Petitioners Ernesto Tanchi, Edwin Ngo, Virginia Khoo, and corporation are personal and non-transferable, unless the articles of
Judith Tan were voted to replace the four deceased member-trustees. incorporation or the bylaws of the corporation provide otherwise. The
determination of whether or not dead members are entitled to
Held: NO. Under Section 52 of the Corporation Code, the majority of exercise their voting rights (through their executor or administrator)
the members representing the actual number of voting rights, not the depends on the articles of incorporation or bylaws.
number or numerical constant that may originally be specified in the
articles of incorporation, constitutes the quorum. Under the By-Laws of One of the implications of considering the subscription contract
GCHS, membership in the corporation shall, among others, be to be one entered into among stockholders is that it is beyond
terminated by the death of the member. The dead members who are the powers of the board of directors to release the subscribers
dropped from the membership roster in the manner and for the cause since the consent of all subscribers is necessary.2 And even if the
provided for in the By-Laws of GCHS are not to be counted in all the subscribers would approve the release of a particular
determining the requisite vote in corporate matters or the requisite subscriber it is still not possible if the creditors would be
quorum for the annual members meeting. With 11 remaining prejudiced, under the trust fund doctrine.3

2
Velasco v. Poizat, 37 Phil. 802 (1918)
1 3
Velasco v. Poizat, 37 Phil. 802 (1918); PNB v. Bituloc Sawmill, Inc., 23 SCRA Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.
1366 (1968); National Exchange Co. v. Dexter, 51 Phil. 601 (1928). (2013 ed.). Manila, Philippines: Rex Book Store.


Stocks shall not be issued for a consideration less than the par or
E. Condition of Payment Provided in By-laws. De Silva v. Aboitiz & Co., issued price thereof. Consideration for the issuance of stock may be
44 Phil. 755 (1923). any or a combination of any two or more of the following:

De Silva v. Aboitiz & Co.1 1. Actual cash paid to the corporation;

Facts: De Silva subscribed for 650 shares of stock. He has paid only 200 2. Property, tangible or intangible, actually received by the
shares. Subsequently, the Board of said corporation declared, by corporation and necessary or convenient for its use and lawful
resolution, the unpaid subscription to be due and demandable; and purposes at a fair valuation equal to the par or issued value of the
non-payment of which on the date fixed would amount to a sale of said stock issued;
shares. De Silva questioned said authority of the Board, as the
corporation's by-laws provided that the Board may deduct an amount 3. Labor performed for or services actually rendered to the
from the net profit to be applied to unpaid subscriptions. He contended corporation;
that the Board cannot prescribe another manner of collecting unpaid
subscriptions when one has already been provided in the by-laws. 4. Previously incurred indebtedness of the corporation;

Held: The Court ruled that the Board of Directors has absolute 5. Amounts transferred from unrestricted retained earnings to stated
discretion to choose which remedy it deems proper in order to collect capital; and
on the unpaid subscriptions. If it does not which to make use of the
authority given to it in the by-law, it still has two other remedies. It may 6. Outstanding shares exchanged for stocks in the event of
put up the unpaid stock for sale as provided in Sections 38 to 48 of the reclassification or conversion.
Corporation Law or by action in court.
Where the consideration is other than actual cash, or consists of
VIII. CONSIDERATION (Section 62): intangible property such as patents of copyrights, the valuation
thereof shall initially be determined by the incorporators or the board
Section 62. Considering for stocks. of directors, subject to approval by the Securities and Exchange
Commission.

1
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. Shares of stock shall not be issued in exchange for promissory notes or


future service. of the cash consideration in order to make the subscription
agreement valid and binding. Indeed, a subscription agreement
The same considerations provided for in this section, insofar as they is a consensual contract, perfect, valid and binding upon the
may be applicable, may be used for the issuance of bonds by the meeting of the minds of the parties on the subject matter (the
corporation. shares subscribed) and the consideration.
Therefore, even though the consideration agreed upon between
The issued price of no-par value shares may be fixed in the articles of the corporation and the subscriber may be "cash", the non-
incorporation or by the board of directors pursuant to authority payment of the consideration does not render the contract
conferred upon it by the articles of incorporation or the by-laws, or in invalid or void, for indeed the unpaid subscription constitutes
the absence thereof, by the stockholders representing at least a "subscription receivable" in the books of the corporation. Only
majority of the outstanding capital stock at a meeting duly called for when there is a call by the board, or when under the terms of
the purpose. (5 and 16) the subscription agreement payment is due, is the stockholder
legally required to pay actual cash to the corporation, and
Atty. Hofilea while youre free to choose how you pay for failure to do so would subject the shares to being declared
your shares, the company must always receive the value for the delinquent and leading to the suspension of the rights of a
shares they are parting with. stockholder.
Stock dividends are in the nature of shares of stock, the
consideration for which is the amount of unrestricted retained B. Property3
earnings converted into equity in the corporations books. The property which a corporation may accept in exchange for its
Lincoln Phil. Life v. Court of Appeals, 293 SCRA 92 (1998).1 stock must be of a kind which the corporation may lawfully
acquire and hold in carrying out the purposes of its
A. Cash2 incorporation, and which is necessary or proper for it to own in
In spite of the wordings of Section 62 of cash actually paid to carrying on its business. 4 It cannot lawfully issue stock for
the corporation, it is not required that there be actual payment property which its charter does not authorize it to acquire, or
for property acquired for an unauthorized purpose.
1
The basis for determining the documentary stamps due on stock dividends
declared would be their book value as indicated in the latest audited financial
statements of the corporation, and not the par value thereof. Commissioner of
3
Internal Revenue v. Lincoln Phil. Life Insurance Co., 379 SCRA 423 (2002). Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.
2
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.
4
(2013 ed.). Manila, Philippines: Rex Book Store. Securities and Exchange Commission. 62, Corporation Code.


The property must be of substantial nature, having a pecuniary other stockholders. Compensation payable for services actually
value capable of being ascertained, and must be something real rendered to the corporation is credit which is property and
and tangible as distinguished from something constructive or whose value is ascertainable.
speculative; and it must be of such character that it can be An agreement to issue stock for services to be rendered in the
delivered to the corporation, instead of being merely future is void under Section 62 of the Corporation Code, and the
communicated to its officers or employees. It must also be such corporation should not be estopped to deny that the services
as is capable of being applied to the payment of debts and of constituted payment of the stock subscription even though it
distribution among the stockholders. has received the benefit thereof.
The Securities and Exchange Commission has ruled that
property, such as financial instruments and receivables, may be D. Shares3
legally accepted as capital contributions, subject to the Stock dividends are in the nature of shares of stock, where the
following conditions: consideration is the amount of unrestricted retained earnings
a. Actually received by the corporation; converted into equity in the corporations books.4
b. Necessary or convenient for the corporations use and o Declaration of stock dividends should be distinguished
lawful purpose; and from reclassification or conversion of shares which do
c. At a fair valuation equal to the par value of the stock not really affect the integrity of capital stock which has
issued to be approved by the Securities and Exchange been paid-up previously but only changes its
Commission.1 composition or manner of classification.

C. Service2 E. Retained Earnings
A corporation is allowed to receive as payment for its stocks not
only money and property but also labor performed for or F. Watered Stocks (Section 65)
services actually rendered to the corporation provided the
transaction is in good faith and no fraud is perpetrated upon Section 65. Liability of directors for watered stocks.
Any director or officer of a corporation consenting to the issuance of
stocks for a consideration less than its par or issued value or for a
1
SECURITIES AND EXCHANGE COMMISSION Opinion, 25 January 1995, XXIX
SECURITIES AND EXCHANGE COMMISSION QUARTERLY BULLETIN 36 (No. 2, June
3
1995) Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.
2
4
(2013 ed.). Manila, Philippines: Rex Book Store. Lincoln Philippine Life v. Court of Appeals, 293 SCRA 92, 96 SCAD 542 (1998).


consideration in any form other than cash, valued in excess of its fair directors of any stock corporation may at any time declare due and
value, or who, having knowledge thereof, does not forthwith express payable to the corporation unpaid subscriptions to the capital stock
his objection in writing and file the same with the corporate secretary, and may collect the same or such percentage thereof, in either case
shall be solidarily, liable with the stockholder concerned to the with accrued interest, if any, as it may deem necessary.
corporation and its creditors for the difference between the fair value
received at the time of issuance of the stock and the par or issued Payment of any unpaid subscription or any percentage thereof,
value of the same. (n) together with the interest accrued, if any, shall be made on the date
specified in the contract of subscription or on the date stated in the
Shares issued as fully paid when in truth the consideration call made by the board. Failure to pay on such date shall render the
received is known to be less than the par value or issued value entire balance due and payable and shall make the stockholder liable
of the shares are called "watered stock". The term sometimes is for interest at the legal rate on such balance, unless a different rate of
used to include "bonus shares" under an agreement that interest is provided in the by-laws, computed from such date until full
nothing shall be paid to the corporation for them, and "discount payment. If within thirty (30) days from the said date no payment is
shares" issued at a discount under an agreement to pay less made, all stocks covered by said subscription shall thereupon become
than the par value in money.1 delinquent and shall be subject to sale as hereinafter provided, unless
the board of directors orders otherwise. (38)
G. Payment of Balance of Subscription (Sections 66 and 67):
1. Nature of the Call (Section 67): The word call is capable of
Section 66. Interest on unpaid subscriptions. three meanings, namely: (a) it may mean the resolution of the
Subscribers for stock shall pay to the corporation interest on all unpaid board of directors for the payment of unpaid subscriptions; (b)
subscriptions from the date of subscription, if so required by, and at notification of such resolution made on the stockholders; or (c)
the rate of interest fixed in the by-laws. If no rate of interest is fixed in the time when subscriptions become payable.2
the by-laws, such rate shall be deemed to be the legal rate. (37) o A call must be uniform with respect to all holders of the
class of shares on which it is made who have already
Section 67. Payment of balance of subscription. paid an equal amount on their shares, and as a general
Subject to the provisions of the contract of subscription, the board of

2
SECURITIES AND EXCHANGE COMMISSION Opinion, 31 August 1995, XXX
1
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. SECURITIES AND EXCHANGE COMMISSION QUARTERLY BULLETIN 25 (No. 1, June
(2013 ed.). Manila, Philippines: Rex Book Store. 1996).


rule it must not exceed the balance remaining unpaid the president refused to pay, prompting the corporation to sue. The
on their shares. defense was that the call was invalid for lack of publication, and that the
2. When Call Not Necessary: There are two (2) instances when call defendant was released from liability by virtue of Resolution 17 and 4.
is not necessary to make the subscriber liable for payment of
the unpaid subscription: Issue: Whether or not the respondent is liable for unpaid subscription
a. When, under the terms of the subscription contract, despite the lack of publication.
subscription is payable, not upon call, but immediately,
or on a specified day, or when it is payable in Held: NO. Notice of any call for the payment of unpaid subscription
installments at specified times; and should be made not only personally but also by publication once a
b. If the corporation becomes insolvent, which makes the week, for four consecutive weeks in some newspapers in accordance
liability on the unpaid subscription due and demandable with Section 40 of the Corporation Code. It will be noted that section 40
regardless of any stipulation to the contrary in the is mandatory as regards publication, using the word "must". The claim
subscription agreement. that Baltazar was released from liability of paying under Resolution No.
Lingayen Gulf Electric Power Co. v. Baltazar, 93 Phil. 404 17 and 4 does not hold water because the release attempted in
(1953). Resolution No. 17 of 1946 was not valid for lack of a unanimous vote. If
found that at least seven stockholders were absent from the meeting
Lingayen Gulf Electric Power Co. v. Baltazar when said resolution was approved.

Facts: Companys president subscribed to shares and paid partially. The Doctrine: In conclusion we hold that under the Corporation Law, notice
Board made a call for payment through a resolution with the first 50% of call for payment for unpaid subscribed stock must be published,
payable within 60 days beginning August 1, 1946, and the remaining except when the corporation is insolvent, in which case, payment is
50% payable within 60 days beginning October 1, 1946. The resolution immediately demandable. We also rule that release from such payment
provided that all unpaid subscriptions after the due dates would be must be made by all the stockholders.
subject to a 12% interest per annum, and if after February 1947 they
remain unpaid, they would revert to the corporation. This resolution The Lingayen v. Baltazar case faced the question on whether or
was set aside about a year later by Resolution No. 17 which stated that not a shareholder may be released from payment without
the company was in no position to absorb unpaid shares, and the Board forfeiting his shares.
decided to issue a call for payment of unpaid shares. Resolution No. 4
was passed a year later directing for the revaluation of shares. However,


o Atty. Hofilea iffy about the implication of releasing a advertisement and expenses of sale, or unless the board of directors
shareholder from obligation if with consent of the otherwise orders, said delinquent stock shall be sold at public auction
stockholders, because it violates the trust fund doctrine. to such bidder who shall offer to pay the full amount of the balance on
A stockholder who is employed with the company, cannot offset the subscription together with accrued interest, costs of
his unpaid subscription against his awarded claims for wages, advertisement and expenses of sale, for the smallest number of shares
where there has been no call for the payment of such or fraction of a share. The stock so purchased shall be transferred to
subscription. Apodaca v. NLRC, 172 SCRA 442 (1989). such purchaser in the books of the corporation and a certificate for
such stock shall be issued in his favor. The remaining shares, if any,
H. Delinquency on Subscription (Sections 68, 69, 70 and 71; Philippine shall be credited in favor of the delinquent stockholder who shall
Trust Co. v. Rivera, 44 Phil. 469 [1923]; Miranda v. Tarlac Rice Mill Co., likewise be entitled to the issuance of a certificate of stock covering
57 Phil. 619 [1932]) such shares.

Section 68. Delinquency sale. Should there be no bidder at the public auction who offers to pay the
The board of directors may, by resolution, order the sale of delinquent full amount of the balance on the subscription together with accrued
stock and shall specifically state the amount due on each subscription interest, costs of advertisement and expenses of sale, for the smallest
plus all accrued interest, and the date, time and place of the sale number of shares or fraction of a share, the corporation may, subject
which shall not be less than thirty (30) days nor more than sixty (60) to the provisions of this Code, bid for the same, and the total amount
days from the date the stocks become delinquent. 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
Notice of said sale, with a copy of the resolution, shall be sent to every vested in the corporation as treasury shares and may be disposed of
delinquent stockholder either personally or by registered mail. The by said corporation in accordance with the provisions of this Code.
same shall furthermore be published once a week for two (2)
consecutive weeks in a newspaper of general circulation in the Section 69. When sale may be questioned.
province or city where the principal office of the corporation is No action to recover delinquent stock sold can be sustained upon the
located. ground of irregularity or defect in the notice of sale, or in the sale itself
of the delinquent stock, unless the party seeking to maintain such
Unless the delinquent stockholder pays to the corporation, on or action first pays or tenders to the party holding the stock the sum for
before the date specified for the sale of the delinquent stock, the which the same was sold, with interest from the date of sale at the
balance due on his subscription, plus accrued interest, costs of legal rate; and no such action shall be maintained unless it is


commenced by the filing of a complaint within six (6) months from the b. Failure to pay the subscription on the date specified on
date of sale. (47a) the contract of subscription.
2. Effects of delinquency
Section 70. Court action to recover unpaid subscription. a. It disqualifies the stockholder to be voted for or be
Nothing in this Code shall prevent the corporation from collecting by entitled to vote or to representation at any
action in a court of proper jurisdiction the amount due on any unpaid stockholder's meeting;
subscription, with accrued interest, costs and expenses. (49a) b. It disqualifies the stockholder to exercise any rights of a
stockholder except the right to dividends, until and
Section 71. Effect of delinquency. unless he pays the amount due on his subscription with
No delinquent stock shall be voted for, be entitled to vote or to accrued interest and the costs and expenses of
representation at any stockholder's meeting, nor shall the holder advertisement, if any.
thereof be entitled to any of the rights of a stockholder except the The holders of delinquent shares shall not be entitled to notice
right to dividends in accordance with the provisions of this Code, until of the regular or special meeting of the stockholders, nor shall
and unless he pays the amount due on his subscription with accrued the shares be included in the determination of a quorum for
interest, and the costs and expenses of advertisement, if any. (50a) shareholdings meetings. 2 The only right remaining to a
delinquent stockholder is the right to receive dividends under
The prescriptive period to recover on unpaid subscription does Section 71 of the Corporation Code, but the cash dividend due
not commence from the time of subscription but from the time shall first be applied to the unpaid balance, while stock dividend
of demand by Board of Directors to pay the balance of shall be withheld until the unpaid balance is fully paid. In effect,
subscription. Garcia v. Suarez, 67 Phil. 441 (1939). the stockholders right to dividend is even restricted.3
Who is the Highest Bidder? Remaining shares go to the 3. Who May Question a Delinquency Sale? (Section 68 and 69).
delinquent stockholder for the simple reason that Section 68
protects the delinquent stockholder himself. Corporations are IX. CERTIFICATE OF STOCK (Section 63)
not supposed to make money out of the sale.1
1. Delinquency is achieved in either one of two ways:
2
SECURITIES AND EXCHANGE COMMISSION Opinion, 13 March 1998, XXXII
a. Failure to pay the subscription on the date mentioned in
SECURITIES AND EXCHANGE COMMISSION QUARTERLY BULLETIN 3 (No. 1, June
the call; or 1998).
3
SECURITIES AND EXCHANGE COMMISSION Opinion, 13 March 1998, XXXII
1
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. SECURITIES AND EXCHANGE COMMISSION QUARTERLY BULLETIN 3 (No. 1, June
(2013 ed.). Manila, Philippines: Rex Book Store. 1998).


Section 63. Certificate of stock and transfer of shares. Tan v. Securities and Exchange Commission
The capital stock of stock corporations shall be divided into shares for
which certificates signed by the president or vice president, Facts: Alfonso Tan owned 400 shares of Visayan Educational Supply
countersigned by the secretary or assistant secretary, and sealed with Corporation, and was president until 1982 and director until 1983. In
the seal of the corporation shall be issued in accordance with the by- 1981, two of Visayans incorporators withdrew from the company. To
laws. Shares of stock so issued are personal property and may be satisfy the 5-member minimum requirement of the Board of Directors,
transferred by delivery of the certificate or certificates endorsed by petitioner Alfonso sold 50 of his shares to his brother Angel. With the
the owner or his attorney-in-fact or other person legally authorized to sale, Petitioner Alfonsos stock certificate no. 2 was cancelled, and stock
make the transfer. No transfer, however, shall be valid, except as certificates no. 6 (Angels 50 shares) and no. 8 (remaining 350 shares)
between the parties, until the transfer is recorded in the books of the were signed and issued by Angel as the new director and VP of Visayan,
corporation showing the names of the parties to the transaction, the upon orders of the president, Alfonso. Allegedly, Alfonso was required
date of the transfer, the number of the certificate or certificates and to endorse stock certificate no. 2 but he failed to give it back and
the number of shares transferred. decided to keep it. Later, Alfonso withdrew from the corporation on
condition that he be paid with stocks-in-trade equivalent to 33.3% in
No shares of stock against which the corporation holds any unpaid lieu of the stock value of his shares in the amount of P35,000.00.
claim shall be transferable in the books of the corporation. (35) Subsequently, the board of Visayan voted and cancelled stock
certificates no. 2 and no. 8. Years later, Alfonso brought a case to the
A. Nature of Certificate: Securities and Exchange Commission of Cebu questioning, for the first
A stock certificate is not necessary to render one a stockholder time, the cancellation of stock certificates no. 2 and no. 8. He contends
in a corporation; nevertheless, it is the paper representative or the cancellation on the ground that there was never any endorsement
tangible evidence of the stock itself and the various interests from Alfonso and that he never delivered his stock certificates,
therein. The stock certificate expresses the contract between rendering the transfer ineffective under Section 63 of the Corporation
the corporation and the stockholder, but it is not essential to Code.
the existence of a share in stock or the creation of the relation
of shareholder to the corporation. Tan v. Securities and Issue: Whether or not Alfonsos argument that the wording of Section
Exchange Commission, 206 SCRA 740 (1992).1 63 of the Corporation Code requires delivery as a mode of transfer is
correct.

1
C.N. Hodges v. Lezama, 14 SCRA 1030 (1965); Ponce v. Alsons Cement Corp., Held: NO. The requirement of delivery under Section 63 is merely
393 SCRA 602 (2002); Nautica Canning Corp. v. Yumul, 473 SCRA 415 (2005).


directory and not mandatory. Furthermore, there is no doubt that there o The Securities and Exchange Commission has aptly ruled
was delivery of Stock Certificate No. 2 made by the petitioner to the that a person may own shares of corporate stock
Corporation before its replacement with the Stock Certificate no. 6 no. without possessing a stock certificate which after all is
8. The problem arose when petitioner was given back stock certificate merely an evidence of ownership of the stock; and that
no. 2 for him to endorse and instead he deliberately withheld it. The for as long as the subscriber to the stock is duly
transfer was recognized when Angel, became a director and the Vice recorded in the stock and transfer book of the
President of the company by reason of his fifty (50) shares from corporation as the owner, he is considered a
Alfonso. The certificate is not stock in the corporation but is merely stockholder or record and is entitled to all the rights of a
evidence of the holders interest and status in the corporation, his stockholder.1
ownership of the share represented thereby, but is not in law the Even without the covering certificate of stock having been
equivalent of such ownership. issued, yet, the registered subscriber to the shares may validly
and legally transact with the shares, and sell and dispose of
Doctrine: Section 63 provides that xxx Shares of stocks so issued are them to any interested buyer thereof provided he complies with
personal property and may be transferred by delivery of the certificate the right of first refusal provided for in the by-laws (?) of the
or certificates indorsed by the owner. The Court held that the use of corporation. Makati Sports Club, Inc. v. Cheng, 621 SCRA 103
the word may is merely permissive rather than mandatory. The word (2010).
may indicates that the transfer may be effected in a manner different
from that provided for in the law. Makati Sports Club, Inc. v. Cheng

Atty. Hofilea at the end of the day, there may be Facts: The Board of Directors of Makati Sports Club (MSCI) adopted a
circumstances which the Court may allow as basis to dispense resolution authorizing the sale of 19 unissued shares at a floor price.
justice. Defendant Cheng was a Treasurer and Director of MSCI. Hodreal
1. Probative Value of Certificate of Stock expressed his interest to buy a share and requested his name be
A certificate of stock is the evidence of a holders interest and included in the waiting list. McFoods also expressed interest in acquiring
status in a corporation it is prima facie evidence that the a share. A Deed of Absolute Sale was executed and a Stock Certificate
holder is a shareholder of a corporation; it is not the share itself. was issued to McFoods. McFoods then sent a letter to the MSCI giving
Lincoln Phil. Life v. Court of Appeals, 293 SCRA 92 (1998); Lao v.
1
Lao, 567 SCRA 558 (2008). SECURITIES AND EXCHANGE COMMISSION Opinion, 6 January 1999, XXXIII
SECURITIES AND EXCHANGE COMMISSION QUARTERLY BULLETIN 44 (No. 1, June,
1999).


advise of its offer to resell the share. It appears that while the sale MSCI received McFoods letter of offer to sell the share, that McFoods
between the MSCI and McFoods was still under negotiations, there and Hodreal executed the Deed of Absolute Sale over the said share of
were negotiations between McFoods and Hodreal for the purchase by stock.
the latter of a share of the MSCI. Upon request, a new certificate was
issued. An investigation was then conducted and the committee held Doctrine: A certificate of stock is the paper representative or tangible
that there is prima facie evidence to show that defendant Cheng evidence of the stock itself and of the various interests therein. The
profited from the transaction because of her knowledge. certificate is not a stock in the corporation but is merely evidence of the
holders interest and status in the corporation, his ownership of the
MSCI asserts that McFoods never intended to become a legitimate share represented thereby. It is not in law the equivalent of such
holder of its purchased Class A share but did so only for the purpose ownership. It expresses the contract between the corporation and the
of realizing a profit in the amount of P1,000,000 at the expense of the stockholder, but is not essential to the existence of a share of stock or
former. MSCI further claims that Cheng confabulated [this means the nature of the relation of shareholder to the corporation.
talked] with McFoods by providing it with an insiders information as to
the status of the shares of stock of MSCI and even, allegedly with The fact that the stock certificates registered in the name of one
unusual interest, facilitated the transfer of ownership of the subject person are found in the possession of another stockholder does
share of stock from McFoods to Hodreal, instead of an original, unissued not prove that the possessor is the owner of the covered shares.
share of stock. A stock certificate is merely a tangible evidence of ownership of
shares of stock. Its presence or absence does not affect the right
Issue: Whether or not McFoods violated Section 30(e) of MSCIs of the registered owner to dispose of the shares covered by the
Amended By-Laws on its pre-emptive rights stock certificate. Republic v. Estate of Hans Menzi, 475 SCRA 20
(2005).
Held: NO. When McFoods offered for sale one Class A share of stock 2. Issuance of Certificate of Stock
to MSCI for the latter to exercise its pre-emptive right as required by A certificate of stock could not be considered issued in
Section 30(e) of MSCIs Amended By-Laws, it legally had the right to do contemplation of law unless signed by the president or vice-
so since it was already an owner of a Class A share by virtue of its president and countersigned by the secretary or assistance
payment, and the Deed of Absolute Share, notwithstanding the fact that secretary. Bitong v. Court of Appeals, 292 SCRA 503 (1998).
the stock certificate was issued only later. Without doubt, MSCI failed to The issuance or delivery of the certificate of stock is not
repurchase McFoods Class A share within the thirty (30) day pre- necessary to constitute the subscriber a stockholder of the
emptive period as provided by the Amended By-Laws. It was only when corporation; however, delivery is generally, an essential


element of the issuance of the certificate of stock itself. There is d. To rescind the contract of subscription if the
no issuance of the certificate where it is never detached from corporation wrongfully refuses to deliver a certificate,
the certificate book although the blanks therein are properly and sue to recover back what has been paid.3
filled up, if the person whose name is inserted therein has no
control over the books of the corporation.1 B. Quasi-Negotiable Character of Certificate of Stock
While the issuance of a stock certificate is not a condition A certificate of stock is merely a quasi-negotiable instrument in
precedent to render one a stockholder, under Section 63 of the the sense that it may be transferred by endorsement, coupled
Corporation Code every stockholder has a right to have a proper with delivery; but it is not negotiable because the holder
certificate issued to him by the corporation upon demand, as thereof takes it without prejudice to such rights or defenses as
soon as he has complied with the conditions under Section 64 of the registered owners or transferors creditors may have under
the Corporation Code which requires full payment of the the law, except only insofar as such rights or defenses are
subscription.2 subject to the limitations imposed by the principles governing
The Securities and Exchange Commission has opined that the estoppel. De los Santos v. Republic, 96 Phil. 577 (1955).
remedies available to a stockholder if a corporation wrongfully
refuses to issue a certificate of stock are as follows: De los Santos v. Republic
a. To file a suit for specific performance of an express or
implied contract; Facts: This involves the title to 1,600,000 shares of stock of the Lepanto
b. To file for an alternative relief by way of damages where Consolidated Mining Co., Inc. (Lepanto), a domestic corporation.
specific performance cannot be granted; Originally, half of said shares of stock were claimed by Apolinario de los
c. To file a petition for mandamus to compel the issuance Santos, and the other half, by Isabelo Astraquillo. During the pendency
of the certificate where the conditions, facts and of this case, Astraquillo has allegedly conveyed and assigned his interest
circumstances of the particular case bring it within the in his shares to de los Santos. The shares in question are covered by
legal rules which govern the granting of the writ; or several stock certificates issued in favor of Vicente Madrigal, who is
registered in the books of Lepanto as owner of said stocks and whose
indorsement in blank appears on the back of said certificates.

1
Tuazon v. La Previsora Filipina, 67 Phil. 36 (1938), quoting from 11 FLETCHER
3
CYC. CORP., at 324-325. SECURITIES AND EXCHANGE COMMISSION Opinion, 8 January 1987, XXI
2
SECURITIES AND EXCHANGE COMMISSION Opinion, 6 January 1999, XXXIII Securities and Exchange Commission QUARTERLY BULLETIN 1 (No. 1, March 1987);
SECURITIES AND EXCHANGE COMMISSION QUARTERLY BULLETIN 44 (No. 2, June, SECURITIES AND EXCHANGE COMMISSION Opinion, 9 June 1988, XXII SECURITIES
1999). AND EXCHANGE COMMISSION QUARTERLY BULLETIN 18 (Nos. 3, Sep. 1988).


aware of sufficient facts to put them on notice of the need of inquiring
De los Santos contends that he bought 55,000 shares from Juan Campos into the regularity of the transactions and the title of the supposed
and 1,200,000 shares from Carl Hess. On the other hand, the US vendors. Indeed, the certificates of stock in question were in the name
Attorney General contends that prior to the outbreak of the war in the of Madrigal. Obviously, Campos and Hess were not registered owners of
Pacific, said shares of stock were bought by Vicente Madrigal, in trust the corresponding shares of stock. Being presumed to know the law
for, and for the benefit of, the Mitsui Bussan Kaisha (Mitsuis), a and, as experienced traders in shares of stock, plaintiffs must have been
corporation organized in accordance with the laws of Japan, with branch conscious of the consequent infirmities in the title of the supposed
office in the Philippines. They further contend that Madrigal delivered vendors, or of the handicaps. Moreover, the aforementioned sales were
the corresponding stock certificates to the Mitsuis, which kept them in admittedly hostile to the Japanese, who had prohibited it and plaintiffs
its office in Manila, until the liberation of the city by the American forces had actual knowledge of these facts and of the risks attendant to the
early in 1945. They add that the Mitsuis had never sold, or otherwise alleged transaction. In other words, plaintiffs advisedly assumed those
disposed of the shares and that these must have been looted during the risks and, hence, they cannot validly claim, against the registered
liberation. stockholder, the status of purchasers in good faith.

After the war, pursuant to the all property vested in the United States, Doctrine: Section 35 of the Corporation Law reads that A share of stock
or any of its officials, under the Trading with the Enemy Act, located in may be transferred by endorsement of the corresponding stock
the Philippines at the time of such vesting, or the proceeds thereof, shall certificate, coupled with its delivery. However, the transfer shall not be
be transferred to the Republic of the Philippines (this is why the valid, except as between the parties, until it is entered and noted
Republic is a party). upon the books of the corporation. No such entry in the name of the
plaintiffs having been made, it follows that the transfer allegedly
Issue: Whether or not plaintiffs had purchased the shares of stock. effected by alleged seller in their favor is not valid, except as between
themselves. It does not bind either Madrigal or the Mitsuis, who are not
Held: NO. It appears that the only evidence on the alleged sale of the parties to said alleged transaction.
shares of stock in question is the testimony of de los Santos. Campos
and Hess, the alleged vendors, could not take the witness stand because Atty. Hofilea while stock certificates sound like its a
both are already dead. The record shows that Madrigal had never negotiable instrument (hence the term quasi-negotiable) its
disposed of said shares of stock in any manner, except by turning over actually not.
the corresponding stock certificates to the Mitsuis, the beneficial and o Stock certificates are not quite negotiable instruments
true owners. At any rate, at the time of the alleged sales, plaintiffs were though you can transfer them by delivery or


endorsement. It is still subject to defenses the endorser transfer of shares only if the same is coupled with delivery. The
might have. As such, where a stock certificate is delivery of the stock certificate duly endorsed by the owner is
negotiated in blank, you should consider the the operative act of transfer of shares from the lawful owner to
circumstances that might surround such blank stock the new transferee. But to be valid against third parties, the
certificate determine the nature of holding. transfer must be recorded in the books of the corporation.
o Stock certificates are evidence of ownership. They are Bitong v. Court of Appeals, 292 SCRA 503 (1998); Raquel-
not like transfer certificate of title (TCT) of land. Santos v. Court of Appeals, 592 SCRA 169 (2009).
Since certificates of stock are quasi-negotiable in nature, the
normal mode of dealing with such certificates is by the process Bitong v. Court of Appeals
of endorsement and delivery. It must be noted that
endorsement and delivery of certificates of stock may be for Facts: The 2 cases originated from a derivative suit filed by petitioner-
any of the three (3) purposes:1 Bitong before the Securities and Exchange Commission. Petitioner
a. For sale or assignment of the shares; complained of irregularities committed by Eugenia Apostol, President
b. Pursuant to a trust or nominee arrangement; or and Chairperson of the Board of Directors of Mr. & Ms. Publishing Co,
c. By way of pledge or encumbrance of the shares. Inc. (Mr. & Ms. Co.) She claims that Eugenia and her husband Jose were
Endorsement is an essential ingredient in dealing with liable for fraud, misrepresentation, disloyalty, evident bad faith, conflict
certificates of stock, and generally cannot be dispensed with. of interest and mismanagement in directing the affairs of Mr. & Ms. Co.
o In order for a transfer of stock certificate to be effective, to the damage and prejudice of the corporation, its stockholders,
it must be properly indorsed and that title to such including petitioner. These acts include cash advances to the Philippine
certificate of stock is vested in the transferee by the Daily Inquirer (of which Spouses Apostol were stockholder, directors
delivery of the duly indorsed certificate of stock. and officers), as well as purchase of PDI shares with money of Mr. & Ms.
Indorsement of the certificate of stock is a mandatory Co.
requirement of law for an effective transfer of a Respondents aver that petitioner does not have personality to initiate
certificate of stock. Razon v. IAC, 207 SCRA 234 (1992). and prosecute a derivative suit because she was merely a holder-in-trust
The rule is that the endorsement of the certificate of stock by of JAKA shares. It was recounted that Mr & Ms Co. stemmed from the
the owner or his attorney-in-fact or any other person legally restructuring of a failed prior venture by organizing a new corporation
authorized to make the transfer shall be sufficient to effect the with the help of JAKA Investment Corporation and the Apostols.

1
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. Issue: Whether or not Bitong was a stockholder, therefore giving her


personality to prosecute a derivative suit against private respondents. Even when a formal Deed of Assignment covering the shares
was duly executed, without the endorsement and delivery of
Held: NO. The records are unclear on how petitioner allegedly acquired the covering certificates of stocks, the covered shares cannot be
the shares of stock of JAKA. Petitioner being the CEO of JAKA and the deemed to transferred and registered in the names of the
sole person in charge of all the business and financial transactions and assignees. Rural Bank of Lipa City v. Court of Appeals, 366 SCRA
affairs of JAKA was supposed to be in the best position to show 188 (2001); Rivera V. Florendo, 144 SCRA 643 (1986).
convincing evidence on the alleged transfer of shares to her, if indeed
there was a transfer. Rural Bank of Lipa City v. Court of Appeals

As found by the Securities and Exchange Commission Hearing Panel, Facts: Reynaldo Villanueva, Sr., a stockholder of the Rural Bank of Lipa
there was overwhelming evidence despite what appears on the City, executed a Deed of Assignment, assigning his shares, as well as
certificate of stock and stock and transfer book, petitioner was not a those of 8 other shareholders under his control with a total of 10, 467
bona fide stockholder of Mr. & Ms. Co. before March 1989 or at the shares, in favor of the stockholders of the Bank represented by its
time the complained acts were committed to qualify her to institute a directors Bernardo Bautista, Jaime Custodio and Octavio Katigbak. The
stockholders derivative suit against private respondents. Bitong spouses Villanueva was indebted to the bank and in a board meeting
admitted that Apostol (as president of the corporation) only signed her assured the bank that they would pay, otherwise the bank would be
certificate of stocks in 1989 entitled to liquidate their shareholdings, including those under their
control. The spouses failed to settle their obligation and ignored the
Doctrine: For a valid transfer of stocks, the requirements are as follows: Banks demands, whereupon their shares of stock were converted into
1. There must be delivery of the stock certificate Treasury Stocks.
2. Certificate must be endorsed by the owner or his attorney-in-
fact or other legally authorized to make the transfer In January 1994, a new set of officers was elected but the spouses
3. To be valid against 3rd persons, the transfer must be recorded Villanueva were not notified, and so they questioned the validity of the
in the books of the corporation. proceedings. The new set of officers informed Atty. Ignacio that the
Considering that the requirements provided under Securities and Villanuevas were no longer entitled to notice of the said meeting since
Exchange Commission. 63 of The Corporation Code should be they had relinquished their rights as stockholders in favor of the Bank.
mandatorily complied with, the rule on presumption of regularity
cannot apply. The regularity and validity of the transfer must be proved. Issue: Whether there was a valid transfer of the shares to the Bank that
would preclude the spouses Villanueva of any right to participate as


stockholder or board member Section 64. Issuance of stock certificates.
No certificate of stock shall be issued to a subscriber until the full
Held: NO. While it may be true that there was an assignment of the amount of his subscription together with interest and expenses (in
spouses shares to the petitioners, said assignment was not sufficient to case of delinquent shares), if any is due, has been paid. (37)
effect the transfer of shares since there was no endorsement of the
certificates of stock by the owners, their attorneys-in-fact or any other The Board resolution which prohibited from voting shares of
person legally authorized to make the transfer. Moreover, petitioners stocks which were not fully paid, although certificates have
admit that the assignment of shares was not coupled with delivery, the been issued for them. Not fully paid shares which are not
absence of which is a fatal defect. delinquent may not be denied their voting rights. It also held
that (under the old Corporation Law) unless prohibited by the b-
Still, while the assignment may be valid and binding on the petitioners laws, certificates of stock may be issued for less than the
and private respondents, it does not necessarily make the transfer number of the shares subscribed for provided the par value of
effective. Consequently, the petitioners, as mere assignees, cannot ach of the stocks represented by each of the certificates has
enjoy the status of a stockholder, cannot vote nor be voted for, and will been paid. Baltazar v. Lingayen Gulf Elect. Power Co., Inc., 14
not be entitled to dividends, insofar as the assigned shares are SCRA 522 [1965]).
concerned. Parenthetically, the private respondents cannot, as yet, be
deprived of their rights as stockholders, until and unless the issue of Baltazar v. Lingayen Gulf Elect. Power Co., Inc.
ownership and transfer of the shares in question is resolved with
finality. Facts: Plaintiffs Baltazar and Rose (Batazar Group) were incorporators of
Lingayen Gulf Electric Power Co, subscribed to 600 and 400 shares of
Doctrine: The rule is that the delivery of the stock certificated duly the capital stock, respectively. Of the 600 shares of capital stock
endorsed by the owner is the operative act of transfer of shares from subscribed by Baltazar, he had fully paid 535 shares of stock, and the
the lawful owner to the transferee. Thus, title may be vested in the Corporation issued to him several certificates of stock, corresponding to
transferee only by delivery of the duly indorsed certificate of stock. For the 535 shares. Of the 400 shares of stock subscribed by Rose, he had
a valid transfer of stocks, there must be strict compliance with the mode 375 shares of fully paid stock, duly covered by certificates of stock
of transfer prescribed by law. issued to him. The respondents Ungson, Estrada, Fernandez and Yuson
(Ungson Group) were stockholders of the Corporation, all holding a total
C. Right to Certificate of Stock for Fully Paid Shares (Section 64) number of fully paid-up shares of stock, of less than100 shares. and the
defendant Acena (part of the Ungson Group), was an incorporator and


stockholder, holding 600 shares of stock. Ungson, Estrada, Fernandez said payments; its call for payment of unpaid subscription and its
and Yuzon, where Directors of the Corporation. declaration of delinquency for non-payment of said call affecting only
the remaining number of shares of its capital stock for which no fully
The Ungson group, passed three (3) resolutions which essentially says paid capital stock shares certificates have been issued, and only do not
that: have voting rights by said declaration of delinquency.
1. All watered stocks issued to Acena, Baltazar, Rose and
Jubenville, of no value and consequently cancelled Doctrine: The present law requires as a condition before a shareholder
2. All unpaid subscriptions will have interest, payments should be can vote his shares, that his full subscription be paid in the case of no
applied to the interest first par value stock; and in case of stock corporation with par value, the
3. That shares of stock, issued to stock holder, but still has unpaid stockholder can vote the shares fully paid by him only, irrespective of
subscribed shares, all of his stock even those paid are not the unpaid delinquent shares. A corporation may now, in the absence of
entitled to vote. (basically it prohibited Baltazar et. al. the provisions in their by-laws to the contrary, apply payment made by
power to vote until all their subscriptions are paid.) subscribers-stockholders either as: (a) full payment for the
corresponding number of shares of stock, the par value of each of which
Baltazar and Rose filled a complaint to allow them to vote, their fully is covered by such payment; or (b) as payment pro-rata to each and all
paid up shares of stocks, and to declare said three resolutions illegal and the entire number of shares subscribed for.
invalid. they had a tentative settlement. The lower court rendered a
decision, approving the agreement. The Ungsons did not agree with the Atty. Hofilea despite jurisprudence, the law and the
decision of the court hence this appeal. Securities and Exchange Commission has interpreted states
that a subscription agreement is indivisible. As such so long as
Issue: Whether or not a shareholder, who subscribes to a number of you have an unpaid amount, you cannot enjoy the rights.
shares over which he partially pays and is issued certificates of stock, is
entitled to vote the latter D. Lost or Destroyed Certificates (Section 63 and 73)

Held: YES. Where the corporation issued par value shares, the Section 73. Lost or destroyed certificates.
stockholder can vote the shares fully paid by him, irrespective of the The following procedure shall be followed for the issuance by a
unpaid delinquent shares. The corporation had chosen to apply corporation of new certificates of stock in lieu of those which have
payments by its stockholders to definite shares of the capital stock of been lost, stolen or destroyed:
the corporation and had fully paid capital stock shares certificates for


1. The registered owner of a certificate of stock in a corporation or his presented to said corporation or if an action is pending in court
legal representative shall file with the corporation an affidavit in regarding the ownership of said certificate of stock which has been
triplicate setting forth, if possible, the circumstances as to how the lost, stolen or destroyed, the issuance of the new certificate of stock in
certificate was lost, stolen or destroyed, the number of shares lieu thereof shall be suspended until the final decision by the court
represented by such certificate, the serial number of the certificate regarding the ownership of said certificate of stock which has been
and the name of the corporation which issued the same. He shall also lost, stolen or destroyed.
submit such other information and evidence which he may deem
necessary; Except in case of fraud, bad faith, or negligence on the part of the
corporation and its officers, no action may be brought against any
2. After verifying the affidavit and other information and evidence corporation which shall have issued certificate of stock in lieu of those
with the books of the corporation, said corporation shall publish a lost, stolen or destroyed pursuant to the procedure above-described.
notice in a newspaper of general circulation published in the place (R. A. 201a)
where the corporation has its principal office, once a week for three
(3) consecutive weeks at the expense of the registered owner of the While Section 73 of Corporation Code appears to be mandatory,
certificate of stock which has been lost, stolen or destroyed. The the same admits exceptions, such that a corporation may
notice shall state the name of said corporation, the name of the voluntarily issue a new certificate in lieu of the original
registered owner and the serial number of said certificate, and the certificate of stock which has been lost without complying with
number of shares represented by such certificate, and that after the the requirements under said section. It would be an internal
expiration of one (1) year from the date of the last publication, if no matter for the corporation to find measures in ascertaining who
contest has been presented to said corporation regarding said are the real owners of stock for purposes of liquidation. It is
certificate of stock, the right to make such contest shall be barred and well-settled that unless proven otherwise, the stock and
said corporation shall cancel in its books the certificate of stock which transfer book is the best evidence to establish stock
has been lost, stolen or destroyed and issue in lieu thereof new ownership. (Securities and Exchange Commission Opinion,
certificate of stock, unless the registered owner files a bond or other dated 28 January 1999, addressed to Ms. Ma. Cecilia Salazar-
security in lieu thereof as may be required, effective for a period of Santos).
one (1) year, for such amount and in such form and with such sureties A corporation may actually not heed the procedure under
as may be satisfactory to the board of directors, in which case a new Section 73 of the Corporation Code in accordance with the
certificate may be issued even before the expiration of the one (1) Securities and Exchange Commission Opinion, but by doing so, it
year period provided herein: Provided, That if a contest has been cannot avail of the free and harmless clause provided in said


section, that Except in case of fraud, bad faith, or negligence J. Santamaria v. HongKong and Shanghai Banking Corp.
on the part of the corporation and its officers, no action may be
brought against any corporation which shall have issued Facts: Mrs. Josefa T. Santamaria bought 10,000 shares of the Batangas
certificate(s) of stock in lieu of those lost, stolen or destroyed Minerals, Inc., through the offices of Woo, Uy-Tioco & Naftaly (a stock
and open itself to claims for damages. 1 brokerage firm). It was endorsed in blank to her. She then used the
certificate as a security for the purchase of 10,000 shares of the Crown
E. Forged and Unauthorized Transfers. Mines, Inc. with R.J. Campos & Co., another brokerage firm. Two days
Since certificates of stock are only quasi-negotiable instruments, later, she returned to R.J. Campos & Co. to pay for the shares and
a transferee in good faith under a forged assignment acquires redeem her certificate only to find out that the firm was prohibited by
no title which can be asserted against the true owner, unless the Securities and Exchange Commission from transacting business.
the true owners own negligence has been such as to create an Also, her stocks that were used as security have been transferred to
estoppel against him. Delos Santos v. Republic, 96 Phil. 577 Hongkong and Shanghai Banking Corporation, who had come into
(1955). possession of the certificates because R.J. Campos & Co., Inc. had
A bona fide pledgee or transferee of a stock from the apparent opened an overdraft account with this bank and to this effect it had
owner is not chargeable with knowledge of the limitations laced executed a document where they pledged to the said bank "all stocks,
on said certificates by the real owner, or of any secret shares and securities which I/we may hereafter come into their
agreement relating to the use which might be made of the stock possession of my/our account and whether originally deposited for safe
by the holder. When a stock certificate has been endorsed in custody only or for any other purpose whatever or which may
blank by the owner thereof, it becomes a street certificate so hereinafter be deposited by me/us in lieu of or in addition to the Stocks
that upon its face the holder is entitled to demand its transfer Shares and Securities now deposited or for any other purposes
into his name from the issuing corporation. As such the whatsoever."
certificate if quasi-negotiable and the transferee thereof is
justified in believing that it belongs to the older and transferor. Issue: Whether or not the stock certificate should be returned to Mrs.
J. Santamaria v. HongKong and Shanghai Banking Corp., 89 Santamaria.
Phil. 780 (1951).
Held: NO. Santamaria was negligent in the transaction. Mrs. Santamaria
could have asked the corporation that had issued said certificate to
cancel it and issue another in lieu thereof in her name to apprise the
1
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. holder that she was the owner of said certificate. This she failed to do,


and instead she delivered said certificate to R.J. Campos & Co. indorsed transfer book. Neugene Marketing, Inc. v. Court of Appeals,
in blank, thereby clothing the latter with apparent title to the shares 303 SCRA 295 (1999).
represented by said certificate including apparent authority to negotiate
it. This was the proximate cause of the damage suffered by her. She is, Neugene Marketing, Inc. v. Court of Appeals
therefore, estopped from claiming further title to or interest therein as
against a bona fide pledgee or transferee thereof. Facts: NEUGENE had authorized capital stock of P3 MILLION (eventually
became P7 MILLION), P600K of which is subscribed and P150K of those
HSBC was justified in believing that R.J. Campos and Company had title subscribed were paid up. On October 24, 1987, the private respondents,
thereto considering it was indorsed in blank, and, therefore, deemed Charles O. Sy, Arsenio Yang, Jr. and Lok Chun Suen, constituting 2/3 of
quasi- negotiable. Thus, HSBC cannot be blamed for believing that such the total shares, sent notice to the directors of NEUGENE for a board
belonged to the holder and transferor. Furthermore, the bank was not meeting to be held on November 30, 1987. They also sent notice for a
obligated to look beyond the certificate to ascertain the ownership of special stockholders meeting on the same day, November 30, 1987, to
the stock at the time it received the same from R.J. Campos and consider the dissolution of NEUGENE in which they voted in
Company. AFFIRMATIVE. Tan et al, brought an action to annul or set aside the said
Securities and Exchange Commission Certification on the Dissolution of
Doctrine: A bona fide pledgee or transferee of a stock from the Neugene on the ground that Yang, Jr. et al. could not validly vote for
apparent owner is not chargeable with knowledge of the limitations dissolution of NEUGENE because they had divested themselves of their
placed on it by the real owner, or of any secret agreement relating to stockholdings when they endorsed their stock certificates in blank and
the use which might be made of the stock by the holder (12 Fletcher, delivered the same to the Uy Family who subsequently transferred the
Corporations, section 5562, p. 521). "Where one of two innocent parties certificates to Johnny Uy and later to Tan et al.
must suffer by reason of a wrongful or unauthorized act, the loss must
fall on the one who first trusted the wrongdoer and put in his hands the Yang, Jr. et al. contends that there never was any agreement entered
means of inflicting such loss." into by the Uy family to award NEUGENES stock certificates, because
subject stock certificates were endorsed in blank by Yang et al to the Uy
When the stock certificates have been endorsed in blank for family for safe keeping.
purposes of showing the nominee relations, the eventual
delivery and registration of the shares in violation of the trust Issue: Whether or not there was a valid transfer of shares, divesting
relationship and after their having been stolen, would be void, Yang Jr. et al of their stockholdings as of the date of the meeting when
even when such transfers have been registered in the stock and they voted for the resolution dissolving NEUGENE.


which shall be set forth in detail the time and place of holding the
Held: NO. The Court found that the certificates of stock were stolen and meeting, how authorized, the notice given, whether the meeting was
therefore not validly transferred, and the transfers of stock relied upon regular or special, if special its object, those present and absent, and
by Tan et al were fraudulently recorded in the Stock and Transfer Book every act done or ordered done at the meeting. Upon the demand of
of NEUGENE under the column Certificates Cancelled. As nominees of any director, trustee, stockholder or member, the time when any
the Uy family, the approval by the Charles O. Sy, Lok Chun Suen and director, trustee, stockholder or member entered or left the meeting
Arsenio Yang, Jr., Jr., was necessary for the validity and effectivity of the must be noted in the minutes; and on a similar demand, the yeas and
transfer of the stock certificates registered under their (Yang Jr et al) nays must be taken on any motion or proposition, and a record
names. In the case under consideration, not only did the transfers of thereof carefully made. The protest of any director, trustee,
stock in question lack the requisite approval, Yang Jr et al categorically stockholder or member on any action or proposed action must be
declared under oath that subject certificates of stock of theirs were recorded in full on his demand.
stolen from the confidential vault of the Uy family and illegally
transferred to the names of petitioners in the Stock and Transfer Book The records of all business transactions of the corporation and the
of NEUGENE. Lastly, there is no reliable showing of any valuable minutes of any meetings shall be open to inspection by any director,
consideration for the supposed transfer of subject stocks to Tan et al. trustee, stockholder or member of the corporation at reasonable
hours on business days and he may demand, writing, for a copy of
Doctrine: To constitute a valid transfer, a stock certificate must be excerpts from said records or minutes, at his expense.
delivered and its delivery must be coupled with an intention of
constituting the person to whom the stock is delivered the transferred Any officer or agent of the corporation who shall refuse to allow any
thereof. Furthermore, in order that there is a valid transfer, the person director, trustees, stockholder or member of the corporation to
to whom the stock certificates are endorsed must be a bona fide examine and copy excerpts from its records or minutes, in accordance
transferee and for value. with the provisions of this Code, shall be liable to such director,
trustee, stockholder or member for damages, and in addition, shall be
X. STOCK AND TRANSFER BOOK (Sections 63, 72 and 74): guilty of an offense which shall be punishable under Section 144 of this
Code: Provided, That if such refusal is made pursuant to a resolution
Section 74. Books to be kept; stock transfer agent. or order of the board of directors or trustees, the liability under this
Every corporation shall keep and carefully preserve at its principal section for such action shall be imposed upon the directors or trustees
office a record of all business transactions and minutes of all meetings who voted for such refusal: and Provided, further, That it shall be a
of stockholders or members, or of the board of directors or trustees, in defense to any action under this section that the person demanding to


examine and copy excerpts from the corporation's records and Atty. Hofilea No claim over unpaid shares for which the
minutes has improperly used any information secured through any corporation has a claim will be recorded in the stock and
prior examination of the records or minutes of such corporation or of transfer books. The remedy of the one who wants such claim
any other corporation, or was not acting in good faith or for a over the unpaid shares to be recorded is to:
legitimate purpose in making his demand. a. Require the owner to pay the shares completely.
b. Resort to subrogation (i.e. substitution of debtors) may
Stock corporations must also keep a book to be known as the "stock be allowed if the consent of the corporation (Board of
and transfer book", in which must be kept a record of all stocks in the Directors), as creditor, is secured.
names of the stockholders alphabetically arranged; the installments Sales and other dispositions of shares of stock must under
paid and unpaid on all stock for which subscription has been made, Section 63 be registered in the stock and transfer book: (a) to
and the date of payment of any installment; a statement of every enable the corporation to know at all times who are the actual
alienation, sale or transfer of stock made, the date thereof, and by and stockholders; (b) to afford the corporation an opportunity to
to whom made; and such other entries as the by-laws may prescribe. object or refuse its consent to such transfer when it has claims
The stock and transfer book shall be kept in the principal office of the against such shares; and (c) to avoid fictitious or fraudulent
corporation or in the office of its stock transfer agent and shall be transfers. Escao v. Filipinas Mining Corporation, 74 Phil. 71
open for inspection by any director or stockholder of the corporation (1944).
at reasonable hours on business days.
Escao v. Filipinas Mining Corporation
No stock transfer agent or one engaged principally in the business of
registering transfers of stocks in behalf of a stock corporation shall be Facts: In the original case, the Court ordered Salvosa to transfer and
allowed to operate in the Philippines unless he secures a license from deliver to Escao 116 active shares and an undetermined number of
the Securities and Exchange Commission and pays a fee as may be shares in escrow of Filipinas Mining. A writ of garnishment was served
fixed by the Commission, which shall be renewable annually: Provided, to Filipinas Mining to satisfy judgment, and the shares were
That a stock corporation is not precluded from performing or making subsequently sold in a public auction. HOWEVER, the said shares of
transfer of its own stocks, in which case all the rules and regulations stocks were sold to Bengzon then to Standard investment of the
imposed on stock transfer agents, except the payment of a license fee Philippines during the pendency of the said case. The transfers,
herein provided, shall be applicable. (51a and 32a; B. P. No. 268.) however, were not recorded in the books of Filipinas Mining and it was
only after around 3 years that the sale to Standard Investment was
recorded. On January 24, 1941 Filipinas Mining issued in favour of


Standard Investment certificate of stocks for 18,580 shares formerly Shares for which no certificate of stock has been issued may
held in escrow. This then prompted Escao to file this present case validly be mortgaged in whole (and not just with respect to the
against Filipinas Mining Corp and Standard and Investment. portion paid-up) and the corporation receiving notice thereof is
bound to respect the security arrangement. Fua Cun v.
Issue: Whether or not the issuance by Filipinas Mining of the said shares Summers, 44 Phil. 704 (1923).
of stock to Standard was valid as against the attaching judgment
creditor (Escao) of the original owner, Salvosa. Fua Cun v. Summers

Held: NO. The transfer of the escrow shares in question from Salvosa to Facts: Chua Soco subscribed for 500 shares of stock of China Bank at
Bengzon and from Bengzon to the Standard Investment of the P100 per share and paid 25,000 representing half of the subscription for
Philippines, not having been recorded in the books of the corporation as which a receipt was issued. Subsequently, Chua Soco issued a
required by Section 35 of the Corporation Law, could not prevail over promissory note in favor of the plaintiff, Fua Cun and secured the note
the garnishment previously made by the plaintiff of the said shares. with a chattel mortgage on the said shares of stock. There came the a
point that Chua Soco became indebted to China Bank and failed to pay
Doctrine: In accordance with Section 35, for transfer of shares to be such which lead to the attachment of the same shares of stock in favor
valid against the corporation and third parties it must be recorded in the of the bank. Fua Cun contested this and claims that he acquired the
book of records of the corporation. Even if the law expressly stated that right to the 250 fully paid shares and he must be given priority over the
this is for issued shares, the Court held that through analogy such ownership plus damages. The bank argues that the interest held by
requirement also applies to unissued shares held in escrow. There is no Chua Soco was merely an equity which could not be made the subject of
valid reason for treating unissued shares held in escrow differently from a chattel mortgage.
the issued shares insofar as the sale and transfer is concerned. In both
cases the possibility of fraudulent transfers exists and the aim of Issue: Whether or not Fua Cun has better rights over the bank.
requiring such recording of transfer is to prevent this. In this case,
therefore, the transfer of shares (whether issued shares or unissued Held: YES. Chua Soco does not own half of the shares. His right consists
shares held in escrow) must be recorded in the book of record of the only in an equity entitling him to a certificate for the total number of
corporation in order to be valid against the corporation and third shares subscribed for by him upon payment of the remaining portion of
parties. the subscription price. There can be no doubt that an equity in shares of
stock may be assigned and that the assignment is valid as between the
parties and as to persons to whom notice is brought home. Such an


assignment exists here, though it was made for the purpose of securing thereof. Monserrat assigned to Ceron a usufruct of half of his shares
a debt. The attachment was levied after the bank had received notice of under a usurfruct agreement. Monserrat reserved for himself and his
the assignment of Chua Soco's interests to the plaintiff and was heirs he right to vote derived from said shares of stock and to recover
therefore subject to the rights of the latter. It follows that as against the ownership thereof at the termination of the usufruct. Certificate of
these rights the defendant bank holds no lien whatever. Stock No. 7 was then issued in the name of Ceron. It was also recorded
on the Stock and Transfer Book of the company. Despite the agreement,
Doctrine: In the absence of special agreement to the contrary, a Ceron mortgaged to Matuto the shares he held (but were actually
subscriber for a certain number of shares of stock does not, upon owned by Monserrat). Ceron showed Matute the Stock and Transfer
payment of one-half of the subscription price, become entitled to the Book of the company. Matute saw that the stocks were in the name of
issuance of certificates for one-half the number of shares subscribed Ceron, free from any lien or encumbrance. When Ceron mortgaged the
for; the subscriber's right consists only in an equity entitling him to a stocks, he did not inform Matute of Monserrats reservation.
certificate for the total number of shares subscribed for by him upon
payment of the remaining portion of the subscription price. Issue: Whether or not it is necessary to enter upon the books of the
corporation a mortgage constituted on common shares of stock in order
When the shares are covered by a stock certificate issued in the for the mortgage to be valid
name of the usufructuary by the original owner with the
agreement between them that they should not be disposed or Held: NO. Ceron testified that when he mortgaged his shares, he said
sold, but the registered owner had pledged the shares by nothing to Erma, Inc., about the existence of the deed, for fear he might
endorsement and delivery of the certificate to one who took not succeed in obtaining the loan he applied for. Erma, Inc., as a
them in good faith and for value, the latter shall be preferred conditional purchaser of the shares of stock in question given as security
since registration of a security arrangement covering shares of for the payment of his credit, acquired in good faith Ceron's right and
stock does not require, for its validity and binding effect on the title to the 600 common shares of stock of the Manila Yellow Taxicab
world, to be registered in the stock and transfer book. Co., Inc., and as such conditional purchaser in good faith, it is entitled to
Monserrat v. Ceron, 58 Phil. 469 (1933). the protection of the law.

Monserrat v. Ceron Doctrine: A chattel mortgage refers to personal property given as
security for payment of a debt. Such personal property has to be
Facts: Monserrat was the president and manager of Manila Yellow delivered. But the transfer is not absolute, being a mere security. A
Taxicab Co., Inc., and the owner of P1,200 common shares of stock chattel mortgage is not a transfer because there is no intent of passing


the rights the transferor has to the transferee. A chattel mortgage is not
the transfer referred to in the (old) corporation law, which transfer Chua Guan v. Samahang Magsasaka, Inc.
should be entered and noted upon the books of a corporation in order
to be valid. Only the transfer or absolute conveyance of the ownership Facts: Toco, a resident of Manila, owns 5,894 shares of capital stock
of the title to shares needs to be entered and noted upon the books of with Samahang Magsasaka Inc., which has principal office in Nueva
the corporation. Hence, inasmuch as a chattel mortgage is not a Ecija. It was represented by 9 certificates which Toco mortgaged to
complete and absolute alienation of the dominion and ownership Chiu. Chiu registered the mortgaged stocks in the register of deeds in
thereof, its entry and notation upon the books of the corporation is not Manila. Later, Chiu assigned all his rights and interest to Chua Guan who
a necessary requisite to its validity. registered it in the register of deeds in Manila and in the office of the
corporation. When Toco defaulted in payment, the shares were
Summary of Points (Atty. Hofilea) foreclosed by Chua Guan who was thereafter declared as the highest
o Much of the disputes come in when there are bidder. When he tendered the certificates of cancellation and asked for
competing interests involved. Because shares are the issuance of new shares in his name, the officers of the Corporation
property, they can be dealt with (sold, mortgaged, refused because prior to Chua Guans demand, and even before the
attached, etc.) notice of mortgage of Chiu, several attachments against the shares
o General Rule: for disposition/sale of shares, they are covered by the certificates had been recorded in its books (the
valid as against third persons only when recorded in the corporation received the notice of mortgage only after 2 years from
stock and transfer book of the corporation. date of registration). Chua Guan filed a writ of mandamus to require the
o Between an assignee and a creditor, who has a better officers to transfer the shares of stock to him by cancelling the old
right? Whoever performs all the acts required by law to certificates and issuing new ones in their stead.
be binding on the world first has better right.
In order for the chattel mortgage on shares of stock be valid and Issue: Whether or not the mortgage takes priority over the writ of
binding on third parties, registration thereof in the stock and attachments.
transfer book is not required and not legally effective. What is
necessary is that the chattel mortgage over the shares be Held: NO. The Corporation received the writ of attachments on the
registered in the Registry of Deeds of the principal place of shares prior to the notice of registration of the mortgage. The basis for
business of the corporation, as well as in the Registry of Deeds notice is the actual notice because there was no valid constructive
of the stockholders domicile. Chua Guan v. Samahang notice. Chattel mortgage of shares should be registered both at the
Magsasaka, Inc., 62 Phil. 472 (1935). owners domicile and in the province where the corporation has its


principal office. Thus, the mortgage should have been registered in the the books of the corporation, is valid as against a subsequent lawful
Register of Deeds of Manila and Nueva Ecija. (It should be understood attachment of said shares, regardless of whether the attaching creditor
that the property mortgaged is not the certificate but the participation had actual notice of said transfer or not.
and share of the owner in the assets of the corporation.)
Held: NO. Section 35 requires that for a disposition of shares to be valid
Doctrine: The registration of the chattel mortgage in the office of the as against third parties, the same must be recorded in the books of the
corporation is not necessary and has no legal effect. corporation. Therefore, the transfer of the 75 shares in the Corporation
made by the Diosomito to Barcelon was not valid as to Uson, on January
The failure to register a sale or disposition of shares of stock in 18, 1932, the date on which she obtained her attachment lien on said
the books of the corporation would render the same invalid to shares of stock which still stood in the name of Diosomito on the books
all persons, including the attaching creditors of the seller. Uson of the Corporation.
v. Diosomito, 61 Phil. 535 (1935).
Doctrine: All transfers of shares not so entered are invalid as to
Uson v. Diosomito attaching or execution creditors of the assignors, as well as to the
corporation and to subsequent purchasers in good faith, and indeed, as
Facts: Uson filed a civil action for debt against Diosomito, and an to all persons interested, except the parties to such transfers. All
attachment was duly issued and levied upon Diosomitos property transfers not so entered on the books of the corporation are absolutely
including his 75 shares in the North Electric Co., Inc. Uson won the case void; not because they are without notice or fraudulent in law or fact,
and so the shares were sold in a public auction to satisfy the judgment. but because they are made so void by statute.
Uson was the highest bidder, but not H.P.L. Jollye now claims to be the
owner of the 75 shares. He presented a certificate of stock issued to him The pledge of shares of stock covered by a certificate is valid
by the company. Apparently, Diosomito, the original owner of the and binding on third parties, when the certificate of stock has
shares, sold the same to Barcelon and delivered to the latter the been endorsed and delivered to the creditor, notwithstanding
corresponding certificates Nos. 2 and 19. Barcelon later sold the shares the fact that the contract does not appear in a public instrument
to Jollye. It must be noted that the transfer of shares by Diosomito to (chattel mortgage). Certificates of stockare quasi- negotiable
Barcelon was registered and noted on the books of the corporation 9 instruments in the sense that they may be given in pledge or
months AFTER the attachment had been levied on the said shares. mortgage to secure an obligation. Bachrach Motor Co. v.
Lacson Ledesma, 64 Phil. 681 (1937).
Issue: Whether or not a transfer of shares, not registered or noted on


Bachrach Motor Co. v. Lacson Ledesma It is true, according to Article 1865 of the Civil Code, that in order that a
pledge may be effective as against third person, evidence of its date
Facts: Bachrach Motors and Philippine National Bank were both must appear in a public instrument in addition to the delivery of the
creditors of Lacson Ledesma, battling over his properties in Bacolod for thing pledged to the creditor. HOWEVER, Section 4 of the Chattel
the purpose of satisfying their claims. Subject to the controversy are Mortgage Law implicitly modified Article 1865 of the Civil Code in the
Ledesmas stocks with the Talisay-Silay Milling Co. sense that a contract of pledge and that of chattel mortgage to be
effective as against third persons, need not appear in a public
Around 1923, Ledesma mortgaged various real properties to PNB for the instrument. Provided, that the thing pledged or mortgaged be delivered
purpose of securing his debts, and in the same transactions, he pledged or placed in the possession of the creditor.
Stock Certificate No.772 containing stocks and stock dividends in favor
of PNB. On the other hand, around 1927, Bachrach Motors obtained a Doctrine: See above.
favorable judgment in civil case against Ledesma. A writ of execution of
said judgment was issued on the same year, and Jose Y. Orosa (special Only fully paid shares for which certificates of stock have been
sheriff), in compliance with the writ of execution, attached on the stocks issued are subject to the registration requirement in the stock
of Ledesma. That notice of said attachment was served not only upon and transfer book in cases dealing with their sales and absolute
the Ledesma but also upon Talisay-Silay Milling Co., Inc. Bachrachs was disposition. Nava v. Peers Marketing Corp., 74 SCRA 65 (1976).
claiming that it had a preferred right over PNB, and they argued that the
stock certificate pledged to PNB were not the shares themselves. And Nava v. Peers Marketing Corp.
the shares being intangible in character cannot be delivered by pledge
to the possession of PNB. Facts: Teofilo Po subscribed to 80 shares of Peers Marketing and paid
25% of the amount of his subscription. Po then sold to Nava 20 of his 80
Issue: Whether or not the certificate of stocks or of stock dividends may shares. Nava requested the officers of Peers Marketing to register the
be pledged. sale in the books of the corporation but the corporation refused
because Po was delinquent in the payment of the balance of his
Held: YES. There was a valid transfer and PNB had the preferred right subscription. Nava filed a mandamus action to compel the corporation
over the stocks/stock dividends of Ledesma. The stock dividends in to register the shares in Navas name. The respondents (executive VP
question were pledged to the bank 5 months prior to the garnishment and secretary) pleaded the defense that no shares of stock which holds
of Bachrach. It is admitted that the delivery of the certificate in question an unpaid claim are transferable in the books of the corporation.
and the pledge thereof were not made to appear in a public instrument.


Issue: Whether or not the officers of Peers Marketing can be compelled which ordinarily are or should be written therein. Lanuza v.
by mandamus to register the sale in the books of the corporation Court of Appeals, 454 SCRA 54 (2005).
The books and records of a corporation, which include even the
Held: NO. The transfer made by Po to Nava is not the alienation, sale, stock and transfer book, are generally admissible in evidence in
or transfer of stock that is supposed to be recorded in the stock and favor of or against the corporation and its members to prove
transfer book, as contemplated in section 52 of the Corporation Law. As the corporate acts, its financial status and other matters
a rule, only those shares covered by certificates of stock may be including ones status as a stockholder. They are ordinarily the
alienated. In this case, there is no clear legal duty on the part of the best evidence of corporate acts and proceedings. However, the
officers of the corporation to register the twenty shares in Navas name, books and records of a corporation are not conclusive even
There is no cause of action for mandamus as no stock certificate was against the corporation but prima facie evidence only. Parol
issued to Po. Without stock certificate, which is the evidence of evidence may be admitted to supply omissions in the records,
ownership of corporate stock, the assignment of corporate shares is explain ambiguities, or show what transpired where no records
effective only between the parties. were kept, or in some cases where such records were
contradicted. The effect of entries in the books of the
Doctrine: Only those shares covered by certificates of stock may be corporation which purport to be regular records of the
alienated. Without stock certificate, the assignment of corporate shares proceedings of its board of directors or stockholders can be
is effective only between the parties to the transaction destroyed by testimony of a more conclusive character than
mere suspicion that there was an irregularity in the manner in
A. Probative Value of Stock and Transfer Book which the books were kept. 1
BUT: The stock and transfer book records the names and The Securities and Exchange Commission has opined that
addresses of all stockholders arranged alphabetically, the corporate books and records are merely private books and
installments paid and unpaid on all stock for which subscription records, and as such, they are subject to the general rule of
has been made, and the date of payment thereof, a statement evidence which are commonly applicable to documentary
of every alienation, sale or transfer of stock made the date evidence.2
thereof and by and to whom made, and such other entries as
may be prescribed by law. A stock and transfer book, like other
1
Bitong v. Court of Appeals, 292 SCRA 304, 96 SCAD 205 (1998).
corporate books and records, is not in any sense a public record, 2
SECURITIES AND EXCHANGE COMMISSION Opinion, 12 January 1994, XXVIII
and thus is not exclusive evidence of the matters and things SECURITIES AND EXCHANGE COMMISSION QUARTERLY BULLETIN 33 (No. 2, June
1994), citing I5 FLETCHER CYC. CORP., 1976 rev. vol., Securities and Exchange
Commission. 2196 at p. 643; FLETCHER Securities and Exchange Commission.


with the meeting. The Potenciano group was re-elected to the Board of
B. Validity of Transfers: Directors, and a new set of officers was thereafter elected. However,
Under Section 63 of Corporation Code, the sale of stocks shall the Bitanga groups refused to relinquish their positions and this caused
not be recognized as valid unless registered in the books of the unrest in the company. It is not disputed that the transfer of the shares
corporation insofar as third persons, including the corporation, of the group of Dolores Potenciano to the Bitanga group has not yet
are concernedas between the parties to the sale, the transfer been recorded in the books of the corporation.
shall be valid even if not recorded in the books of the
corporation. Batangas Laguna Tayabas Bus Co. v. Bitanga, 362 Issue: Whether or not the Potenciano group, in whose names those
SCRA 635 (2001). shares still stand, were the ones entitled to attend and vote at the
stockholders meeting of the BLTB on 19 May 1998.
Batangas Laguna Tayabas Bus Co. v. Bitanga
Held: YES. The Potenciano group, in whose names those shares still
Facts: The Potenciano group owned 87.5% of the outstanding capital stand, were the ones entitled to attend and vote at the stockholders
stock of Batangas Laguna Tayabas Bus Company, Inc. (BLTB). The meeting. Indeed, until registration is accomplished, the transfer, though
Potenciano group sold to BMB Property Holdings, Inc., represented by valid between the parties, cannot be effective as against the
its President, Benjamin Bitanga, their shares of stock representing corporation. Thus, the unrecorded transferee, the Bitanga group in this
47.98% of the total outstanding capital stock of BLTB. Barely a month case, cannot vote nor be voted for.
after the Sale Agreement was executed, at a meeting of the
stockholders of BLTB, members of the Bitanga group were elected as Doctrine: The purpose of registration, therefore, is two-fold: to enable
directors of the corporation, replacing the Potenciano group. During a the transferee to exercise all the rights of a stockholder, including the
meeting of the Board of Directors, the newly elected directors of BLTB right to vote and to be voted for, and to inform the corporation of any
(Bitanga group) scheduled the annual stockholders meeting on May 19, change in share ownership so that it can ascertain the persons entitled
1998, to be held at the principal office of BLTB in San Pablo, Laguna. to the rights and subject to the liabilities of a stockholder.
Potenciano requested for postponement but it was not acted upon by
Bitanga. On the scheduled day of the meeting, the majority of the Until challenged in a proper proceeding, a stockholder of record has a
stockholders present rejected the postponement and voted to proceed right to participate in any meeting; his vote can be properly counted to
determine whether a stockholders resolution was approved, despite
the claim of the alleged transferee. On the other hand, a person who
2196, at p. 644; and FLETCHER, Securities and Exchange Commission. 2197, at p. has purchased stock, and who desires to be recognized as a stockholder
648.


for the purpose of voting, must secure such a standing by having the vote and to be voted for, and to inform the corporation of any
transfer recorded on the corporate books. Until the transfer is change in share ownership so that it can ascertain the persons
registered, the transferee is not a stockholder but an outsider. entitled to the rights and subject to the liabilities of a
stockholder. Until challenged in a proper proceeding, a
As between the General Information Sheet and the corporate stockholder of record has a right to participate in any meeting;
books, it is the latter that is controlling. Lao v. Lao, 567 SCRA his vote can be properly counted to determine whether a
558 (2008). stockholders resolution was approved, despite the claim of the
A transfer of shares which is not recorded in the books of the alleged transferee. On the other hand, a person who has
corporation is valid only as between the parties, hence, the purchased stock, and who desires to be recognized as a
transferor has the right to dividends as against the corporation stockholder for the purpose of voting, must secure such a
without notice of transfer but it serves as trustee of the real standing by having the transfer recorded on the corporate
owner of the dividends, subject to the contract between the books. Until the transfer is registered, the transferee is not a
transferor and transferee as to who is entitled to receive the stockholder but an outsider. Batangas Laguna Tayabas Bus
dividends. Cojuangco v. Sandiganbayn, 586 SCRA 790 (2009). Company, Inc. v. Bitanga, 362 SCRA 635 (2001). [CLV- I agree
The view that under Section 63 of the Corporation Code, the with the dissenting opinion of Justice Puno: The rule [Section
sale of the stocks shall not be recognized as valid unless 63] is intended to protect the interest of the corporation and
registered in the books of the corporation is valid only insofar as third persons who may be prejudiced by the transfer of the
third persons, including the corporation, are concernedas shares of stocks. It follows, therefore, that as between the
between the parties to the sale, the transfer shall be valid even parties to the sale, the transfer shall be valid even if not
if not recorded in the books of the corporation. Batangas recorded in the books of the corporation.]
Laguna Tayabas Bus Co. v. Bitanga, 362 SCRA 635 (2001). A bona fide transfer of shares, not registered in the corporate
A transferee has no right to intervene as a stockholder in books, is not valid as against a subsequent lawful attachment of
corporate issue on the strength of the transfer of shares said shares, regardless of whether the attaching creditor had
allegedly executed by a registered stockholder. It is explicit actual notice of said transfer or not. All transfers not so entered
under Section 63 that the transfer must be registered to affect on the books of the corporation are absolutely void; not
the corporation and third persons. Magsaysay-Labrador v. because they are without notice or fraudulent in law or fact, but
COURT OF APPEALS, 180 SCRA 266 (1989). because they are made so void by statute. Garcia v. Jomouad,
The purpose of registration is two-fold: to enable the transferee 323 SCRA 424 (2000).
to exercise all the rights of a stockholder, including the right to


Garcia v. Jomouad of the levy on execution.

Facts: Spouses Jose and Sally Atinon won a collection case against Jaime Doctrine: Said provision of law strictly required the recording of the
Dico so sheriff Nicolas Jomouad proceeded to execute the Propriety transfer in the books of the corporation and not elsewhere, to be valid
Ownership Certificate in the Cebu Country Club which was in Dicos against third parties.
name. Claiming ownership over the subject certificate, Nemesio Garcia
filed the aforesaid action for injunction with prayer for preliminary Atty. Hofilea youre not required to have a public
injunction to enjoin respondents from proceeding with the auction. instruments to support your transaction, but ideally you should
always have one in order to support your transaction.
Garcia avers that Dico was his manager at Young Auto Supply. To assist Pursuant to Section 63, a transfer of shares of stock not
him in entertaining clients, Garcia lent his POC, then bearing the recorded in the stock and transfer book is non-existent as far as
number 1459, in the Cebu Country Club to Dico so the latter could enjoy the corporation is concerned. As between the corporation on
the signing of privileges of its members. The Club issued POC No. 0668 the one hand, and its shareholders and third persons on the
in the name of Dico. Thereafter, Dico resigned as manager. Upon other, the corporation looks only into its books for the purpose
demand of Garcia, Dico returned the POC. The latter then executed a of determining who its shareholders are. Ponce v. Alsons
Deed of Transfer in favor of Garcia. The Club was furnished with a copy Cement Corp., 393 SCRA 602 (2002).
of said deed but the transfer was not recorded in the books of the club The absence of a deed of sale evidencing the sale of shares of
because Garcia failed to present proof of payment of the requisite stock does not necessarily show irregularity since Section 63 of
capital gains tax. the Corporation Code itself does not require any deed for the
validity of the transfer of shares stock, it being sufficient that
Issue: Whether or not a bona fide transfer of the shares of a such transfer be effected by delivery of the stock certificates
corporation, not registered or noted in the books of the corporation, is duly endorsed. The Corporation Code acknowledges that the
valid as against a subsequent lawful attachment of said shares, delivery of a duly indorsed stock certificate is sufficient to
regardless of whether the attaching creditor had actual notice of said transfer ownership of shares of stock in stock corporations.
transfer or not. Such mode of transfer is valid between the parties. In order to
bind third persons, however, the transfer must be recorded in
Held: NO. The transfer of the subject certificate made by Dico to Garcia the books of the corporation. Clearly then, the absence of a
was not valid as to the spouses Atinon, the judgment creditors, as the deed of assignment is not a fatal flaw which renders the transfer
same still stood in the name of Dico, the judgment debtor, at the time invalid as the Republic posits. In fact, as has been held in Rural


Bank of Lipa City, Inc. v. Court of Appeals, [366 SCRA 188 Attachments of shares of stock are not included in the term
(2001)] the execution not a deed of sale does not necessarily transfer as provided in Section 63 of Corporation Code. Both
make the transfer effective. Republic v. Estate of Hans Menzi, the Revised Rules of Court and the Corporation Code do not
475 SCRA 20, 38 (2005). require annotation in the corporations stock and transfer books
for the attachment of shares to be valid and binding on the
C. Who May Make Entries: corporation and third parties. Chemphil Export & Import Corp.
Entries made on the stock and transfer book by any person v. COURT OF APPEALS, 251 SCRA 257 (1995).
other than the corporate secretary, such as those made by the
President and Chairman, cannot be given any valid effect. G. Meaning of Unpaid Claims:
Torres, Jr. v. Court of Appeals, 278 SCRA 793 (1997). Unpaid claims under Section 63 refers to any unpaid
subscription, and not to any indebtedness which a stockholder
D. Registration with Securities and Exchange Commission changes may owe the corporation arising from any other transactions,
The Securities and Exchange Commission Rules Requiring the like unpaid monthly dues. Fua Cun v. Summers, 44 Phil. 704
Maintenance of Stock and Transfer Book,1 require that all stock (1923); China Banking Corp. v. COURT OF APPEALS, 270 SCRA
corporations must set-up and register their stock and transfer 503 (1997).
book with the Securities and Exchange Commission within thirty
(30) days from receipt of their certificate of incorporation. H. Equitable Mortgage Assignment:
It seems that the assignment of voting shares as security for a
E. BIR Certification to Effect Transfer of Shares loan operates to give the assignee not only the right to vote on
Under Section 97 of the 1997 National Internal Revenue Code, the shares, but would also treat the assignee as the owner of
the corporate secretary is not authorized to effect transfer of the shares (not just an equitable mortgage): It is true that the
shares to any new owner in the books of a corporation, unless assignment was predicated on the intention that it would serve
accompanied by a certification from the Commissioner of as security vis--vis DBPs financial accommodation extended to
Internal Revenue that the taxes, either estate tax, donor's tax, PJI, but it was a valid and duly executed assignment, subject to a
have been paid. resolutory condition, which was the settlement of PJIs loan
obligation with DBP. APT v. Sandiganbayan, 341 SCRA 551,
F. Attachments: 560 (2000).

1
XX SECURITIES AND EXCHANGE COMMISSION QUARTERLY BULLETIN 125 XI. Situs of Shares of Stocks (Section 55)
(Nos. 3 & 4, Sept. & Dec 1986).


attachment or levy of the shares duly effected pursuant to the
Section 55. Right to vote of pledgors, mortgagors, and administrators. Rules of Court by the judgment creditors of the registered
In case of pledged or mortgaged shares in stock corporations, the stockholder;
pledgor or mortgagor shall have the right to attend and vote at 2. Outside of physical transfer of delivery of the certificates of
meetings of stockholders, unless the pledgee or mortgagee is expressly stock, a chattel mortgage over the shares of stock, whether or
given by the pledgor or mortgagor such right in writing which is not covered certificates of stock, would be valid and binding on
recorded on the appropriate corporate books. (n) third parties only if the mortgage was registered with the
register of deeds or registers of deeds, as the case may be, of
Executors, administrators, receivers, and other legal representatives the province or city where the mortgagor has his domicile and
duly appointed by the court may attend and vote in behalf of the where the corporation has its principal place of business;
stockholders or members without need of any written proxy. (27a) 3. A writ of attachment/execution against the shares of stock of
the judgment debtor would be valid and binding on the shares
Situs of shares of stock is the domicile of the corporation to and against third parties, the moment there is proper service of
which they pertain to. Wells Fargo Bank and Union v. Collector, the writ to the proper officer of the corporation pursuant to
70 Phil. 325 (1940).1 Section 7(d), Rule 57 of the Rules of Court;
4. In any of the three (3) cases above, the pledge, mortgage,
SUMMARY OF CURRENT DOCTRINAL RULINGS ON SHARES OF STOCK attachment or levy of the shares of stock would thereupon be
valid and binding on the entire world upon their constitution or
If we analyze the doctrinal rules laid down by the Supreme Court in the completion of process; no registration of the pledge, mortgage,
various decisions is has rendered covering dealings with shares of stock, attachment or levy in the stock and transfer book of the
we can draw up the following summary: corporation is required either to make any of them valid or
1. A mortgage or pledge of shares of stock that would involve the binding; and their registration in the stock and transfer book
outright assignment or delivery and indorsement of the would have no legal effect at all and such registration does not
certificates of stock to the pledgee or mortgagee would produce the effect of notice to third parties;
constitute a valid mortgage even without registration with the 5. As between two contending judgment creditor, it would seem
register of deeds, but it would always be subject to prior that the first to have the writ served upon the proper officer of
the corporation would be preferred;
6. As between contending pledgee/mortgagee and an attaching
1
Tayag v. Benguet Consolidated, Inc., 26 SCRA 242 (1968); cf. Perkins v. Dizon, creditor, if the registration requirement for the pledge or
69 Phil. 186 (1939).


mortgage happened first in point of time prior to service of the
writ to the proper corporate officer, the pledge or mortgage In effect, by the strict application of Section 63 of the Corporation Code
shall be preferred; whereas, if the service of the writ to the to cover only the sale, assignment or absolute disposition of shares of
proper court officer happened ahead of the registration of the stock, the Supreme Court has placed a bias against voluntary sales,
pledge or mortgage, then the attaching creditor would be assignments or dispositions of shares of stock vis--vis pledges,
preferred; mortgages, attachment or levy thereof. To be valid and binding on third
7. As between a pledge/mortgage duly constituted (even when parties, the voluntary sale, assignment or disposition of the shares
not registered in the stock and transfer book) and the buyer or requires the essential element of registration in the stock and transfer
assignee of the shares, if the pledge or mortgage was book; otherwise the sale, assignment or disposition is considered void
constituted and registered ahead of the registration of the sale as to third parties, even when they have actual notice. Whereas, when it
or assignment in the stock and transfer book (even when the comes to pledge, mortgage, encumbrance, attachment or levy of shares,
sale or assignment was perfected and consummated ahead of registration thereof in the stock and transfer book is not essential either
the pledge or mortgage) the pledge or mortgage would still be for validity or as a species of notifying third parties.
preferred because the registration of the sale or assignment in
the stock and transfer book is a necessary ingredient to make Consequently, a buyer or assignee would always have to declare the
the sale or assignment binding on third parties, including the contract to the entire world by registration in the stock and transfer
pledgee/mortgagee; book in order to be valid, whereas all others who deal with the same
8. As between an attaching/levying creditor where there has been shares can complete their priority claim in private outside of the stock
proper service of the writ to the proper corporate officer (even and transfer book unknown to the rest of the world who may want to
when not registered in the stock and transfer book) and the voluntarily deal with the shares but would be in no position to ever be
buyer or assignee of the shares, if writ was properly served fully assured on whether there is no lien completed against the shares.
upon the corporate officer ahead of the registration of the sale
or assignment in the stock and transfer book (even when the We would have therefore the clearly inequitable situation where the
sale or assignment was perfected and consummated ahead of attaching or levying creditors using the stock and transfer book as the
the service of the writ) the attachment/levy would still be conclusive basis by which to enforce the writ against shares still
preferred because the registration of the sale/assignment in the standing in the name of the judgment debtor (although he has sold the
stock and transfer book is a necessary ingredient to make the shares to another person), whereas a buyer in good faith and for value
sale or assignment binding on third parties, including on who actually registers his purchase in the stock and transfer book at the
attaching/ levying creditor. time when nothing was annotated therein of any lien, would be


precluded from using the stock and transfer book as his conclusive basis order to foster economic development. The transfer by endorsement
to determine the clean title of his registered seller as a basis for securing and delivery of a certificate with the intention to pledge the shares
his title to the shares of stock. covered thereby should be sufficient to give legal effect to that
intention and to consummate the juristic act without necessity of
In the same manner a pledgee or mortgagee who registers his pledge or registration."1
mortgage in the register of deeds may rely upon the stock and transfer
book as the conclusive basis by which to determine the validity and
priority of the pledge or mortgage of the shares still standing in the
name of the pledgor and mortgagor, and yet a buyer in good faith and
for value, and even to whom the clean certificate of stock have been
duly endorsed and delivered, and who actually registers his purchase in
the stock and transfer book at the time when they stood clean in the
name of the registered seller, is precluded from using the stock and
transfer book as his conclusive basis to determine the clean title of his
registered seller as the basis for securing his title to the shares of stock.

In these cases, the registration requirements under stock and transfer
books, instead of becoming the basis by which title to shares of stock
can clearly and conclusively be voluntarily sold and bought, and the
basis for assurance and protection to the investing public, has been
transformed into the very stumbling block to achieving the ideal
situation by which shares of stock can voluntarily be dealt with,
accompanied with a reasonable assurance of the clean title thereto.

Making registration in the stock and transfer book as the mandatory
means by which dealings with shares of stock can be valid and effective
as against both the corporation and third parties would make the
procedure simple and easier to verify. After all as the Supreme Court
said in Chua Guan "Loans upon stock securities should be facilitated in
1
Chua Guan v. Samahang Magsasaka, Inc., supra, at p. 482.


ACQUISITIONS, MERGERS AND CONSOLIDATIONS the corporate property and assets if thereby the corporation would be
rendered incapable of continuing the business or accomplishing the
I. ACQUISITIONS AND TRANSFERS purpose for which it was incorporated.

After such authorization or approval by the stockholders or members,
A. Concept of Business Enterprise, Economic Unit or Going
Concern (Section 40) the board of directors or trustees may, nevertheless, in its discretion,
abandon such sale, lease, exchange, mortgage, pledge or other
disposition of property and assets, subject to the rights of third parties
Section 40. Sale or other disposition of assets.
under any contract relating thereto, without further action or approval
Subject to the provisions of existing laws on illegal combinations and
by the stockholders or members.
monopolies, a corporation may, by a majority vote of its board of

directors or trustees, sell, lease, exchange, mortgage, pledge or
Nothing in this section is intended to restrict the power of any
otherwise dispose of all or substantially all of its property and assets,
corporation, without the authorization by the stockholders or
including its goodwill, upon such terms and conditions and for such
members, to sell, lease, exchange, mortgage, pledge or otherwise
consideration, which may be money, stocks, bonds or other
dispose of any of its property and assets if the same is necessary in the
instruments for the payment of money or other property or
usual and regular course of business of said corporation or if the
consideration, as its board of directors or trustees may deem
proceeds of the sale or other disposition of such property and assets
expedient, when authorized by the vote of the stockholders
be appropriated for the conduct of its remaining business.
representing at least two-thirds (2/3) of the outstanding capital stock,

or in case of non-stock corporation, by the vote of at least to two-
In non-stock corporations where there are no members with voting
thirds (2/3) of the members, in a stockholder's or member's meeting
rights, the vote of at least a majority of the trustees in office will be
duly called for the purpose. Written notice of the proposed action and
sufficient authorization for the corporation to enter into any
of the time and place of the meeting shall be addressed to each
transaction authorized by this section. (28 1/2a)
stockholder or member at his place of residence as shown on the
books of the corporation and deposited to the addressee in the post
office with postage prepaid, or served personally: Provided, That any Business enterprise constitutes the goodwill, the customer lists
dissenting stockholder may exercise his appraisal right under the and all factors that make a business profitable. Villa Rey Transit,
conditions provided in this Code. Inc. v. Ferrer, 25 SCRA 845 (1968).

A sale or other disposition shall be deemed to cover substantially all Villa Rey Transit, Inc. v. Ferrer


pay for his own obligations, and that he also bought money into the
Facts: Villarama entered into a Contract of Sale with PANTRANCO for 2 corporations coffers. Evidence further shows that the initial cash
certificates of public convenience (first set) which authorizes the owner capitalization of the corporation of P105,000 was mostly financed by
to operate 32 units of buses along the Pangasinan to Manila route. The Villarama. Further, the evidence shows that when the Corporation was
contract contains a stipulation that prohibits Villarama from applying for in its initial months of operation, Villarama purchased and paid with his
new TPUs for 10 years identical or competing with the buyers. personal checks Ford trucks for the Corporation. Villarama had co-
mingled his personal funds and transactions with those made in the
3 months alter, a corporation called Villa Rey Transit Inc. was organized name of the Corporation.
with a capital stock of P500,000. The incorporators are Natividad
Villarama (wife) and other relatives. After registering with the SEC, Villa The clear intention of the parties was to prevent the seller from
Rey bought five TPUs (second set) from Fernando along with 49 buses, conducting any competitive line for 10 years since, anyway, he has
tools and other equipment. Villa Rey prayed for the Public Service bound himself not to apply for authorization to operate along such lines
Commission (PSC) to grant it provisional authority to operate. Before for the duration of such period. If the prohibition is to be applied only to
the PSC could take action on the application, two of the five TPUs were the acquisition of new certificates of public convenience thru an
levied in favor of Ferrer in cases against Fernando. Ferrer then sold application with the Public Service Commission, this would, in effect,
these two TPUs to PANTRANCO. Subsequently, the PSC ordered that allow the seller just the same to compete with the buyer as long as his
PANTRANCO would have the authority to operate on the two TPUs authority to operate is only acquired thru transfer or sale from a
acquired from Ferrer. Villa Rey now questioned this order and initiated previous operator, thus defeating the intention of the parties.
an action in the CFI of Manila to annul these two TPUs. PANTRANCO on
the other hand initiated a third-party complaint alleging that Doctrine:
Villarama/Villa Rey Inc. was disqualified from operating on the two TPUs
by virtue of their original contract of Sale. As a rule Personal Liabilities remain with the company even
where assets are disposed. But those liabilities that attach to
Issue: Whether or not the stipulation on the original contract between the object disposed of follow that object and become the
PANTRANCO and Villarama binds Villa Rey Inc. as well. liability of the purchaser/transferee.

Held: YES. Evidence discloses that for someone claiming he is only a B. Types of Acquisitions\Transfers
part-time manager, the evidence on record shows Villarama practically As a rule, a corporation that purchases the assets of another will
controlled the corporation because he used the corporation funds to not be liable for the debts of the selling corporation, provided


the former acted in good faith and paid adequate consideration including the pumping equipment it sold to Insular Farms. The sale
for such assets, except when any of the following circumstances transaction was not entered into fraudulently. The sale between Insular
is present: (1) where the purchasers expressly or impliedly and Pacific took place nearly 6 months before the rendition of the
agrees to assume the debts; (2) where the selling corporation judgment sought to be collected. In addition, Pacific purchased the
fraudulently enters into the transactions to escape liability for shares of stock of Insular as the highest bidder at an action sale at the
those debts (3) where the purchasing corporation is merely a instance of a bank. The claim that the amount paid (P10,000) is grossly
continuation of the selling corporation, and (4) where the inadequate cannot be assailed because the sale was submitted to and
transaction amounts to a consolidation or merger of the approved by the SEC and as such, presumed fair and reasonable.
corporations. Edward J. Nell Co. v. Pacific, 15 SCRA 415 (1965).1
Doctrine: See above.
Edward J. Nell Co. v. Pacific
Even under the provisions of the Civil Code, a creditor has a real
Facts: Edward J. Nell Company (EJNC) secured a judgment against interest to go after any person to whom the debtor fraudulently
Insular Farms, Inc. representing unpaid balance of the price of a pump transferred its assets. Caltex (Phils.), Inc. v. PNOC Shipping and
sold by EJNC to the former. The writ of execution was returned stating Transport Corp., 498 SCRA 400 (2006).
that Insular Farms had no leviable property. A few months later, EJNC
filed this present action against Pacific Farms, Inc. for the collection of Caltex (Phils.), Inc. v. PNOC Shipping and Transport Corp.
the judgment against Insular Farms, upon the theory that Pacific Farms
is the alter ego of Insular Farms. Facts: The PNOC Shipping and Transport Corporation (PSTC) and the
Luzon Stevedoring Corporation (LUSTEVECO) entered into an
Issue: Whether or not Pacific Farms is liable for the unpaid obligation of Agreement of Assumption of Obligations, which provides that PSTC shall
Insular Farms. assume all obligations of LUSTEVECO with respect to certain claims
enumerated in the Annexes of the Agreement. This Agreement also
Held: NO. The theory of EJNC that Pacific Farms is an alter ego of Insular provides that PSTC shall control the conduct of any litigation pending
Farms, arose because the former purchased all or substantially all of the which may be filed with respect to such claims, and that LUSTEVECO
shares of stock, as well as the real and personal properties of the latter, appoints and constitutes PSTC as its attorney-in-fact to demand and
receive any claim out of the countersuits and counterclaims arising from
1
Philippines National Bank v. Andrada Electric & Engineering Co., 381 SCRA 244 said claims. Among the actions mentioned is Caltex (Phils) v. Luzon
(2002); McLeod v. NLRC, 512 SCRA 222 (2007); Jiao v. NLRC, 670 SCRA 184 Stevedoring Corporation, which was then pending appeal. Caltex won
(2012).


the case and a writ of execution was issued in its favor but was not 1. "Assets-Only" Level.1
satisfied. When it learned about the agreement between PSTC and In the "assets-only" acquisition, the purchaser is only interested
LUSTEVECO, it sued PSTC and brought an action. in the "raw" assets and properties of the business, perhaps to
be used to establish his own business enterprise or to be used
Issue: Whether or not Caltex may recover from PTSC. for his on-going business enterprise. In such an acquisition, the
purchaser is not interested in the entity of the corporate owner
Held: YES. The Agreement provides that PSTC shall assume all the of the assets, nor of the goodwill and other factors relating to
obligations of LUSTEVECO. LUSTEVECO transferred, conveyed and the business itself.
assigned to PSTC all of LUSTEVECOs business, properties and assets In other instances, the purchaser is interested only in
pertaining to its tanker and bulk business together with all the purchasing the assets to ensure that he would not be embroiled
obligations relating to the said business, properties and assets. The in issues relating to the liabilities and other contractual
assumption of obligations was stipulated not only in the Agreement of commitments of the business enterprise or those pertaining to
Assumption of Obligations but also in the Agreement of Transfer. the transferor.
2. "Business-Enterprise" Level. 2
Even without the Agreement, PSTC is still liable. While the Corporation In the "business-enterprise" level, the purchaser's interest goes
Code allows the transfer of all or substantially all the properties and beyond the assets or properties of the business enterprise. The
assets of a corporation, the transfer should not prejudice the creditors purchasers primary interest is essentially to obtain the earning
of the assignor by holding the assignee liable for the formers capability of the venture. However, the purchaser in such is not
obligations. interested in obtaining the juridical entity that owns the
business enterprise, and therefore purchases directly the
Doctrine: To allow an assignor to make a transfer without the consent business from the corporate entity.
of its creditors and without requiring the assignee to assume the As will be shown in the discussions hereunder, the essence of
formers obligations will defraud creditors. the "business-enterprise" transfer is that the effect is that the
transferee merely continues the same business of the
PSALM took ownership over most of NPCs assets by operation transferor.
of lawthese properties may be used to satisfy the Courts

judgment, and such being the case, the employees may go after 1
such properties. NPC Drivers and Mechanics Association (NPC (2013 ed.). Manila, Philippines: Rex Book Store.
2
DAMA) v. NPC, 606 SCRA 409 (2009). Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.


3. "Equity" Level. 1 title of the transferee over the assets would be void, even if he
The "equity" level constitutes looking at the entirety of the were a purchaser in good faith.5
business enterprise as it is owned and operated by the 3. Special Rule in Corporate Dissolution.6
corporation. The purchaser takes control and ownership of the When another corporation takes over the assets of another
business by purchasing the shareholdings of the corporate corporation which is dissolved, the succeeding corporation is
owner. The control of the business enterprise is therefore liable for the claims against the dissolved corporation to the
indirect, since the corporate owner remains the direct owner of extent of the fair value of the assets assumed.
the business, and what the purchaser has actually purchased is 4. Voluntary Assumption of Liabilities.7
the ability to elect the members of the board of the corporation The other instance in an assets-only transfer when the
who run the business. transferee becomes liable for the obligations of the transferor is
when by contract, express or implied, the transferee voluntarily
C. Assets Only Transfers assumes such obligations of the transferor.
1. Rationale for Non-Assumption of Liability.2
In an assets-only transfer, the transferee is not liable for the D. Business Enterprise Transfers:
debts and liabilities of the transferor, except where the 1. Nature of Business-Enterprise.8
transferee expressly or impliedly agrees to assume such debts. A business enterprise, apart from the juridical personality under
2. Coverage of the Bulk Sales Law.3 which is operates, has a "separate being" of its own. Properly
An assets-only transfer if constituting "bulk sale" under the Bulk speaking, a business enterprise comprises more than just the
Sales Law,4 would affect the transferee in the sense that if the properties of the business, but includes a "concern" that covers
sale has not complied with the requirements of the Law, the the employees, the goodwill, list of clientele and suppliers, etc.,
sale could be classified as fraudulent and void, and therefore which give it value separate and distinct from its owners or the

5
The Court of Appeals in People v. Wong, 50 O.G. 4867, has held that the Bulk
Sales Law applies only to merchandising business or establishments, and has no
application to other forms of activities such as in that case the sale of the
1
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. equipment, tools and machineries of a foundry shop.
6
2
7
3
8
4
Act No. 3952, as amended by Rep. Act No. 111. (2013 ed.). Manila, Philippines: Rex Book Store.


juridical entity under which it operates. This is what is termed as Facts: A.D. Santos, Inc. operates taxicabs. Ventura Vasquez was one of
the "economic unit", "the enterprise", "the going concern", or his taxi drivers. While driving A.D. Santos, Inc.s taxi cab, Vasquez
the "financial unit", recognized in other disciplines, such as vomited blood. The companys physician, Dr. Roman, treated him. He
Economics and Accounting. was sent to and confined in Santo Tomas Hospital. Afterwards, he was
Although, jurisprudence refuses to recognize a separate admitted at the Quezon Institute where he was diagnosed with
existence of the business enterprise apart from the juridical pulmonary tuberculosis. He did not resume work. Vasquez filed a claim
personality which the State grants in corporations, 1 and with the Workmens Compensation Commission. A.D. Santos, Inc. was
partnerships, 2 such separate existence of the business ordered to pay compensation and reimburse Vasquez the amount he
enterprise does exist and is recognized in the business world. spent for his treatment.
2. Statement of Doctrine. 3
Jurisprudence has held that in a business-enterprise transfer, Issue: Whether or not A.D. Santos is liable for the expenses of Vasquez
the transferee is liable for the debts and liabilities of his
transferor. Held: YES. Vasquez cause of action against A.D. Santos, Inc. is complete.
The purpose of the jurisprudential doctrine is to protect the In its answer to Vasquezs claim, A.D. Santos, Inc. categorically admitted
creditors of the business by allowing them a remedy against the that Vasquez was its taxi driver. Further, Vasquez contracted pulmonary
new controller or owner of the business enterprise. tuberculosis by reason of his employment.
3. Application of Doctrine
A.D. Santos v. Vasquez, 22 SCRA 1156 (1968) Vasquez cited in his testimony that he worked for City Cab, a company
operated by a certain Amador Santos. This does not detract the validity
A.D. Santos v. Vasquez of Vasquez right to compensation. Amador Santos was the sole owner
and operator of City Cab (sole proprietorship). It was subsequently
transferred to A.D. Santos, Inc. in which Amador Santos was a majority
stockholder. In business enterprise transfers, the transferee is liable for
1
Tayag v. Benguet Consolidated Inc., 26 SCRA 242 (1968). It rejected the
genossenchaft theory of Friedman that would recognize the corporate entity as the liabilities of his transferor arising from the business enterprise
"the reality of the group as a social and legal entity independent of state transferred. Mentioning Amador Santos as his employer should not
recognition and concession." confuse the facts relating to the employer-employee relationship. In this
2
Ang Pue & Co. v. Section of Commerce and Industry, 5 SCRA 645 (1962). The
formation of a corporate entity or a partnership is not a matter of right, but
case, the veil of the corporate fiction is used as a shield to perpetrate a
rather of a privilege. fraud or confuse legitimate issues.
3


Doctrine: In business enterprise transfers, the transferee is liable for the
liabilities of his transferor arising from the business enterprise Issue: Whether or not Laguna Trans Co. Inc. was bound by the
transferred. compulsory coverage of the Social Security Act

Where a corporation is formed by, and consisted of members of Held: YES. While it is true that a corporation once formed is conferred a
a partnership whose business and property was conveyed and juridical personality separate and district from the persons composing it,
transferred to the corporation for the purpose of continuing its it is but a legal fiction introduced for purposes of convenience and to
business, in payment for which corporate capital stock was subserve the ends of justice. To adopt Laguna Trans. Co. Inc.s argument
issued, such corporation is presumed to have assumed would defeat, rather than promote, the ends for which the Social
partnership debts, and is prima facie liable therefore. Laguna Security Act was enacted. An employer could easily circumvent the
Trans. Co., Inc. v. SSS, 107 Phil. 833 (1960). statute by simply changing his form of organization every other year,
and then claim exemption from contribution to the System as required,
Laguna Trans. Co., Inc. v. SSS on the theory that, as a new entity, it has not been in operation for a
period of at least 2 years. In this case, it can be said that there was only
Facts: In 1940 the Bian Transportation Co., a corporation duly a change in the form of organization of the entity in the common carrier
registered with the SEC, sold part of the lines and equipment it operates business. This is said to be so because when the unregistered
to G. Mercado, A. Mercado, Mata and Vera Cruz. After this, the vendees partnership was turned into a corporation, the firm name was not
formed an unregistered partnership under the name of Laguna altered save for the fact that Inc. was added to show that it was duly
Transportation Company which continued to operate the lines and incorporated under existing laws.
equipment bought from Bian Transportation Co. Later on, the original
partners forming Laguna Transport Company along with 2 new Doctrine: The law provides that the Commission may not compel any
members organized a corporation known as the Laguna Transportation employer to become a member of the System unless he shall have been
Co., Inc. and the corporation was registered in the SEC on June 20, 1956, in operation for at least two years, such is not applicable to a
which continued the same transportation business of the unregistered corporation that merely changed its form of organization.
partnership. Laguna Trans. Co. Inc. requested for exemption from
coverage by the System on the ground that it started operation only on A business enterprise operated under a partnership and later
June 20, 1956, when it was registered with the Securities and Exchange incorporated, or where a corporation assumed all the assets
Commission but on November 11, 1957, the Social Security System and liabilities of the partnership, then the corporation cannot be
notified plaintiff that it was covered. regarded, for purposes of the SSS Law, as having come into


being only on the date of its incorporation but from the date the counsel holds office in the same address, and that all respondents have
partnership started the business. Oromeca Lumber Co. v. SSS, 4 the same key personnel such as Lim.
SCRA 1188 (1962); San Teodoro Dev. v. SSS, 8 SCRA 96 (1963).
When a corporation transferred all its assets to another Issue: Whether or not an employer-employee relationship exists
corporation to settle its obligations that would not amount to between private respondents and McLeod
a fraudulent transfer. McLeod v. NLRC, 512 SCRA 222 (2007).
Held: YES BUT he was an employee of Peggy Mills ONLY. What
McLeod v. NLRC happened between Peggy Mills and Sta. Rosa textile was dation in
payment with lease. Peggy Mills had ceded, conveyed and transferred
Facts: John F. McLeod filed a complaint for unpaid benefits and all of its rights, title and interests in and to the assets to Sta. Rosa Textile
damages, against Filipinas Synthetic Corporation (Filsyn), Far Eastern to settle its obligations.
Textile Mills, Inc., Sta. Rosa Textiles, Inc., Patricio Lim and Eric Hu
(respondents). McLeod said that he is an expert in textile manufacturing Doctrine: See above.
process, and was hired as the Manager of Universal Textiles, Inc. (UTEX)
under its President, Patricio Lim. Lim later formed Peggy Mills, Inc. (with When the bus operations belonging to the estate of the
Filsyn having controlling interest), and it absorbed McLeod. Filsyn then deceased spouses is duly incorporated by the administratrix
sold Peggy Mills to Far Eastern Textile Mills with Lim as the chairman with the intention to make the corporation liable for past and
and president. Peggy Mills was renamed Sta. Rosa Textile. When pending obligations of the estate as the transportation business
McLeod reached retirement age, he was only given a reduced 13 month itself, then that liability on the part of the corporation, vis--vis
pay. Lim offered McLeod a compromise settlement but was rejected. the estate, should continue to remain with it even after the
percentage of the estates shares of stock in the corporation
UTEX Peggy Mills Far Eastern Textile Mills Sta. Rosa Textile should have been diluted. Buan v. Alcantara, 127 SCRA 845
(1984).
Respondents allege that Filsyn and Far Eastern Textiles are separate Settled now is the rule that where one corporation sells or
legal entities and have no employer relationship with McLeod. Sta. Rosa otherwise transfers all its assets to another corporation for
only acquired the assets and NOT the liabilities of Peggy Mills. In value, the latter is not, by that fact alone, liable for the debts
McLeods reply, he alleged that all the respondents are solidarily liable and liabilities of the transferor. Pantranco Employees
for all salaries and benefits he is entitled to, being one and the same Association (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009).
entity. McLeod said that their offices were all in the same building, their


Pantranco Employees Association (PEA-PTGWO) v. NLRC Madecor, Mega Prime, and PNEI are corporations with their own
personalities. PNB was only a stockholder of PNB-Madecor which later
Facts: The Gonzales family owned two corporations, PANTRANCO North sold its shares to Mega Prime; and that PNB-Madecor was the owner of
Express Inc. (PNEI) and Macris Realty Corporation (Macris). PNEI the Pantranco properties. Neither can we merge the personality of PNEI
provided transportation services and its terminals were on the with PNB simply because the latter acquired the former.
Pantranco properties registered under the name of Macris. Due to
financial losses, creditors took over both corporations and later Doctrine: See above.
transferred to the National Investment Development Corporation
(NIDC), a subsidiary of the Philippine National Bank. Macris was later 4. Rationale of Doctrine in Business Enterprise Transfers
renamed and merged to another corporation to form the new PNB The doctrine in business-enterprise transfers recognizes the
subsidiary, the PNB-Madecor. NIDC sold PNEI to North Express reality in the business world that although no formal mortgage
Transport, Inc. (NETI), PNEI was later placed under sequestration by the contract is executed, creditors and suppliers extend credit to
PCGG. Eventually PNEI ceased its operation which came with the various the business enterprise because they see the business's earning
labor claims commenced by the former employees of PNEI where the capacity and assets as a "security" to the undertaking that they
employees won. The employees now seek to attach on the properties will eventually be paid back.1 The doctrine therefore puts the
registered to PNB-Madecor to satisfy their claim. burden on the shoulder of the person who is in the best position
to protect himself, namely the transferee, by obtaining certain
Issue: Whether or not the former PNEI employees can attach the guarantees and protection from his transferor.
properties (specifically the Pantranco properties) of PNB, PNB-Madecor
1
and Mega Prime to satisfy their unpaid labor claims against PNEI It would be instructive to see the judicial attitude to the extension of credit as
underpinning a clear intention to establish a long-term business. On the issue
of whether a foreign corporation intended to engage in business in the
Held: NO. First, the subject property is not owned by the judgment Philippines, in Eriks Pte. Ltd. v. Court of Appeals, 267 SCRA 567 (1997), the
debtor, PNEI. The properties were owned by Macris, the predecessor of Supreme Court found that the extension of credit terms to be indicative of
intent to do business in the Philippines for an indefinite period, thus: "More
PNB-Madecor. Hence, they cannot be pursued against by the creditors than the sheer number of transactions entered into, a clear and unmistakable
of PNEI. It is a settled rule that the court in executing judgments extends intention on the part of petitioner to continue the body of its business in the
only to properties unquestionably belonging to the judgment debtor Philippines is more than apparent. . . Further, its grant and extension of 90-day
credit terms to private respondent for every purchase made, unarguably shows
alone. Second, the general rule is that a corporation has a personality an intention to continue transaction with private respondent, since in the usual
separate and distinct from those of its stockholders and other course of commercial transactions, credit is extended only to customers in good
corporations to which it may be connected. Obviously, PNB, PNB- standing or to those on whom there is an intention to maintain long-term
relationship.


operate the railway assets of PHIVIDEC. Borres sued PRI and Panay, and
E. Equity Transfers Panay disclaimed liability on the ground that in the Agreement
1. Rationale of Doctrine. 1 concluded between PHIVIDEC and PHILSUCOM, it was provided that
In an equity transfers, the transferee is not liable for the debts PHIVIDEC holds PHILSUCOM free from any action that might arise from
and liabilities of the transferor, except where the transferee any act of omission prior to the turn-over.
expressly or impliedly agreed to assume such debts.
The logic of the doctrine in equity transfer finds support in the Issue: Whether or not PHIVIDEC should be held liable.
main doctrine of separate juridical personality, that by
purchasing the shares in a corporation that owns a business, the Held: YES. It is clear from the evidence of record that by virtue of the
stockholder does not by that reason alone become the owner agreement between PHIVIDEC and PHILSUCOM, particularly the
directly of the business assets and does not become personally stipulation exempting the latter from any claim or liability arising out of
liable for the debts and liabilities of the business. any act or transaction prior to the turn-over, PHIVIDEC had expressly
2. Application of the Doctrine assumed liability for any claim against PRI. Since the accident happened
The transfer by the controlling shareholder of all of its equity in before that agreement and PRI ceased to exist after the turn-over, it
the corporation warrants the application of the alter ego should follow that PHIVIDEC cannot evade its liability for the injuries
piercing doctrine since it shows that the transferor had sustained by the private respondent. In the interest of justice and
complete control of the corporation. Phividec v. Court of equity, and to prevent the veil of corporate fiction from denying her the
Appeals, 181 SCRA 669 (1990). reparation to which she is entitled, that veil must be pierced and
PHIVIDEC and PRI regarded as one and the same entity.
Phividec v. Court of Appeals
Doctrine: See above.
Facts: On March 29, Violeta M. Borres was injured in an accident which
the trial court ruled was due to the negligence of PHIVIDEC Railways, o The general rule therefore is that in an equity transfer,
Inc. (PRI). Prior, on May 25, PHIVIDEC sold all its rights and interests in the transferee does not become personally liable for the
the PRI to the PHILSUCOM. Two days later, PHILSUCOM caused the obligations of the corporate enterprise under the main
creation of a wholly-owned subsidiary, the Panay Railways Inc. to doctrine of separate juridical personality, unless either

1


the transferee by contract assumes such obligations, or 1. Plan of Merger or Consolidation (Section 76)
there is basis for piercing the veil of corporate fiction. 1
Proper Doctrine: The mere fact that a stockholder sells his Section 76. Plan or merger of consolidation.
shares of stock in the corporation during the pendency of a Two or more corporations may merge into a single corporation which
collection case against the corporation, does not make such shall be one of the constituent corporations or may consolidate into a
stockholder personally liable for the corporate debt, since the new single corporation which shall be the consolidated corporation.
disposing stockholder has no personal obligation to the creditor,
and it is the inherent right of the stockholder to dispose of his The board of directors or trustees of each corporation, party to the
shares of stock anytime he so desires. Remo, Jr. v. IAC, 172 merger or consolidation, shall approve a plan of merger or
SCRA 405 (1989).2 consolidation setting forth the following:

II. MERGER AND CONSOLIDATIONS 1. The names of the corporations proposing to merge or consolidate,
hereinafter referred to as the constituent corporations;
A. Concepts (McLeod v. NLRC, 512 SCRA 222 [2007]).
A consolidation is the union of two or more existing entities to 2. The terms of the merger or consolidation and the mode of carrying
form a new entity called the consolidated corporation. A the same into effect;
merger, on the other hand, is a union whereby one or more
existing corporations are absorbed by another corporation that 3. A statement of the changes, if any, in the articles of incorporation of
survives and continues the combined business. Since a merger the surviving corporation in case of merger; and, with respect to the
or consolidation involves fundamental changes in the consolidated corporation in case of consolidation, all the statements
corporation, as well as in the rights of stockholders and required to be set forth in the articles of incorporation for
creditors, there must be an express provision of law authorizing corporations organized under this Code; and
them. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244
(2002). 4. Such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or desirable. (n)
B. Procedure:
2. Stockholders or Members Approvals (Section 77)
1
(2013 ed.). Manila, Philippines: Rex Book Store. Section 77. Stockholder's or member's approval.
2
PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001).


Upon approval by majority vote of each of the board of directors or
trustees of the constituent corporations of the plan of merger or Section 78. Articles of merger or consolidation.
consolidation, the same shall be submitted for approval by the After the approval by the stockholders or members as required by the
stockholders or members of each of such corporations at separate preceding section, articles of merger or articles of consolidation shall
corporate meetings duly called for the purpose. Notice of such be executed by each of the constituent corporations, to be signed by
meetings shall be given to all stockholders or members of the the president or vice-president and certified by the secretary or
respective corporations, at least two (2) weeks prior to the date of the assistant secretary of each corporation setting forth:
meeting, either personally or by registered mail. Said notice shall state
the purpose of the meeting and shall include a copy or a summary of 1. The plan of the merger or the plan of consolidation;
the plan of merger or consolidation. The affirmative vote of
stockholders representing at least two-thirds (2/3) of the outstanding 2. As to stock corporations, the number of shares outstanding, or in
capital stock of each corporation in the case of stock corporations or at the case of non-stock corporations, the number of members; and
least two-thirds (2/3) of the members in the case of non-stock
corporations shall be necessary for the approval of such plan. Any 3. As to each corporation, the number of shares or members voting for
dissenting stockholder in stock corporations may exercise his appraisal and against such plan, respectively. (n)
right in accordance with the Code: Provided, That if after the approval
by the stockholders of such plan, the board of directors decides to 4. Submission of Financial Statements Requirements: For
abandon the plan, the appraisal right shall be extinguished. applications of merger, the audited financial statements of the
constituent corporations (surviving and absorbed) as of the date
Any amendment to the plan of merger or consolidation may be made, not earlier than 120 days prior to the date of filing of the
provided such amendment is approved by majority vote of the application and the long-form audit report for absorbed
respective boards of directors or trustees of all the constituent corporation(s) are always required. Long form audit report for
corporations and ratified by the affirmative vote of stockholders the surviving corporation is required if it is insolvent. (SEC
representing at least two-thirds (2/3) of the outstanding capital stock Opinion 14, s. of 2002, 15 November 2002).
or of two-thirds (2/3) of the members of each of the constituent 5. Approval by SEC (Section 79)
corporations. Such plan, together with any amendment, shall be
considered as the agreement of merger or consolidation. (n) Section 79. Effectivity of merger or consolidation.
The articles of merger or of consolidation, signed and certified as
3. Articles of Merger or Consolidation (Section 78) herein above required, shall be submitted to the Securities and


Exchange Commission in quadruplicate for its approval: Provided, That transferred to and vested in the surviving corporation. Poliand
in the case of merger or consolidation of banks or banking institutions, Industrial Ltd. V. NDC, 467 SCRA 500 (2005).1
building and loan associations, trust companies, insurance companies, When the procedure for merger/consolidation prescribed under
public utilities, educational institutions and other special corporations the Corporation Code are not followed, there can be no merger
governed by special laws, the favorable recommendation of the or consolidation, and corporate separateness between the
appropriate government agency shall first be obtained. If the constituent corporations remains, and the liabilities of one
Commission is satisfied that the merger or consolidation of the entity cannot be enforced against another entity. PNB v.
corporations concerned is not inconsistent with the provisions of this Andrada Electric & Engineering Co., 381 SCRA 244 (2002).
Code and existing laws, it shall issue a certificate of merger or of
consolidation, at which time the merger or consolidation shall be C. Effects of Merger or Consolidation (Section 80): Associated Bank v.
effective. CA, 291 SCRA 511 (1998).

If, upon investigation, the Securities and Exchange Commission has Section 80. Effects of merger or consolidation.
reason to believe that the proposed merger or consolidation is The merger or consolidation shall have the following effects:
contrary to or inconsistent with the provisions of this Code or existing
laws, it shall set a hearing to give the corporations concerned the 1. The constituent corporations shall become a single corporation
opportunity to be heard. Written notice of the date, time and place of which, in case of merger, shall be the surviving corporation designated
hearing shall be given to each constituent corporation at least two (2) in the plan of merger; and, in case of consolidation, shall be the
weeks before said hearing. The Commission shall thereafter proceed consolidated corporation designated in the plan of consolidation;
as provided in this Code. (n)
2. The separate existence of the constituent corporations shall cease,
The issuance by the SEC of the certificate of merger is crucial except that of the surviving or the consolidated corporation;
because not only does it bear out SECs approval but also marks
the moment whereupon the consequences of a merger take 3. The surviving or the consolidated corporation shall possess all the
place. By operation of law, upon the effectivity of the merger, rights, privileges, immunities and powers and shall be subject to all the
the absorbed corporation ceases to exist but its rights, and duties and liabilities of a corporation organized under this Code;
properties as well as liabilities shall be taken and deemed

1
Mindanao Savings and Loan Asso. V. Willkom, 634 SCRA 291 (2010).


4. The surviving or the consolidated corporation shall thereupon and
thereafter possess all the rights, privileges, immunities and franchises Issue: Whether or not Associated Bank, the surviving corporation, may
of each of the constituent corporations; and all property, real or enforce the promissory note made by private respondent in favor of
personal, and all receivables due on whatever account, including CBTC, the absorbed company.
subscriptions to shares and other choses in action, and all and every
other interest of, or belonging to, or due to each constituent Held: YES. Ordinarily, in the merger of two or more existing
corporation, shall be deemed transferred to and vested in such corporations, one of the combining corporations survives and continues
surviving or consolidated corporation without further act or deed; and the combined business, while the rest are dissolved and all their rights,
properties and liabilities are acquired by the surviving corporation.
5. The surviving or consolidated corporation shall be responsible and Although there is a dissolution of the absorbed corporations, there is no
liable for all the liabilities and obligations of each of the constituent winding up of their affairs or liquidation of their assets, because the
corporations in the same manner as if such surviving or consolidated surviving corporation automatically acquires all their rights, privileges
corporation had itself incurred such liabilities or obligations; and any and powers, as well as their liabilities. The merger, however, does not
pending claim, action or proceeding brought by or against any of such become effective upon the mere agreement of the constituent
constituent corporations may be prosecuted by or against the corporations. The procedure to be followed is prescribed under the
surviving or consolidated corporation. The rights of creditors or liens Corporation Code. Assuming that the effectivity date of the merger was
upon the property of any of such constituent corporations shall not be the date of its execution, we still cannot agree that petitioner no longer
impaired by such merger or consolidation. (n) has any interest in the promissory note. The agreement itself clearly
provides that all contracts irrespective of the date of execution
Associated Bank v. CA entered into in the name of CBTC shall be understood as pertaining to
the surviving bank, herein petitioner. Clause have been deliberately
Facts: Associated Banking Corporation (ABC) and Citizens Bank and Trust included in the agreement in order to protect the interests of the
Company (CBTC) merged to form just one banking corporation known as combining banks; specifically, to avoid giving the merger agreement a
Associated Citizens Bank (ACB), which changed its name to Associated farcical interpretation aimed at evading fulfillment of a due obligation.
Bank (AB). Lorenzo Sarmiento Jr. executed in favor of AB a promissory
note whereby the former undertook to pay on or before March 6, 1978. Doctrine: The merger, however, does not become effective upon the
Sarmiento still owes AB today despite repeated demands. He alleges mere agreement of the constituent corporations Section 79 requires:
that AB is not the proper party in interest because the promissory note 1. Approval by the SEC of the articles of merger
was executed in favor of Citizens Bank and Trust Company. 2. Must have been duly approved by a majority of the respective


stockholders of the constituent corporations. III. EFFECTS ON EMPLOYEES OF CORPORATION
3. Merger shall be effective only upon the issuance by the SEC of a
certificate of merger. A. Assets Only Transfers: Sundowner Dev. Corp. v. Drilon, 180 SCRA 14
4. The effectivity date of the merger is crucial for determining (1989).
when the merged or absorbed corporation ceases to exist; and
when its rights, privileges, properties as well as liabilities pass Sundowner Dev. Corp. v. Drilon
on to the surviving corporation.
Facts: Hotel Mabuhay, Inc. (Mabuhay) leased the premises belonging to
Atty. Hofilea The assumption of rights is a matter of law. Santiago Syjuco, Inc. (Syjuco) but failed to pay their rentals, and so
Global is bound by the terms of the contract entered into by its Syjuco instituted and ejectment case. They settled the case with the
predecessor-in-interest, Asian Bank. Due to Globals merger surrender of the premises to Syjuco. The assets of Mabuhay within it
with Asian Bank and because it is the surviving corporation, it is were sold to Sundowner who also leased the property from Syjuco. The
as if it was the one which entered into contract with Surecomp. National Union of Workers in Hotel, Restaurant and Allied Services
In the merger of two existing corporation, one of the (NUWHRAIN) picketed the leased premises, barricaded the entrance
corporations survives and continues the business, while the and denied Sundowners officers, employees and guests access. The
other is dissolved, and all its rights, properties, and liabilities are Secretary of Labor ordered the workers to return and for Mabuhay to
acquired by the surviving corporation. In the same way, Global accept them pending final determination of the issue of the absorption
also has the right to exercise all defenses, rights, privileges, and of the former employees of Mabuhay. Mabuhay argues that such is
counter-claims of every kind and nature which Asian Bank may impossible because it has ceased operations. NUWHRAIN alleged that
have or invoke under the law. Global Business Holdings Inc. v. Mabuhay and Sundownder connived to sell the assets and close the
Surecompsoftware, B.V., 633 SCRA 94 (2010) hotel to escape its obligations to the employees and asked that
It is settled that in the merger of two existing corporations, one Sundowner accept the workforce of Mabuhay and pay backwages.
of the corporations survives and continues the business, while
the other is dissolved and all its rights, properties and liabilities Issue: Whether or not the purchaser of the assets of an employer
are acquired by the surviving corporation. The surviving corporation can be considered a successor employer of the latters
corporation therefore has a right to institute a collection suit on employees.
accounts of one of one of the constituent corporations. Babst v.
CA, 350 SCRA 341 (2001). Held: NO. It was only when Mabuhay offered to sell its assets and
personal properties in the premises to Sundowner that they came to


deal with each other. Thus, the absorption of the employees of B. Business-Enterprise Transfers: Central Azucarera del Danao v. CA,
Mabuhay may not be imposed on Sundowner. In a tripartite agreement 137 SCRA 295 (1985); Complex Electronics Employees Assn. v. NLRC,
that was entered into by Sundowner with NUWHRAIN and Mabuhay, it 310 SCRA 403 (1999).1
is clear that Sundowner has no liability whatsoever to the employees of
Mabuhay and its responsibility if at all, is only to consider them for re- Central Azucarera del Danao v. CA
employment in the operation of the business in the same premises.
There is no implied acceptance of the employees of Mabuhay by Facts: Bana-ay, Cosculluela, and Palma were among the regular and
Sundowner and no commitment or duty to absorb them. permanent employees of Central Danao, the owner and operator of a
sugar mill. Central Danao later sold its sugar mill to DADECO. DADECO
Doctrine: Also, while it is true that Sundowner is using the leased actually took over operations of the mill pursuant to the Deed of Sale.
property for the same type of business as that of Mabuhay, there can be
no continuity of the business operations from Mabuhay to Sundowner Although the Deed made no mention of currently employed employees,
because Mabuhay had not retained control of the business. Sundowner DADECO did hire regular and permanent employees pursuant to its own
is a corporation entirely different from Mabuhay and has no controlling hiring and selection processes, including Bana-Ay, Cosculluela, and
interest whatever in the same. What is obvious is that the Sundowner, Palma. During the period of their employment, they were terminated by
by purchasing the assets in the hotel premises, enabled Mabuhay to pay DADECO. Bana-Ay, Cosculluela, and Palma filed a complaint against
its obligations to its employees. There being no employer-employee Central Danao and DADECO.
relationship between the Sundowner and the Mabuhay employees, it
cannot be compelled to absorb the latter and to pay them backwages. Central Danao claimed that DADECO was the employer during that time
since the former had already transferred its assets to DADECO at the
There is no law requiring that the purchaser of MDIIs assets time of termination. DADECO claims that it was Central Danao who was
should absorb its employees . . . the most that the NLRC could liable since the termination happened during the time that Central
do, for reasons of public policy and social justice, was to direct Danao was there employer.
[the buyer] to give preference to the qualified separated
employees of MDII in the filling up of vacancies in the facilities. Issue: Whether or not Central Danao is liable
MDII Supervisors & Confidential Employees Asso. v. Pres.
Assistance on Legal Affairs, 79 SCRA 40.

1
Yu v. NLRC, 245 SCRA 134 (1995); Sunio v. NLRC, 127 SCRA 390 (1984); San
Felipe Neri School of Mandaluyong, Inc. v. NLRC, 201 SCRA 478 (1991).


Held: YES, CENTRAL DANAO IS LIABLE. The Deed reveals no express the employees that it was left with no alternative but to close down the
stipulation whatsoever relative to the continued employment by operations of Lite-On. The Union pushed for a retrenchment pay
Dadeco of the former employees of Central Danao. There was in fact, an equivalent to 1 month salary for every year of service, which Complex
interruption of the employment of the private respondents in the sugar refused.
central. In reality then, they were rehired anew by Dadeco, their new
employer. The records also reveal that negotiations for the sale were The machinery, equipment and materials being used for production at
made behind the back of the employees who were taken by surprise Complex were pulled-out from the company premises and transferred
upon its consummation. Technically then, the employees were to Ionics Circuit, Inc. (Ionics) at Cabuyao, Laguna. The following day, a
terminated on the date of the sale. Worse, they were not even given the total closure of company operation was effected.
required notice of termination.
A complaint was filed with the Labor Arbitration Branch of the NLRC.
Doctrine: The sale or disposition must be motivated by good faith. Ionics was impleaded as a party because the officers and management
Indeed, an innocent transferee of a business establishment has no personnel were also holding office there. Ionics contended that it was
liability to the employees of the transferor to continue employing them. an entity separate and distinct from Complex and had been in existence
Nor is the transferee liable for past unfair labor practices of the previous 8 years before the labor dispute arose. Ionics further argued that the
owner, except, when the liability therefor is assumed by the new hiring of some displaced workers of Complex was an exercise of
employer under the contract of sale. management prerogatives.

Complex Electronics Employees Assn. v. NLRC Issue: Whether or not there was transfer of business from Complex to
Ionics
Facts: Complex was engaged in the manufacture of electronic products.
There were different lines, including Ionics and Lite-On. The rank and Held: NO. There was no transfer of business. A runaway shop is
file workers of Complex were organized into the Complex Electronics defined as an industrial plant moved by its owners from one location to
Employees Association (Union). Complex received a fax message from another to escape union labor regulations or state laws, but the term is
Lite-On, requiring it to lower its price by 10%. also used to describe a plant removed to a new location in order to
discriminate against employees at the old plant because of their union
Complex informed its Lite-On personnel that such request of lowering activities. A runaway shop in this sense, is a relocation motivated by
their selling price was not feasible as they were already incurring losses anti-union animus rather than for business reasons.
at the present prices of their products. Complex regretfully informed


In this case, however, Ionics was not set up merely for the purpose of earlier firm. Pepsi-Cola Bottling Co., v. NLRC, 210 SCRA 277
transferring the business of Complex. At the time the labor dispute (1992).
arose at Complex, Ionics was already existing as an independent
company. It cannot, therefore, be said that the temporary closure in Pepsi-Cola Bottling Co., v. NLRC
Complex and its subsequent transfer of business to Ionics was for anti-
union purposes. The Union failed to show that the primary reason for Facts: Private respondent Encabo was employed as a maintenance
the closure of the establishment was due to the union activities. manager in Pepsi Cola Distributors (PCD). His employment was
terminated because of his negligence in repairing the beverage plants
Doctrine: The mere fact that one or more corporations are owned or CEM-72 soaker machine which needed rehabilitation. According to PCD,
controlled by the same or single stockholder is not a sufficient ground his delays in repairing the machine caused the company to incur
for disregarding separate corporate personalities. Ionics may be significant losses.
engaged in the same business as that of Complex, but this fact alone is
not enough reason to pierce the veil of corporate fiction of the Encabo filed a complaint for illegal dismissal and unfair labor practice
corporation. Well-settled is the rule that a corporation has a personality claiming that he was denied due process. The NLRC found in favor of
separate and distinct from that of its officers and stockholders. Encabo and issued a writ of execution addressed to Pepsi Cola Bottling
Corp (PBC) ordering PCD to reinstate him. The writ was delivered to
Furthermore, under the principle of absorption, a bona fide Pepsi-Cola Products Philippines (PCPPI). PCCPI alleged that
buyer or transferee of all, or substantially all, the properties of reinstatement is no longer possible since PCD had closed down its
the seller or transferor is not obliged to absorb the latters business on the ground of serious business losses and the new franchise
employees. The most that the purchasing company may do, for holder, PCPPI, is a new entity.
reasons of public policy and social justice, is to give preference
of reemployment to the selling companys qualified separated Issue: Whether or not PCPPI is liable
employees, who in its judgment are necessary to the continued
operation of the business establishment. Barayoga v. Asset Held: YES. PCPPI is liable and must reinstate Encabo. PCD may have
Privation Trust, 473 SCRA 690 (2005). ceased business operations and PCPPI may be a new company but it
Although a corporation may have ceased business operations does necessarily follow that one may now be held liable for illegal acts
and an entirely new company has been organized to take over committed by the earlier firm. The complaint was filed when PCD was
the same type of operations, it does not necessarily follow that still in existence. Pepsi-Cola never stopped doing business in the
no one may now be held liable for illegal acts committed by the Philippines. The same soft drink products sold in 1988 when the


complaint was initiated continue to be sold now. The sale of products transgressions of his or her precedessor. Peafrancia Tours and
did not stop at the time PCD bowed out and PCPPI came into being. Travel Transport v. Sarmiento, 634 SCRA 279 (2010).
There is no evidence presented showing that PCCPI, as the new entity or
purchasing company is free from any liabilities incurred by the former C. Equity Transfers: Pepsi Cola Distributors v. NLRC, 247 SCRA 386
company. (1995); Manlimos v. NLRC, 242 SCRA 145 (1995).1

In fact, in the surety bond put up by petitioners, both PCD and PCPPI Pepsi Cola Distributors v. NLRC
bound themselves to answer for monetary awards which clearly implies
that the PCPPI as a result of the transfer of the franchise bound itself to Facts: Private respondent Yute started working with Pepsi-Cola Bottling
answer for the liability of PCD to its employees. Company (PCBCP) as contractual maintenance electrician and when
Pepsi Cola Distributors (PCD) took over the companys manufacturing
Doctrine: See above. operations, he was absorbed as a regular employee. PCD terminated
Yute for alleged abandonment of work and/or absence without leave so
Where a corporation is closed for alleged losses and its he filed a complaint for illegal dismissal before the NLRC wherein the
equipment are transferred to another company which engaged labor arbiter declared the dismissal illegal and ordered PCD to reinstate
in the same operations, the separate juridical personality of the him. However, 33 days after his reinstatement, PCD stopped payment of
latter can be pierced to make it liable for the labor claims of the Yutes salary on the ground that it allegedly sold its business interest
employees of the closed company. National Federation of with Pepsi Cola Products Philippines, Inc. (PCPPI)
Labor Union v. Ople, 143 SCRA 124 (1986).
In the case of a transfer of all or substantially all of the assets of NLRC issued a writ of execution ordering PCD to pay the salaries. PCPPI
a corporation (i.e., business enterprise transfers), the liabilities filed in the case a motion praying that the change of ownership of the
of the previous owners to its employees are not enforceable company be taken cognizance of by the NLRC saying that PCPPI has a
against the buyer or transferee, unless (a) the latter separate personality from PCD and therefore, not a party to the cases
unequivocally assumes them; or (b) the sale or transfer was filed. Not being a party, they cannot be subjected to the issue writ of
made in bad faith. Barayoga v. Asset Privatization Trust, 473 execution. NLRC in resolving the MR modified its decision by ordering
SCRA 690 (2005). both PCD and PCPPI to reinstate Yute. PCD was further ordered to pay
Where the change of ownership is done in bad faith, or is used
1
to defeat the rights of labor, the successor-employer is deemed Robledo v. NLRC, 238 SCRA 52 (1994); Pepsi-Cola Bottling Co. v. NLRC, 210
SCRA 277 (1992); DBP v. NLRC, 186 SCRA 841 (1990); Coral v. NLRC, 258 SCRA
to have absorbed the employees and is held liable for the
704 (1996); Avon Dale Garments, Inc. v. NLRC, 246 SCRA 733 (1995).


Yutes separation pay. petitioners continued to work for the new owner and were considered
terminated, with their conformity much later when they received their
Issue: Whether or not the dismissal of Yute on the ground that the separation pay and all other benefits due them. Each of them then
company already sold its business interest to PCCPI was proper executed a Release and Waiver which they acknowledged before Atty.
Nolasco Discipulo, Hearing Officer of the Butuan City District Office of
Held: NO. The contention that the second dismissal of private DOLE.
respondent presents an issue separate and distinct from the issue of the
earlier dismissal on December 15, 1988 is nothing but an attempt of The new owner caused the publication of a notice for the hiring of
PCD to evade liability. Pepsi Cola Distributors of the Philippines may workers, indicating therein who of the separated employees could be
have ceased business operations and Pepsi-Cola Products Philippines, accepted on probationary basis. The petitioners were hired on
Inc. may be a new company but it does not necessarily follow that no probationary basis for six months as patchers or tapers, but were
one may now be held liable for illegal acts committed by the earlier compensated on piece-rate or task basis.
firm. The complaint was filed when PCD was still in existence. Pepsi-Cola
never stopped doing business in the Philippines. The same soft drinks For their alleged absence without leave, Perla Cumpay and Virginia Etic
products sold in 1988 when the complaint was initiated continue to be were considered to have abandoned their work. The rest were
sold now. dismissed later because they allegedly committed acts prejudicial to the
interest of the new management which consisted of their "including
Doctrine: The sale of products, purchases of materials, payment of unrepaired veneers in their reported productions on output as well as
obligations, and other business acts did not stop at the time PCD bowed untaped corestock or whole sheets in their supposed taped
out and PCPPI came into being. There is no evidence presented showing veneers/corestock."
that PCPPI, as the new entity or purchasing company is free from any
liabilities incurred by the former corporation. The employee-petitioners allege that they remained regular employees
of the corporation because the change in ownership and management
Manlimos v. NLRC of Super Mahogany left its separate juridical personality unaffected. In
their defense, the corporation claims that it was within their
Facts: Manlimos along with 15 others were employees of Mahogany management prerogative to terminate the employee-petitioners, as
Plywood Corporation. A new owner/management group headed by they were rehired by the new management under probationary status.
Alfredo Roxas acquired complete ownership of the corporation. The
petitioners were advised of such change of ownership; however, the Issue: Whether or not an innocent transferee of a business


establishment has liability to the employees of the transfer or to vacancies in the facilities of the purchaser.
continue employing them.
D. Mergers and Consolidations: Filipinas Port Services v. NLRC, 177
Held: NO. The change in ownership of the management was done bona SCRA 203 (1989).1
fide and the petitioners did not for any moment before the filing of their
complaints raise any doubt on the motive for the change. On the Filipinas Port Services v. NLRC
contrary, upon being informed thereof and of their eventual
termination from employment, they freely and voluntarily accepted Facts: On Feb. 16, 1977, the government adopted a policy in Davao that
their separation pay and other benefits and individually executed the only one company can operate stevedoring and arrastre services in the
Release or Waiver which they acknowledged before no less than a ports of Davao. Because of this, the companies providing such services
hearing officer of the DOLE. consolidated together and formed a corporation named Davao
Dockhandlers, Inc. which was later renamed Filipinas Port Services.
Since the petitioners were effectively separated from work due to a Among the corporations in the consolidation agreement was Davao
bona fide change of ownership and they were accordingly paid their Maritime Stevedoring Corporation (DAMASTICOR).
separation pay, which they freely and voluntarily accepted, the private
respondent corporation was under no obligation to employ them; it In the articles of incorporation of the new corporation, it provided that
may, however, give them preference in the hiring. The private all labor force together with its necessary personnel complement, of
respondent in fact hired, but on probationary basis, was legally the merging operators shall be absorbed by the merged or integrated
permissible. organization to constitute its labor force.

The hiring of employees on a probationary basis is an exclusive Private respondent, an employee of DAMASTICOR, upon retirement
management prerogative. The employer has the right or privilege to from Filipinas, was paid his retirement fee from 1977-1987. He however
choose who will be hired and who will be denied employment. contends that his employment from DAMASTICOR should be counted in
computing his retirement fee.
Doctrine: Where such transfer of ownership is in good faith, the
transferee is under no legal duty to absorb the transferor employees as Issue: Whether or not the successor-in-interest of an employer is liable
there is no law compelling such absorption. The most that the
transferee may do, for reasons of public policy and social justice, is to 1
Reiterated in Filipinas Port Services v. NLRC, 200 SCRA 773 (1991); National
give preference to the qualified separated employees in the filling of Union Bank Employees v. Lazaro, 156 SCRA 123 (1988); First Gen. Marketing
Corp. v. NLRC, 223 SCRA 337 (1993).


for the differential retirement pay of an employee earned by him when that employment, because they are obligations, are
he was still under the employment of the predecessor-in-interest. carried over.

Held: NO. Petitioner cannot be held liable for the payment of the E. Spin-Offs: SMC Employees Union-PTGWO v. Confessor, 262 SCRA 81
retirement pay of private respondent while in the employ of (1996).
DAMASTICOR. It is the latter who is responsible for the same as the
labor contract of private respondent with DAMASTICOR is in personam SMC Employees Union-PTGWO v. Confessor
and cannot be passed on to the petitioner.
Facts: SMC-Union entered into a Collective Bargaining Agreement with
Doctrine: Unless expressly assumed, labor contracts are not enforceable SMC. SMC management informed its employees in a letter that the
against a transferee of an enterprise, labor contracts being in personam. company - which was composed of 4 operating divisions (1) beer, (2)
packaging, (3) feed and livestocks and (4) Magnolia and Agri-business -
It is more in keeping with the dictates of social justice and the would undergo a restructuring. Magnolia and Feeds and Livestock
State policy of according full protection to labor to deem divisions were spun-off and became 2 separate and distinct
employment contracts as automatically assumed by the corporations: Magnolia Corp. (Magnolia) and San Miguel Foods (SMFI).
surviving corporation in a merger, even in the absence of an Because of this, the CBA was renegotiated. During the negotiations,
express stipulation in the articles of merger or the merger plan. SMC-Union insisted that the bargaining unit of SMC should still include
By upholding the automatic assumption of the non-surviving the employees of the spun-off corporation and the CBA shall be
corporations existing employment contracts by the surviving effective for 2 years. SMC, on the other hand, contended that the
corporation in a merger, the Court strengthens judicial members/employees who had moved to Magnolia and SMFI,
protection of the right to security of tenure of employees automatically ceased to be part of the bargaining unit at the SMC.
affected by a merger and avoids confusion regarding the status
of their various benefits. Bank of P.I. v. BPI Employees Union- Issue: Whether or not the bargaining unit of SMC includes also the
Davao Chapter, etc., 658 SCRA 828 (2011). employees of Magnolia and SMFI.
o Atty. Hofilea the surviving corporation, in a merger
situation, is absorbing everything including employees. Held: NO. Magnolia and SMFI were spun-off to operate as distinct
As such, there is no interruption. This case seems to companies. Undeniably, the transformation of the companies was a
suggest that the employees have a choice whether to management prerogative and business judgment which the courts
join the new company or not. However, the rule still is cannot look into unless it is contrary to law, public policy or morals.


Neither can we impute any bad faith on the part of SMC so as to justify
the application of the doctrine of piercing the corporate veil. Magnolia
and SMFI became distinct entities with separate juridical personalities.
Thus, they cannot belong to a single bargaining unit.

Doctrine: In determining an appropriate bargaining unit, the test of
grouping is mutuality or commonality of interests. Considering the spin-
offs, the companies would consequently have their respective and
distinctive concerns in terms of the nature of work, wages, hours of
work and other conditions of employment.


CORPORATE DISSOLUTION AND LIQUIDATION an act of the sovereign power, or which results from the
expiration of the charter period of corporate life.

o A de facto dissolution is one which takes place in
I. No Vested Rights to Corporate Fiction:
substance and in fact when the corporation by reason
No person who has a claim against a juridical entity can claim
of insolvency, cessation of business, or suspension of all
any constitutional right to the perpetual existence of such
its operations, as the case may be, goes into liquidation,
entity. Gonzales v. SRA, 174 SCRA 377 (1989).
still retaining its primary franchise to be a corporation.
However, the Court emphasized that the termination of the life
This is actually a dissolution only of the "business
of a juridical entity does not by itself imply the diminution or
enterprise," while leaving intact the juridical entity.
extinction of rights demandable against a juridical entity.
2. Obtaining of Tax Clearance
Consequently, when the assets of a dissolved entity are taken
Under Section 2 of BIR-SEC Regulations No. 1, whenever a
over by another entity, the successor entity must be held liable
corporation undergoes dissolution, whether voluntarily or
for the obligations of the dissolved entity pertaining to the
involuntarily, a tax clearance must be obtained from the Bureau
assets so assumed, to the extent of the fair value of assets
of Internal Revenue, by filing with the Bureau an income tax
actually taken over.1
returns covering the income earned by them from the beginning

of the taxable year to the date of dissolution. The SEC is
A. Nature of Dissolution2
required to furnish the Commissioner of Internal Revenue a
Dissolution of a corporation signifies the extinguishment of its
copy of any order of involuntary dissolution or suspension of
franchise and the termination of its corporate existence for
the primary franchise or certificate of registration of a
business purpose. The mere fact that the corporation has
corporation.3
ceased to do business does not necessarily constitute a

dissolution, if it is still solvent and has not gone into liquidation.
B. Methods of Dissolution
1. Dissolution: de jure v. de facto
1. Voluntary
o A de jure dissolution is one adjudged and determined by
administrative or judicial sentence, or brought about by

3
A corporation whose corporate powers cease and are deemed dissolved
1
Gonzales v. Sugar Regulatory Administration, 174 SCRA 377 (1989). because it was not formally organized and did not commence the transaction of
2
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. its business within two (2) years from its incorporation need not secure a
(2013 ed.). Manila, Philippines: Rex Book Store. certificate of tax clearance. BIR Ruling No. 242, 10 November 1986.


a. Where no creditors are affected by the dissolution, by and object of the meeting for three (3) consecutive weeks in a
an administrative application for dissolution filed with newspaper published in the place where the principal office of said
the SEC;1 corporation is located; and if no newspaper is published in such place,
b. Where creditors are affected by dissolution, by a formal then in a newspaper of general circulation in the Philippines, after
petition for dissolution filed with the SEC, with due sending such notice to each stockholder or member either by
notice, and hearing to be duly conducted;2 and registered mail or by personal delivery at least thirty (30) days prior to
c. Shortening of corporate term by the amendment of the said meeting. A copy of the resolution authorizing the dissolution shall
articles of incorporation.3 be certified by a majority of the board of directors or trustees and
2. Involuntary countersigned by the secretary of the corporation. The Securities and
Exchange Commission shall thereupon issue the certificate of
II. Voluntary Dissolution (Section 117) dissolution. (62a)

Section 117. Methods of dissolution. When no creditors are involved, only a SEC application for
A corporation formed or organized under the provisions of this Code dissolution is required. The process is equivalent to the
may be dissolved voluntarily or involuntarily. (n) application for the amendment of the articles of incorporation,
except that in addition, publication of the notice of dissolution
A. No Creditors Affected (Section 118) must also be complied with.4
The SEC will not deny an application for dissolution when there
Section 118. Voluntary dissolution where no creditors are affected. are no creditors involved because of the constitutional
If dissolution of a corporation does not prejudice the rights of any prohibition against involuntary servitude or the constitutional
creditor having a claim against it, the dissolution may be effected by guarantee of association, and the right to refuse to continue an
majority vote of the board of directors or trustees, and by a resolution association. Since other than the stockholders or members of
duly adopted by the affirmative vote of the stockholders owning at the corporation, no third parties are involved, the State,
least two-thirds (2/3) of the outstanding capital stock or of at least through the SEC, will generally grant the request for the
two-thirds (2/3) of the members of a meeting to be held upon call of dissolution of the corporation.5
the directors or trustees after publication of the notice of time, place

4
1
Section 118, Corporation Code. (2013 ed.). Manila, Philippines: Rex Book Store.
2 5
Sec. 119, Corporation Code. Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.
3
Sec. 120, Corporation Code. (2013 ed.). Manila, Philippines: Rex Book Store.


Upon five (5) day's notice, given after the date on which the right to
B. There Are Creditors Affected (Sections 119 and 122). file objections as fixed in the order has expired, the Commission shall
proceed to hear the petition and try any issue made by the objections
Section 119. Voluntary dissolution where creditors are affected. filed; and if no such objection is sufficient, and the material allegations
Where the dissolution of a corporation may prejudice the rights of any of the petition are true, it shall render judgment dissolving the
creditor, the petition for dissolution shall be filed with the Securities corporation and directing such disposition of its assets as justice
and Exchange Commission. The petition shall be signed by a majority requires, and may appoint a receiver to collect such assets and pay the
of its board of directors or trustees or other officers having the debts of the corporation. (Rule 104, RCa)
management of its affairs, verified by its president or secretary or one
of its directors or trustees, and shall set forth all claims and demands Section 122. Corporate liquidation.
against it, and that its dissolution was resolved upon by the Every corporation whose charter expires by its own limitation or is
affirmative vote of the stockholders representing at least two-thirds annulled by forfeiture or otherwise, or whose corporate existence for
(2/3) of the outstanding capital stock or by at least two-thirds (2/3) of other purposes is terminated in any other manner, shall nevertheless
the members at a meeting of its stockholders or members called for be continued as a body corporate for three (3) years after the time
that purpose. when it would have been so dissolved, for the purpose of prosecuting
and defending suits by or against it and enabling it to settle and close
If the petition is sufficient in form and substance, the Commission its affairs, to dispose of and convey its property and to distribute its
shall, by an order reciting the purpose of the petition, fix a date on or assets, but not for the purpose of continuing the business for which it
before which objections thereto may be filed by any person, which was established.
date shall not be less than thirty (30) days nor more than sixty (60)
days after the entry of the order. Before such date, a copy of the order At any time during said three (3) years, the corporation is authorized
shall be published at least once a week for three (3) consecutive weeks and empowered to convey all of its property to trustees for the benefit
in a newspaper of general circulation published in the municipality or of stockholders, members, creditors, and other persons in interest.
city where the principal office of the corporation is situated, or if there From and after any such conveyance by the corporation of its property
be no such newspaper, then in a newspaper of general circulation in in trust for the benefit of its stockholders, members, creditors and
the Philippines, and a similar copy shall be posted for three (3) others in interest, all interest which the corporation had in the
consecutive weeks in three (3) public places in such municipality or property terminates, the legal interest vests in the trustees, and the
city. beneficial interest in the stockholders, members, creditors or other
persons in interest.


Section 120. Dissolution by shortening corporate term.
Upon the winding up of the corporate affairs, any asset distributable A voluntary dissolution may be effected by amending the articles of
to any creditor or stockholder or member who is unknown or cannot incorporation to shorten the corporate term pursuant to the
be found shall be escheated to the city or municipality where such provisions of this Code. A copy of the amended articles of
assets are located. incorporation shall be submitted to the Securities and Exchange
Commission in accordance with this Code. Upon approval of the
Except by decrease of capital stock and as otherwise allowed by this amended articles of incorporation of the expiration of the shortened
Code, no corporation shall distribute any of its assets or property term, as the case may be, the corporation shall be deemed dissolved
except upon lawful dissolution and after payment of all its debts and without any further proceedings, subject to the provisions of this Code
liabilities. (77a, 89a, 16a) on liquidation. (n)

If there are creditors involved, there is a need to file a formal Where a corporation is contemplating dissolving itself, it is
petition for dissolution with the SEC. The proceedings are quasi- required to submit tax return on the income earned by it from
judicial in nature and conducted to ensure that the rights of the the beginning of the year up to the date of its dissolution and
creditors are fully protected. In such proceedings, the SEC is not pay the corresponding tax due. Bank of P.I. v. Court of Appeals,
mandated to dissolve the corporation, especially when it would 363 SCRA 840 (2001).
be detrimental to the interests of the creditors, who may wish Under its internal rules, the SEC would require the following:2
to rehabilitate the operations of the corporation to ensure that a. Notice of the dissolution of the corporation by
it would be able to pay-off all of its debts. This authority of the shortening of the corporate term be published in a
SEC is also provided for in Presidential Decree 902-A.1 newspaper of general circulation for three (3)
When a corporation is contemplating dissolution, it must submit consecutive weeks;
tax return on the income earned by it from the beginning of the b. Listing of the corporate creditors, with their consent to
year up to the date of its dissolution and pay the corresponding the shortening of the corporate term;
tax due. BPI v. Court of Appeals, 363 SCRA 840 (2001). c. Submission by the majority stockholders or principal
officers of the corporation of an undertaking under oath
C. Shortening of Corporate Term (Section 120) that they shall personally answer for any outstanding
obligations of the corporation; and

1 2
Please see discussions on corporate rehabilitation in Chapter 14, Suspension Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.
of Payments, Rehabilitation and Insolvency Proceedings. (2013 ed.). Manila, Philippines: Rex Book Store.


d. The latest audited financial statements of the
corporation which must not be earlier than the date of 3. Refusal to comply or defiance of any lawful order of the Commission
the stockholders' or membership meeting approving the restraining commission of acts which would amount to a grave
amendment to the articles of incorporation, and a BIR violation of its franchise;
clearance on the tax liabilities of the corporation. 1
4. Continuous inoperation for a period of at least five (5) years;
III. Involuntary Dissolution (Section 121; Section 6(l), P.D. 902-A;
Section 2, Rule 66, Rules of Court) 5. Failure to file by-laws within the required period;

Section 121. Involuntary dissolution. 6. Failure to file required reports in appropriate forms as determined
A corporation may be dissolved by the Securities and Exchange by the Commission within the prescribed period;
Commission upon filing of a verified complaint and after proper notice x x x
and hearing on the grounds provided by existing laws, rules and
regulations. (n) CIVIL CODE
Section 2. When Solicitor General or public prosecutor must
PRESIDENTIAL DECREE NO. 902-A commence action.
Section 6. The Solicitor General or a public prosecutor, when directed by the
x x x President of the Philippines, or when upon complaint or otherwise he
(i) To suspend, or revoke, after proper notice and hearing, the has good reason to believe that any case specified in the preceding
franchise or certificate of registration of corporations, partnerships or section can be established by proof, must commence such action.
associations, upon any of the grounds provided by law, including the
following: A. Quo Warranto
Dissolution is a serious remedy granted by the courts only in
1. Fraud in procuring its certificate of registration; extreme cases and only to ensure that there is an avoidance of
prejudice to the public. Even when the prejudice were public in
2. Serious misrepresentation as to what the corporation can do or is nature, the remedy is to enjoin or correct the mistake; and only
doing to the great prejudice of or damage to the general public; when it cannot be remedied anymore that dissolution should be
imposed. Republic v. Bisaya Land Transportation Co., 81 SCRA
9 (1978). Government v. El Hogar Filipino, 50 Phil. 399 (1927).
1
SEC Opinion, 5 July 1979, the XIII SEC QUARTERLY BULLETIN 3 (No. 4, Oct. 1979).


Thus, in Republic v. Security Credit & Acceptance Corp., 19 merely to the systematization and orderly arrangement of the
SCRA 58 (1967), dissolution was imposed on a corporation that internal and managerial affairs and organs of the corporation.
was engaging in banking activities without a license from the Benguet Consolidated Mining Co. v. Pineda, 98 Phil. 711.
Central Bank, and risking the savings of the public. The failure to file the by-laws does not automatically operate to
dissolve a corporation but is now considered only a ground for
B. Non-user of Charter and Continuous In-Operation (Section 22) such dissolution. Chung Ka Bio v. IAC, 163 SCRA 534 (1988).

Section 22. Effects on non-use of corporate charter and continuous C. Expiration of Term
inoperation of a corporation. Where the corporate life of a corporation as stated in its articles
If a corporation does not formally organize and commence the of incorporation expired, without a valid extension having been
transaction of its business or the construction of its works within two effected, it was deemed dissolved by such expiration without
(2) years from the date of its incorporation, its corporate powers cease need of further action on the part of the corporation. Majority
and the corporation shall be deemed dissolved. However, if a Stockholders of Ruby Industrial Corp. v. Lim, 650 SCRA 461
corporation has commenced the transaction of its business but (2011), citing VILLANUEVA, PHILIPPINE CORPORATE LAW (2010
subsequently becomes continuously inoperative for a period of at ed.), p. 841.
least five (5) years, the same shall be a ground for the suspension or A corporation cannot extend its life by amendment of its articles
revocation of its corporate franchise or certificate of incorporation. of incorporation to be effected during the three (3) year
statutory period for liquidation when its original term had
This provision shall not apply if the failure to organize, commence the already expired. The three (3) year statutory period for
transaction of its businesses or the construction of its works, or to corporate liquidation is not for the purpose of continuing the
continuously operate is due to causes beyond the control of the business for which it was established, but strictly limited to
corporation as may be determined by the Securities and Exchange liquidation. The extension of corporate life of a corporation is
Commission. deemed to constitute new business and cannot be validly
pursued during the liquidation stage. Alhambra Cigar and
Organize involves the election of officers, providing for the Cigarette Manufacturing Corp. v. Securities and Exchange
subscription and payment of the capital stock, the adoption of Commission 24 SCRA 269 (1968).
by-laws, and such other steps as are necessary to endow the Under Section 11 of the Corporation Code, the corporate term
legal entity with the capacity to transact the legitimate business as originally stated in the articles of incorporation may be
for which the corporation was created. Organization relates extended in any single instance by an amendment of the articles


of incorporation, but cannot be made earlier than five (5) years not grant the prayer, depending upon the facts and
prior to the original or subsequent expiry date.1 circumstances attending it.2
o The privilege of extension of corporate term is purely o This doctrine has eventually became part of Presidential
statutory and that all statutory conditions precedent Decree 902-A which grants to the SEC the power to
must be complied with in order that the extension may decree the dissolution of the corporation upon the
be effectuated. appointment of a management committee or receiver
brought in a private suit filed by stockholders or officers
D. Demand of Minority Stockholders for Dissolution. on cases within the jurisdiction of the SEC.3
When it comes to close or family corporations, there was Corporate dissolution due to mismanagement of majority
recognition under the Corporation Law of an equitable right to stockholder is too drastic a remedy, especially when the
demand dissolution of the corporation. Financing Corp. of the situation can be remedied such as giving minority stockholders a
Phil. v. Teodoro, 93 Phil. 404 (1953). veto power to any decision. Chase v. Buencamino, 136 SCRA
o The Court said that although as a rule, minority 365 (1985).
stockholders of a corporation may not ask for its
dissolution in a private suit, and that such action should IV. Legal Effects of Dissolution
be brought by the Government through its legal officer A corporations board of directors is not rendered funtus officio
in a quo warranto case, at their instance and request, by its dissolution, since Section 122 of the Corporation Code
there might be exceptional cases wherein the prohibits a dissolved corporation from continuing its business,
intervention of the State, for one reason or another, but allows it to continue with a limited personality in order to
cannot be obtained, as when the State is not interested settle and close it affairs, including its complete liquidation.
because the complaint is strictly a matter between the Necessarily there must be a board that will continue acting for
stockholders and does not involve, in the opinion of the and on behalf of the dissolved corporation for that purpose.
legal officer of the Government, any of the acts or Aguirre II v. FQB+7, Inc., 688 SCRA 242 (2013).
omissions warranting quo warranto proceedings, in The dissolution of a juridical entity does not by itself cause the
which minority stockholders are entitled to have such extinction or diminution of the rights and liability of such entity,
dissolution. When such action or private suit is brought since it is allowed to continue as a juridical entity for 3 years for
by them, the trial court has jurisdiction and may or may
2
Financing Corp. of the Phil. v. Teodoro, 93 Phil. 404 (1953).
1 3


the purpose of prosecuting and defending suits by or against it settlement and adjustment of claims against it and the payment
and enabling it to settle and close its affairs, to dispose of and of its just debts. Yu v. Yukayguan, 589 SCRA 588 (2009).1
convey its property, and to distribute its assets. Republic v. Liquidation, in corporation law, connotes a winding up or
Tancinco, 394 SCRA 386 (2002). settling with creditors and debtors. It is the winding up of a
A board resolution to dissolve the corporation does not operate corporation so that assets are distributed to those entitled to
to so dissolve the juridical entity. For dissolution to be effective receive them. It is the process of reducing assets to cash,
[t]he requirements mandated by the Corporation Code should discharging liabilities and dividing surplus or loss. PVB
have been strictly complied with. Vesagas v. Court of Appeals, Employees Union-N.U.B.E. v. Vega, 360 SCRA 33 (2001).
371 SCRA 509 (2002). A derivative suit is fundamentally distinct and independent from
1. No Authority to Enter into New Business liquidation proceedings they are neither part of each other
A corporation cannot extend its life by amendment of its articles nor the necessary consequence of the other. There is therefore
of incorporation effected during the three-year statutory period no basis from one action to result in the other. Yu v.
for liquidation when its original term of existence had already Yukayguan, 589 SCRA 588 (2009).
expired, as the same would constitute new business. Alhambra
Cigar & Cigarette Manufacturing Company, Inc. v. SEC, 24 VI. Methods of Liquidation (Section 122)
SCRA 269 (1968).
o When the period of corporate life expires, the A. The Board of Trustees Pursuing Liquidation; Subject to the 3-year
corporation ceases to be a body corporate for the Period
purpose of continuing the business for which it was There is nothing in the Corporation Law which bars an action for
organized. PNB v. Court of First Instance of Rizal, Pasig, the recovery of the debts of the corporation against the
Br. XXI, 209 SCRA 294 (1992). liquidator thereof, after the lapse of the said three-year period.
o A corporation that has reached the stage of dissolution It immaterial that the present action was filed after the
is no longer qualified to receive a secondary franchise. expiration of the three yearsfor at the very least, and
Buenaflor v. Camarines Industry, 108 Phil. 472 (1960). assuming that judicial enforcement of taxes may not be initiated
after said three years despite the fact that actual liquidation has
V. Meaning of Liquidation not terminated and the one in charge thereof is still holding the
Following the dissolution of a corporation, liquidation or the assets of the corporation, obviously for the benefit of all the
settlement of its affairs consists of adjusting the debts and
claims, i.e., collecting all that is due to the corporation, the
1
Majority Stockholders of Ruby Industrial Corp. v. Lim, 650 SCRA 461 (2011).


creditors thereof, the assessment aforementioned, made within B. Liquidation Pursued Thru a Court-Appointed Receiver
the three years, definitely established the Government as a A receivership, is created by means of judicial or quasi-jucidial
creditor of the corporation for whom the liquidator is supposed appointment of the receiver. The receiver is actually an officer
to hold assets of the corporation. Republic v. Marsman Dev. of the court and must therefore be accountable to the court.2
Co., 44 SCRA 418 (1972). Reiterated under the Corporation When the liquidation of a dissolved corporation has been placed
Code in Paramount Insurance Corp. v. A.C. Ordonez Corp., 561 in the hands of a receiver or assignee, the 3-year period
SCRA 327 (2008). prescribed by law for liquidation cannot be made to apply, and
Old Rule: Since the old Corporation Law did not contain any that the receiver or trustee may institute all actions leading to
provision that allowed any action after the 3-year period for the liquidation of the assets of the corporation even after the
liquidation, then all actions for or against the corporation as expiration of said period. Sumera v. Valencia, 67 Phil. 721
abated after the expiration thereof. National Abaca Corp. v. (1939).
Pore, 2 SCRA 989 (1961). There can be no doubt that under the Corporation Law, the
NOW: Even after the expiration of the 3-year period, corporate Legislature intended to let the shareholders have the control of
creditors can still pursue their claims against corporate assets the assets of the corporation upon dissolution in winding up its
against the officers or stockholders who have taken over the affairs, by having the directors and executive officers to have
properties of the corporation. Tan Tiong Bio v. Commissioner, charge of the winding up operations, though there is the
100 Phil. 86 (1956).1 alternative method of assigning the property of the corporation
Although a corporate officer is not liable for corporate to the trustees for the benefit of its creditors and shareholders.
obligations, such as claims for wages, however, when such While the appointment of a receiver rests within the sound
corporate officer ceases corporate property to apply to his own judicial discretion of the court, such discretion must, however,
claims against the corporation, he shall be liable to the extent always be exercised with caution and governed by legal and
thereof to corporate liabilities, since knowing fully well that equitable principles, the violation of which will amount to its
certain creditors had similarly valid claims, he took advantage of abuse, and in making such appointment the court should take
his position as general manager and applied the corporation's into consideration all the facts and weigh the relative
assets in payment exclusively to his own claims. De Guzman v. advantages and disadvantages of appointing a receiver to wind
NLRC, 211 SCRA 723 (1992). up the corporate business. China Banking Corp. v. M. Michelin
& Cie, 58 Phil. 261 (1933).

2
1
Reiterated in Republic v. Marsman Dev. Co., 44 SCRA 418 (1972). (2013 ed.). Manila, Philippines: Rex Book Store.


C. Liquidation Pursued Through a Trustee Facts: Insular Sawmill is a corporation organized for the primary
A trusteeship is basically a contractual relationship governed by purpose of carrying on a general lumber and sawmill business. It was
the Law on Trust, and generally centered upon property, such leasing property of the Spouses Gelano, and the latter owed the
that the trustee assumes naked title to the property placed in company certain sums of money arising from cash advances of the
trust. It is therefore a relationship that can be created by a husband, a loan in China Bank which Insular executed jointly with the
corporation through its Board of Directors, without need of husband, and credit purchases of lumber materials for the spouses
judicial authorization. The trustee in liquidation is not appointed residence. Insular then filed a complaint for collection against the
by any court, but he is actually a transferee who holds legal title spouses. While the case was on going, Insular amended its Articles of
to the corporate assets and he is accountable under the terms Incorporation to shorten its corporate existence of up to December 31,
of the trust agreement. The trustee's fiduciary obligations are 1960 only. The amended Articles of Incorporation was filed with and
provided in the trust instrument and by applicable legal approved by the Securities and Exchange Commission, but the trial
provisions.1 court was not notified of the amendment shortening the corporate
When upon dissolution the affairs of the corporation were existence and no substitution of party was ever made. Almost 4 years
placed in a Board of Liquidators, they were duly constituted as after the dissolution of the corporation, the trial court rendered a
trustees for the liquidation of the corporate affairs, and there decision holding spouses liable. On appeal, the spouses filed a motion to
being no term placed on the Board, their power to pursue dismiss based on the grounds that the case was prosecuted even after
liquidation did not terminate upon the expiration of the 3- year dissolution of Insular as a corporation and that a defunct corporation
period. Board of Liquidators v. Kalaw, 20 SCRA 987 (1967) cannot maintain any suit for or against it without first complying with
For purposes of dissolution and liquidation of a corporation, the the requirements of the winding up of the affairs of the corporation and
term trustee should include counsel of record who may be the assignment of its property rights within the required period.
deem to have authority to pursue pending litigation after the Incidentally, after the receipt of the spouses motion to dismiss, Insular
expiration of the 3-year liquidation period. Gelano v. Court of through its former directors filed a Petition for Receivership, which
Appeals, 103 SCRA 90 (1981). petition remains pending before the lower court.

Gelano v. Court of Appeals Issue: Whether a corporation whose corporate life had ceased by the
expiration of its terms of existence, could still continue prosecuting and
defending suits after its dissolution and beyond the period of 3 years
1
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. and without having undertaken any step to transfer its assets to a


trustee or assignee in the assets, including the shareholders and the creditors of the
corporation, acting for and in its behalf, might make proper
Held: YES. It can continue prosecuting. When Insular Sawmill, Inc. was representations with the appropriate body for working out a
dissolved on December 31, 1960, under Section 77 of the Corporation final settlement of the corporate concerns. Clemente v. Court of
Law, it still has the right until December 31, 1963 to prosecute in its Appeals, 242 SCRA 717 (1995).1
name the present case. Although private respondent did not appoint Under Section 122 of the Corporation Code, a corporation
any trustee, yet the counsel who prosecuted and defended the interest whose corporate existence is terminated in any manner
of the corporation in the instant case and who in fact appeared in behalf continues to be a body corporate for three (3) years after its
of the corporation may be considered a trustee of the corporation at dissolution for purposes of prosecuting and defending suits by
least with respect to the matter in litigation only. Said counsel had been and against it and to enable it to settle and close its affairs,
handling the case when the same was pending before the trial court culminating in the disposition and distribution of its remaining
until it was appealed before the Court of Appeals and finally to this assets. If the three-year extended life has expired without a
Court. We therefore hold that there was a substantial compliance with trustee or receiver having been expressly designated by the
Section 78 of the Corporation Law and as such, private respondent corporation within that period, the board of directors (or
Insular Sawmill, Inc. could still continue prosecuting the present case trustee) itself, may be permitted to continue as trustees by
even beyond the period of three (3) years from the time of its legal implication to complete the corporation liquidation.
dissolution. A trustee appointed for purposes of liquidation does not
become personally liable for the outstanding obligations of the
Doctrine: A corporation that has a pending action and which cannot be corporation. Republic v. Tancinco, 394 SCRA 386 (2003).
terminated within the three-year period after its dissolution is
authorized under Section 78 to convey all its property to trustees to VII. Reincorporation:
enable it to prosecute and defend suits by or against the corporation By following the procedures on the sale of all or substantially all
beyond the three-year period. of the assets of the corporation, the stockholders may transfer
the assets and business enterprise of the dissolved corporation
If the 3-year extended life has expired without a trustee or to a newly registered entity bearing the same corporate name.
receiver having been designated, the Board of Directors itself, Chung Ka Bio v. IAC, 163 SCRA 534 (1988).
following the rationale of the decision in Gelano, may be
1
permitted to so continue as trustees to complete liquidation; Reiterated in Reburiano v. Court of Appeals, 301 SCRA 342 (1999); Knecht v.
and in the absence of a Board, those having pecuniary interest United Cigarette Corp., 384 SCRA 48 (2002); Pepsi- Cola Products Phils., Inc. v.
Court of Appeals, 443 SCRA 571 (2004).


finding, the penalty is not necessarily revocation but may be only
Chung Ka Bio v. IAC suspension of the charter. In fact, under the rules and regulations of the
SEC, failure to file the by-laws on time may be penalized merely with the
Facts: Philippine Blooming Mills Company, Inc. was incorporated for a imposition of an administrative fine without affecting the corporate
term of 25 years. The members of its board of directors executed a deed existence of the erring firm.
of assignment of all of the accounts receivables, properties, obligations
and liabilities of the old PBM in favor of Chung Siong Pek in his capacity Doctrine:
as treasurer of the new PBM, then in the process of reincorporation.
The new PMB was issued a certificate of incorporation by the Securities 1. Applicable Legal Provisions
and Exchange Commission. Chung Ka Bio and the other petitioners Section 121 and 122, Corporation Code
herein, all stockholders of the old PBM, filed with the SEC a petition for Section 6(l), of Pres. Decree 902-A
liquidation of both the old PBM and the new PBM. The allegation was 2. Extension of Corporate Life During Period of Dissolution
that the former had become legally non-existent for failure to extend its The Supreme Court has consistently taken the position that it
corporate life and that the latter had likewise been ipso facto dissolved would be illegal for the corporation, when it has reached the
for non-use of the charter and continuous failure to operate within 2 stage of dissolution, to seek to extend its corporate life, even
years from incorporation. with the amendment of the articles of incorporation, because
the same would constitute "new business" contrary to the
Issue: Whether or not the new corporation has not substantially injunction of the law that upon dissolution the corporation
complied with the two-year requirement of Section 22 of the new cannot go into a transaction "for the purpose of continuing the
Corporation Code on non-user because its stockholders never adopted a business for which it was established."1
set of by-laws. 3. Distinctions Between Extension of Corporate Life, Revival and
Reincorporation2
Held: NO. Non-filing of the by-laws will not result in automatic

dissolution of the corporation. Under Section 6(i) of PD 902-A, the SEC is 1
empowered to suspend or revoked, after proper notice and hearing, (2013 ed.). Manila, Philippines: Rex Book Store.
2
the franchise or certificate of registration of a corporation on the 8 FLETCHER CYCLOPEDIA CORPORATIONS, Perm. Ed., Sec. 4092. Fletcher also holds
that "[w]hether a charter creates a new corporation or merely continues the
ground inter alia of failure to file by-laws within the required period. It existence of an old one is to be determined from its terms, construed in
is clear from this provision that there must first of all be a hearing to accordance with the legislative intent and the intent of the corporators.
determine the existence of the ground, and secondly, assuming such Ordinarily neither an extension nor a revival creates a new corporation." Ibid,
Sec. 4093.


"To renew a charter is to revive a charter which has expired, or, corporation, is not prohibited, even when the old corporation
in other words, to give a new existence to one which has been has reached the state of dissolution.
forfeited, or which has lost its vitality by lapse of time. Even under the provisions of the present Corporation Code,
o The renewal of a corporate charter by extending the nothing prohibits the old board of directors of a dissolved
term of corporate life has been considered, in legal corporation to negotiate and transfer the assets of the dissolved
effect, as amounting to the grant of a new charter so as corporation to the new corporation intended to be created as
to subject the corporation to the laws in effect at the long as the stockholders have given their consent, and such
time of renewal. consent by stockholders is expressly allowed in Section 40 of the
To extend a charter is to increase the time for the existence of said Code.
one which would otherwise reach its limit at an earlier period.
(E.g. amendment made within 5 years before term expiration) Summary on Dissolution and Liquidations Proceedings
"[R]eincorporation consists in the taking out of a new charter by
a corporation in order to correct errors or defects in the original Recently, Clemente v. Court of Appeals2 revisited the procedures
incorporation, or to enlarge the power or limit the liabilities of of dissolution and liquidation. In that case, the Supreme Court refused
the corporation, or to lengthen or revive the corporate life. In a the petition filed by alleged stockholders of a sociedad anonima for the
sense it is but an amendment of the charter, and generally, declaration of the corporate assets to pertain to them in the absence of
under the statutes, there is no new corporation but the showing any transfer or disposition by the corporation in their favor.
company is the same as before the reincorporation. The Court said that in the absence of a corporate liquidation, it is the
As has already been pointed out, under Philippine
o corporation, not the stockholders, which can assert, if at all, any title to
jurisprudence the reincorporation of a corporation the corporate assets. "If indeed, the sociedad has long become defunct,
which has the legal effect of extended the old corporate it should behoove petitioners, or anyone else who may have any
entity is not authorized when this is sought to be interest in the corporation, to take appropriate measures before a
achieved after the original term has expired. proper forum for a peremptory settlement of its affairs."3
4. Process of Reincorporating1
While extension of corporate life of a corporation which has The Court then proceeded to lay down the procedures and
reached the stage of dissolution, is not permitted, the Supreme effects of dissolution and liquidation of a corporation as provided for in
Court has recognized that "reincorporation" of an old

1 2
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. 242 SCRA 717 (1995).
3
(2013 ed.). Manila, Philippines: Rex Book Store. Ibid, at p. 722.


Sections 117 to 122 of the Corporation Code, and existing jurisprudence,
thus: Reburiano v. Court of Appeals, 3 reiterated the ruling of the
1. The termination of the life of a juridical entity does not by itself Supreme Court that seeks to allow the full liquidation of the corporate
cause the extinction or diminution of the rights and liabilities of affairs even beyond the three-year period provided for in the Code, and
such entity nor those of its owners and creditor;1 invoked in addition the transitory provision of Section 145 of the
2. The corporation continues to be a body corporate for three (3) Corporation Code, thus:
years after its dissolution for purposes of prosecuting and
defending suits by and against it and for enabling it to settle and In Gelano case, the counsel of the dissolved
close its affairs, culminating in the disposition and distribution corporation was considered a trustee. In the later case
of its remaining assets; of Clemente v. Court of Appeals [242 SCRA 717 (1995)],
3. It may, during the three-year term, appoint a trustee or a we held that the board of directors may be permitted to
receiver who may act beyond that period; complete the corporate liquidation by continuing as
4. If the three-year extended life has expired without a trustee or trustees by legal implication. Under Section 145 of the
receiver having been expressly designated by the corporation Corporation Code, No right of remedy in favor or
within that period, the board of directors or trustees against any corporation . . . shall be removed or
themselves, following the rationale of the Supreme Court's impaired either by the subsequent dissolution of said
decision in Gelano v. Court of Appeals2 may be permitted to so corporation or by any subsequent amendment or repeal
continue as "trustees" by legal implication to complete the of this Code or of any part thereof. This provision
corporate liquidation; safeguards the rights of a corporation which is dissolved
5. Still in the absence of a board of directors or trustees, those pending litigation.
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 sufficient broad jurisdiction
in matters of this nature, for working out a final settlement of
the corporate concerns.

1
See Gonzales v. Sugar Regulatory Administration, 174 SCRA 377 (1989).
2 3
103 SCRA 90 (1981). 301 SCRA 342, 102 SCAD 285 (1999).


CLOSE CORPORATIONS The concept of a close corporation organized for the purpose of
running a family business or managing family property has
I. Definition (Section 96) formed the backbone of Philippine commerce and industry.
Through this device, Filipino families have been able to turn
their humble, hard-earned life savings into going concerns
Section 96. Definition and applicability of Title.
capable of providing them and their families with a modicum of
A close corporation, within the meaning of this Code, is one whose
material comfort and financial security as a reward for years of
articles of incorporation provide that: (1) All the corporation's issued
hard work. A family corporation should serve as a reward for
stock of all classes, exclusive of treasury shares, shall be held of record
years of hard work as a rallying point for family unity and
by not more than a specified number of persons, not exceeding twenty
prosperity, not as a flashpoint for familial strife. It is hoped that
(20); (2) all the issued stock of all classes shall be subject to one or
people reacquaint themselves with the concepts of mutual aid
more specified restrictions on transfer permitted by this Title; and (3)
and security that are the original driving forces behind the
The corporation shall not list in any stock exchange or make any public
formation of family corporations and use these tenets in order
offering of any of its stock of any class. Notwithstanding the foregoing,
to facilitate more civil, if not more amicable, settlements of
a corporation shall not be deemed a close corporation when at least
family corporate disputes. Gala v. Ellice Agro-Industrial Corp.,
two-thirds (2/3) of its voting stock or voting rights is owned or
418 SCRA 431 (2003).
controlled by another corporation which is not a close corporation
Atty. Hofilea What is required is not only the concurrence of
within the meaning of this Code.
the three requisites present in Section 96, but such
Any corporation may be incorporated as a close corporation, except status/limitation must also be expressed in the Articles of
mining or oil companies, stock exchanges, banks, insurance Incorporation.
companies, public utilities, educational institutions and corporations
declared to be vested with public interest in accordance with the A. De Jure Close Corporations: Articles of Incorporation Requirements
provisions of this Code. (Section 97)

The provisions of this Title shall primarily govern close corporations: Section 97. Articles of incorporation.
Provided, That the provisions of other Titles of this Code shall apply The articles of incorporation of a close corporation may provide:
suppletorily except insofar as this Title otherwise provides.
1. For a classification of shares or rights and the qualifications for
owning or holding the same and restrictions on their transfers as may


be stated therein, subject to the provisions of the following section; (1) The restriction on the transferability of shares of stock in
a close corporation is limited to what in general parlance is
2. For a classification of directors into one or more classes, each of called a "right of first refusal;" and from the wordings of Section
whom may be voted for and elected solely by a particular class of 98, it would be the most onerous restriction allowed. The right
stock; and of first refusal is a control scheme essential to a close
corporation which allows the existing stockholders the power to
3. For a greater quorum or voting requirements in meetings of maintain the character of delectus personae and thereby
stockholders or directors than those provided in this Code. prevent an outsider from coming into and interfering with the
affairs of the corporation.1
The articles of incorporation of a close corporation may provide that (2) The classification of directors provision in a close
the business of the corporation shall be managed by the stockholders corporation setting allows the group to parcel out among
of the corporation rather than by a board of directors. So long as this themselves various management aspects in the corporate
provision continues in effect: enterprises. The provision indicate an inherent closeness
between equity and management, especially when the scheme
1. No meeting of stockholders need be called to elect directors; of profit distribution is based not only on the equity holdings,
but is also tied to management performance, in the form of
2. Unless the context clearly requires otherwise, the stockholders of salaries, per dicus, and expensive account privileges.2
the corporation shall be deemed to be directors for the purpose of (3) The specific grant of authority to allow super-majority for
applying the provisions of this Code; and quorum reflects the Corporation Codes policy that in a close-
corporation setting, the property rights are not only tied with
3. The stockholders of the corporation shall be subject to all liabilities dividend rights; that parties are able to employ the corporate
of directors. set-up to improve their management prerogatives by having a
greater say in the affairs of the corporation. Since in a close-
The articles of incorporation may likewise provide that all officers or corporation setting, participation in management may be
employees or that specified officers or employees shall be elected or agreed to be a manner by which corporation profits shall be
appointed by the stockholders, instead of by the board of directors.

1
Section 97, Paragraph 1 (2013 ed.). Manila, Philippines: Rex Book Store.
2


distributed, therefore the parties are allowed leeway by which purchase the shares of the transferring stockholder with such
minority shareholders are given a say by requiring super- reasonable terms, conditions or period stated therein. If upon the
majority requirements for corporate acts.1 expiration of said period, the existing stockholders or the corporation
Section 97, Paragraph 2 The feature of a close corporation fails to exercise the option to purchase, the transferring stockholder
whereby there is a merger of stock ownership and active may sell his shares to any third person.
management is what significantly distinguished it from other
corporations. An ordinary corporation is managed and Section 99. Effects of issuance or transfer of stock in breach of
controlled by its board of directors. In de facto close qualifying conditions.
corporations even if there is an actual merger of stock 1. If stock of a close corporation is issued or transferred to any person
ownership and corporate management in the same group, if the who is not entitled under any provision of the articles of incorporation
acts are not those of the board of directors, the act would be to be a holder of record of its stock, and if the certificate for such stock
invalid because of the clear and restrictive provision of Sections conspicuously shows the qualifications of the persons entitled to be
23 and 27. The Supreme Court held that "contracts between a holders of record thereof, such person is conclusively presumed to
corporation and third persons must be made by or under the have notice of the fact of his ineligibility to be a stockholder.
authority of its board of directors and not by its stockholders,"
and that the action of its stockholders in such matters is only 2. If the articles of incorporation of a close corporation states the
advisory and is not binding on the corporation. Barreto v. La number of persons, not exceeding twenty (20), who are entitled to be
Previsora Filipina 57 Phil. 649 (1932).2 holders of record of its stock, and if the certificate for such stock
1. Restriction on Transfer of Shares (Sections 98 and 99) conspicuously states such number, and if the issuance or transfer of
stock to any person would cause the stock to be held by more than
Section 98. Validity of restrictions on transfer of shares. such number of persons, the person to whom such stock is issued or
Restrictions on the right to transfer shares must appear in the articles transferred is conclusively presumed to have notice of this fact.
of incorporation and in the by-laws as well as in the certificate of
stock; otherwise, the same shall not be binding on any purchaser 3. If a stock certificate of any close corporation conspicuously shows a
thereof in good faith. Said restrictions shall not be more onerous than restriction on transfer of stock of the corporation, the transferee of
granting the existing stockholders or the corporation the option to the stock is conclusively presumed to have notice of the fact that he
has acquired stock in violation of the restriction, if such acquisition
1
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. violates the restriction.
2
Also Ramirez v. Orientalist Co., 38 Phil. 634 (1918).


4. Whenever any person to whom stock of a close corporation has restriction is not more onerous than a right of first
been issued or transferred has, or is conclusively presumed under this refusal, the restriction will be valid.
section to have, notice either (a) that he is a person not eligible to be a
holder of stock of the corporation, or (b) that transfer of stock to him 2. Pre-Emptive Rights (Section 102)
would cause the stock of the corporation to be held by more than the
number of persons permitted by its articles of incorporation to hold Section 102. Pre-emptive right in close corporations.
stock of the corporation, or (c) that the transfer of stock is in violation The pre-emptive right of stockholders in close corporations shall
of a restriction on transfer of stock, the corporation may, at its option, extend to all stock to be issued, including reissuance of treasury
refuse to register the transfer of stock in the name of the transferee. shares, whether for money, property or personal services, or in
payment of corporate debts, unless the articles of incorporation
5. The provisions of subsection (4) shall not applicable if the transfer of provide otherwise.
stock, though contrary to subsections (1), (2) of (3), has been
consented to by all the stockholders of the close corporation, or if the Pre-emptive rights for close corporations are not included under
close corporation has amended its articles of incorporation in the circumstances in Section 39 where stockholders may be
accordance with this Title. denied the exercise of their pre-emptive rights.1

6. The term "transfer", as used in this section, is not limited to a 3. Amendment (Section 103)
transfer for value.
Section 103. Amendment of articles of incorporation.
7. The provisions of this section shall not impair any right which the Any amendment to the articles of incorporation which seeks to delete
transferee may have to rescind the transfer or to recover under any or remove any provision required by this Title to be contained in the
applicable warranty, express or implied. articles of incorporation or to reduce a quorum or voting requirement
stated in said articles of incorporation shall not be valid or effective
Subject to one or more specified restrictions (Section 96 vis-a- unless approved by the affirmative vote of at least two-thirds (2/3) of
vis Section 98) the restriction must not unnecessarily/ the outstanding capital stock, whether with or without voting rights,
absolutely prevent the holder from exercising acts of ownership or of such greater proportion of shares as may be specifically provided
over his shares.
o Atty. Hofilea the law allows, as a maximum
1
restriction, a right of first refusal. As long as the Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.


in the articles of incorporation for amending, deleting or removing any In 1976, the corporation through its President, sold the Dulay
of the aforesaid provisions, at a meeting duly called for the purpose. Apartments under a sale with option to purchase within 2 years, to one
Veloso who mortgaged the property in favor of one Torres, who
B. De Facto Close Corporation: eventually foreclosed on the property and become the highest bidder at
Manuel R. Dulay Enterprises v. Court of Appeals, 225 SCRA 678 the auction sale. When the redemption period expired, Torres sought to
(1993). consolidate title and filed an action to recover possession of the
o Dean CLV other than a description of the property. The corporation filed an action against Torres and Veloso for
composition of the corporation, nothing at all was the cancellation of the sale at foreclosure on the ground that the sale of
indicated in the decision to show how the Court arrived the property to Veloso was done by the President without actual board
at the conclusion that the corporation was a close approval.
corporation. Neither was there any attempt at all to
square with the definition under Section 96 of the Issue: Whether or not the sale is binding upon the corporation.
Corporation Code.1
Held: YES. Manuel Dulay Enterprises Inc. is a close corporation so a
Manuel R. Dulay Enterprises v. Court of Appeals board resolution authorizing the sale or mortgage of the property is not
necessary to bind the corporation for the action of its president. [At any
Facts: The corporation was described to have its controlling rate, corporate action taken at a board meeting without proper call or
stockholders, members of the Dulay family, to compose the board of notice in a close corporation is deemed ratified by the absent director
directors and officers, with nominal shares listed in the names of two unless the latter promptly files his written objection with the secretary
other nominees, and which corporation was the registered owner of the of the corporation after having knowledge of the meeting which, in his
Dulay Apartments. The corporation obtained various loans for the case, petitioner Virgilio Dulay failed to do.]
construction of its hotel project, Dulay Continental Hotel, and borrowed
money from one of its directors, Virgilio Dulay to continue the project. Doctrine:
As a result, Virgilio Dulay occupied one of the apartment units since
1973 while at the same time managed the Dulay Apartments. Sergio F. Naguiat v. NLRC, 269 SCRA 564 [1997]
o Dean CLV The Dulay and Sergio F. Naguiat rulings
demonstrate a tendency that may be followed in the
future: (a) the coverage of "close corporation" may
1
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. expand beyond the definition provided for in the


Corporation Code; or (b) principles pertaining peculiarly (NOWM), they filed a complaint against Sergio Naguiat under the name
to close corporations under Title XII of the Corporation and style Naguiat Enterprises, AAFES and AAFES union.
Code would be expanded to apply even to non-close
corporation, i.e., de facto close corporations, or even Issue: Whether or not Naguiat Enterprises, Sergio Naguiat and Antolin
publicly-held corporations. At any rate, with the Naguiat are liable.
statutory recognition of the strict close corporation, it
can be anticipated that the Supreme Court would by Held: Naguiat Enterprises is not liable, Antolin Naguiat isnt personally
jurisprudence expand the doctrines into and recognize liable whereas Sergio Naguiat is solidarily liable. The respondents were
the de facto close corporations.1 regular employees of CFTI who received wages on a boundary basis.
They offered no evidence that Naguiat Enterprises managed, supervised
Sergio F. Naguiat v. NLRC and controlled their employment. They instead submitted documents
which had to do with CFTI, not Naguiat Enterprises. Both CFTI and
Facts: Clark Field Taxi, Inc. (CFTI) held a concessionaires contract with Naguiat Enterprises were close family corporations owned by the same
the Army Air Force Exchange Services (AAFES) for the operation of taxi family. To the extent that stockholders are actively engaged in the
services within Clark Air Base. Sergio Naguiat was the president of CFTI management or business affairs of a close corporation, the stockholders
while Antolin Naguiat was its vice president. Like Naguiat Enterprises, shall be held to strict fiduciary duties to each other and among
Inc., which was a trading firm, it was also a family-owned corporation. themselves. Sergio Naguiat was a stockholder and director of Naguiat
Respondents (Leonardo T. Galang, et al. all employees) were Enterprises but, in supervising the taxi driver and determining their
employed by the CFTI as taxicab drivers. Respondents were terminated employment terms, he was carrying out his responsibility as president
because of the phase-out of the military bases in the Philippines. AAFES of CFTI.
Taxi Drivers Association, the drivers union, and CFTI held negotiations as
regards separation benefits. They arrived at an agreement that the Doctrine: A director or officer may be held solidarly liable with a
separated drivers would be given P500 for ever year as severance pay. corporation by a specific provision of law because a corporation, being a
Most of the drivers accepted this but some refused to do so. Those who juridical entity, may act only through its directors and officers.
did not accept the initial severance pay disaffiliated themselves with Obligations incurred by them, acting as such corporation agents, are not
drivers union and through the National Organization of Workingmen theirs but the direct accountabilities of the corporation they represent.
In the absence of definite proof of who clearly are the officers of the
corporation, the assumption falls on the President of the corporation.
1


BUT SEE: San Juan Structural v. Court of Appeals, 296 SCRA 631 Sales had refused to execute the Transfer of Rights/Deed of Assignment.
(1998). irmative defense that the President and Chairman of Motorich did not
o Nevertheless, in 1998, in San Juan Structural and Steel sign the agreement and that Mrs. Gruenbergs signature on the
Fabricators, Inc. v. Court of Appeals, the Court looked agreement is inadequate to bind Motorich.
into the requisites under Section 96 to determine
whether to consider a corporation a close corporation, Issue: Whether or not Motorich Sales can be treated as a close
and thereby would allow the enforcement of corporate corporation which can be bound by the acts of its principal stockholder
liability upon its corporate officers. The Court sought to who needs no specific authority
distinguish its ruling in Dulay thus: The principle in
Manuel R. Dulay Enteprises, Inc. v. Court of Appeals, Held: NO. The Court held just because the corporate treasurer and her
225 SCRA 678 (1993), do not apply because in Dulay the husband together owned 99.866% of the outstanding capital stock of
sale of real property was contracted by the president of the corporation does not justify a conclusion that it is a close
a close corporation with the knowledge and corporation which can be bound by the acts of its principal stockholder
acquiescence of its board of directors.1 who need no specific authority. The determination of when a
corporation is a close corporation is determined by the requisites
San Juan Structural v. Court of Appeals provided in Section 96 of the Corporation Code. In this case, the articles
of incorporation do not contain any provision stating that (1) the
Facts: San Juan Structural and Steel Fabricators entered into an number of stockholders shall not exceed 20, or (2) a preemption of
agreement with Motorich Sales Corporation (which 99.866%of its shares is restricted in favor of any stockholder or of the corporation, or
subscribed capital stock is owned by Spouses Gruenberg) for the (3) listing its stocks in any stock exchange or making a public offering of
transfer of a parcel of land. San Juan Inc., wrote a letter to defendant- such stocks is prohibited. The corporation does not become a close
appellee requesting for a computation of the balance to be paid. corporation by the mere fact that the spouses owned 99.866% of the
Representatives of San Juan Inc. and Motorich Sales Corporation were capital stock.
supposed to meet in the office of plaintiff-appellant but defendant-
appellee's treasurer, Nenita Lee Gruenberg, did not appear. Despite Doctrine: The mere ownership by a single stockholder or by another
repeated demands and in utter disregard of its commitments, Motorich corporation of all or nearly all of the capital stock of a corporation is not
of itself sufficient ground for disregarding the separate corporate
personalities. So, too, a narrow distribution of ownership does not, by
1
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. itself, make a close corporation.


directors: Provided, That such agreement shall impose on the
II. Binding Agreements by Stockholders (Section 100) stockholders who are parties thereto the liabilities for managerial acts
imposed by this Code on directors.
Section 100. Agreements by stockholders.
1. Agreements by and among stockholders executed before the 5. To the extent that the stockholders are actively engaged in the
formation and organization of a close corporation, signed by all management or operation of the business and affairs of a close
stockholders, shall survive the incorporation of such corporation and corporation, the stockholders shall be held to strict fiduciary duties to
shall continue to be valid and binding between and among such each other and among themselves. Said stockholders shall be
stockholders, if such be their intent, to the extent that such personally liable for corporate torts unless the corporation has
agreements are not inconsistent with the articles of incorporation, obtained reasonably adequate liability insurance.
irrespective of where the provisions of such agreements are
contained, except those required by this Title to be embodied in said An agreement among stockholders in an ordinary corporation
articles of incorporation. that relates to the conduct of the business affairs of the
corporation as to restrict or interfere with the discretion or
2. An agreement between two or more stockholders, if in writing and powers of the board of directors would be invalid because of
signed by the parties thereto, may provide that in exercising any the restrictive provisions of Sections 23 and 27 of the
voting rights, the shares held by them shall be voted as therein Corporation Code. On the other hand, in the realism of close
provided, or as they may agree, or as determined in accordance with a corporation thereof, the law recognizes the ability of parties to
procedure agreed upon by them. arrange their affairs by specific contract terms operating within
the corporate structure. In a close corporation, the sanctity of
3. No provision in any written agreement signed by the stockholders, the corporate entity is given less emphasize to allow the
relating to any phase of the corporate affairs, shall be invalidated as parties to primarily be governed by the specific contracts they
between the parties on the ground that its effect is to make them enter into at the time of incorporating their enterprise.1
partners among themselves.
III. No Necessity of Board (Section 101).
4. A written agreement among some or all of the stockholders in a
close corporation shall not be invalidated on the ground that it so
relates to the conduct of the business and affairs of the corporation as
1
to restrict or interfere with the discretion or powers of the board of Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.


Section 101. When board meeting is unnecessary or improperly held. directors must be made by "at least a majority of the directors
Unless the by-laws provide otherwise, any action by the directors of a or trustees present at a meeting at which there is a quorum."1
close corporation without a meeting shall nevertheless be deemed o Exception: Ultra Vires Acts
valid if:
IV. Deadlocks (Section 104): Ong Yong v. Tiu, 401 SCRA 1 (2003).
1. Before or after such action is taken, written consent thereto is
signed by all the directors; or Section 104. Deadlocks.
Notwithstanding any contrary provision in the articles of incorporation
2. All the stockholders have actual or implied knowledge of the action or by-laws or agreement of stockholders of a close corporation, if the
and make no prompt objection thereto in writing; or directors or stockholders are so divided respecting the management of
the corporation's business and affairs that the votes required for any
3. The directors are accustomed to take informal action with the corporate action cannot be obtained, with the consequence that the
express or implied acquiescence of all the stockholders; or business and affairs of the corporation can no longer be conducted to
the advantage of the stockholders generally, the Securities and
4. All the directors have express or implied knowledge of the action in Exchange Commission, upon written petition by any stockholder, shall
question and none of them makes prompt objection thereto in have the power to arbitrate the dispute. In the exercise of such power,
writing. the Commission shall have authority to make such order as it deems
appropriate, including an order: (1) canceling or altering any provision
If a director's meeting is held without proper call or notice, an action contained in the articles of incorporation, by-laws, or any
taken therein within the corporate powers is deemed ratified by a stockholder's agreement; (2) canceling, altering or enjoining any
director who failed to attend, unless he promptly files his written resolution or act of the corporation or its board of directors,
objection with the secretary of the corporation after having stockholders, or officers; (3) directing or prohibiting any act of the
knowledge thereof. corporation or its board of directors, stockholders, officers, or other
persons party to the action; (4) requiring the purchase at their fair
For ordinary corporations, it is mandated under Section 25 of value of shares of any stockholder, either by the corporation
the Corporation Code that every decision of the board of regardless of the availability of unrestricted retained earnings in its

1


books, or by the other stockholders; (5) appointing a provisional petition to the Securities and Exchange Commission, compel the
director; (6) dissolving the corporation; or (7) granting such other relief dissolution of such corporation whenever any of acts of the directors,
as the circumstances may warrant. officers or those in control of the corporation is illegal, or fraudulent,
or dishonest, or oppressive or unfairly prejudicial to the corporation or
A provisional director shall be an impartial person who is neither a any stockholder, or whenever corporate assets are being misapplied or
stockholder nor a creditor of the corporation or of any subsidiary or wasted.
affiliate of the corporation, and whose further qualifications, if any,
may be determined by the Commission. A provisional director is not a Even prior to the passage of Corporation Code which recognized
receiver of the corporation and does not have the title and powers of a close corporations, the Supreme Court had on limited instances
custodian or receiver. A provisional director shall have all the rights recognized the common law rights of minority stockholders to
and powers of a duly elected director of the corporation, including the seek dissolution of the corporation. Financing Corp. of the Phil.
right to notice of and to vote at meetings of directors, until such time v. Teodoro, 93 Phil. 404 (1953).
as he shall be removed by order of the Commission or by all the Atty. Hofilea The corporation may be compelled to buy back
stockholders. His compensation shall be determined by agreement shares from the shareholder even if it doesnt have unrestrained
between him and the corporation subject to approval of the earnings so long as at the time of the sale, the corporation has
Commission, which may fix his compensation in the absence of sufficient assets to cover its debts and liabilities (Put Option).
agreement or in the event of disagreement between the provisional
director and the corporation.

V. Withdrawal and Dissolution (Section 105)

Section 105. Withdrawal of stockholder or dissolution of corporation.
In addition and without prejudice to other rights and remedies
available to a stockholder under this Title, any stockholder of a close
corporation may, for any reason, compel the said corporation to
purchase his shares at their fair value, which shall not be less than
their par or issued value, when the corporation has sufficient assets in
its books to cover its debts and liabilities exclusive of capital stock:
Provided, That any stockholder of a close corporation may, by written


NON-STOCK CORPORATIONS AND FOUNDATIONS A. Eleemosynary Purpose and Non-Distribution of Profits1
The Corporation Code definition and treatment of non-stock

I. Essence of Non-Stock Corporations non-profit corporations are counter-intuitive to the
nomenclature used for such juridical entities.
1. The non-existence of capital stock is not determinative on
Section 87. Definition.
whether the entity is a non-stock corporation; and it is legally
For the purposes of this Code, a non-stock corporation is one where no
possible for a corporation having capital stock to still be
part of its income is distributable as dividends to its members,
considered a non-stock corporation. In fact, under pertinent
trustees, or officers, subject to the provisions of this Code on
jurisprudence, as discussed hereunder, the existence of stocks
dissolution: Provided, That any profit which a non-stock corporation
in an eleemosynary-purposed company has not disqualified it
may obtain as an incident to its operations shall, whenever necessary
from being considered as a non-stock non-profit corporation.
or proper, be used for the furtherance of the purpose or purposes for
2. The non-incurring of profits is not likewise determinative for an
which the corporation was organized, subject to the provisions of this
entity to be classified as non-profit corporation. The codal
Title.
definition recognizes that non-stock and non-profit corporations

may actually earn profits as an incident to their primary
The provisions governing stock corporation, when pertinent, shall be
operations, and so long as the profits are devoted for their
applicable to non-stock corporations, except as may be covered by
eleemosynary purpose. The SEC has ruled that the mere fact
specific provisions of this Title. (n)
that a non-stock corporation may earn profit does not make it a

profit-making corporation where such profit or income is used
Section 88. Purposes.
to carry out the purpose set forth in the articles of incorporation
Non-stock corporations may be formed or organized for charitable,
and is not distributed to its incorporators, members, trustees or
religious, educational, professional, cultural, fraternal, literary,
officers.2
scientific, social, civic service, or similar purposes, like trade, industry,
o It is not inconsistent with the nature of a non-stock
agricultural and like chambers, or any combination thereof, subject to
corporation for it to incidentally earn profits in pursuing
the special provisions of this Title governing particular classes of non-
its eleemosynary purpose. What is prohibited is to
stock corporations. (n)

1
2
SEC Opinion, 13 November 1990, XXIV SEC QUARTERLY BULLETIN 63 (No. 1,
March, 1990).


operate the company for profit and/or distribute any B. Distribution of Net Assets and Profits Upon Dissolution1
profits so earned to its officers and members. Collector Although a non-stock corporation cannot distribute profits or
of Internal Revenue v. Club Filipino Inc. de Cebu, 5 dividends to its members, officers and trustees during its
SCRA 321 (1962); Collector of Internal Revenue v. corporate term, in the event of dissolution, after the payment of
University of Visayas, 1 SCRA 669 (1961). all liabilities and return of assets received subject to limitations
o The incurring of profit or losses does not determine permitting their use, the remaining assets may be distributed to
whether an activity is for profit or non-profit, and the the members, or any class or classes of members, as provided
courts will consider whether dividends have been for in its articles of incorporation and by-laws; and in the
declared or its members or that is property, effects or absence of distribution rules in the articles of incorporation and
profit was ever used for personal or individual gain, and by-laws, the remaining assets may be distributed to such
not for the purpose of carrying out the objectives of the persons, societies, organizations or corporations, whether or not
enterprise. Manila Sanitarium and Hospital v. Gabuco, organized for profit, as may be specified in a plan of distribution
7 SCRA 14 (1963). as adopted by the board of trustees and ratified by the
o In a mutual life insurance company organized as a non- members.2
stock nonprofit corporation, the so-called dividend Therefore, in a regular non-stock corporation it is possible for its
that is received by members-policyholders is not a net assets, as well as the accumulated profits from its years of
portion of profits set aside for distribution to the operations, to inure to the benefit of private individuals or
stockholders in proportion to their subscription to the entities for profit but only as a consequence of dissolution.
capital stock of a corporation. One, a mutual company
has no capital stock to which subscription is necessary; II. Theory on Non-Stock Corporation (Sections 14(2), 43, 87, 88 and
there are no stockholders to speak of, but only 94[5])
members. Two, the amount they receive does not
partake of the nature of a profit or income. The quasi- Section 14. Contents of the articles of incorporation.
appearance of profit will not change its character; it All corporations organized under this code shall file with the Securities
remains an overpayment, a benefit to which the and Exchange Commission articles of incorporation in any of the
member-policyholder is equitably entitled. Republic v. official languages duly signed and acknowledged by all of the
Sunlife Assurance Company of Canada, 473 SCRA 129

(2005). 1
2
Sections 94 and 95, Corporation Code.


incorporators, containing substantially the following matters, except institution or creditor, whether local or foreign, from declaring
as otherwise prescribed by this Code or by special law: dividends without its/his consent, and such consent has not yet been
x x x secured; or (3) when it can be clearly shown that such retention is
2. The specific purpose or purposes for which the corporation is being necessary under special circumstances obtaining in the corporation,
incorporated. Where a corporation has more than one stated purpose, such as when there is need for special reserve for probable
the articles of incorporation shall state which is the primary purpose contingencies. (n)
and which is/are he secondary purpose or purposes: Provided, That a
non-stock corporation may not include a purpose which would change A non-stock corporation may only be formed or organized for
or contradict its nature as such; charitable, religious, educational, professional, cultural,
x x x fraternal, literary, scientific, social, civic or other similar
purposes. It may not engage in undertakings such as the
Section 43. Power to declare dividends. investment business where profit is the main or underlying
The board of directors of a stock corporation may declare dividends purpose. Although the non-stock corporation may obtain profits
out of the unrestricted retained earnings which shall be payable in as an incident to its operation such profits are not to be
cash, in property, or in stock to all stockholders on the basis of distributed among its members but must be used for the
outstanding stock held by them: Provided, That any cash dividends furtherance of its purposes. People v. Menil, G.R. 115054-66, 12
due on delinquent stock shall first be applied to the unpaid balance on September 1999 [unrep.])
the subscription plus costs and expenses, while stock dividends shall The rationale for the use of the non-profit form for
be withheld from the delinquent stockholder until his unpaid eleemosynary endeavors, such as activities for charitable,
subscription is fully paid: Provided, further, That no stock dividend religious, scientific, educational, or similar activities, "lies in the
shall be issued without the approval of stockholders representing not chief function of the non-distribution constraint, namely, that it
less than two-thirds (2/3) of the outstanding capital stock at a regular helps to overcome contractual failure in situations where such
or special meeting duly called for the purpose. (16a) failure is quite likely to occur."1 In other words, the non-profit
corporation is employed in activities where there would be
Stock corporations are prohibited from retaining surplus profits in difficulties in properly monitoring and quantifying the
excess of one hundred (100%) percent of their paid-in capital stock,
except: (1) when justified by definite corporate expansion projects or
programs approved by the board of directors; or (2) when the
corporation is prohibited under any loan agreement with any financial
1
CLARK, CORPORATE LAW (Little, Brown and Company, 1986 ed.), at pp. 699-700.


effectiveness and quality of the services rendered, which in products, the product itself is services bargained for have been
essence is covered by the concept of "contractual failure."1 an objective gauge of whether properly and adequately delivered or
o "Contractual failure" is characterized by the inability of the purchaser thereof is performed, or whether the providers
a buyer of services to assure himself that he is getting receiving equal value for the thereof, in order to increase their profit
what he intends to be contracting for; in more general amount he has paid margin, have in fact cut corners.
terms, it denotes high monitoring and enforcement therefore.
2
costs.
III. Non-Applicability of the Nationalization Laws
Stock Corporation Non-Stock Corporation A foreigner may a member or an officer of a non-stock
All net earnings and residual Expressed legal prohibition from corporation. Save for the position of the Secretary, who must be
value of the business in a making such distributions a Filipino citizen and a resident of the Philippines, the
stock corporation can be prohibition of foreign citizens becoming officers in corporations
distributed to its stockholders engaged in business does not apply to the activities of a non-
Both the shareholders and the The prohibition in non-stock stock corporation which do not fall within the coverage of a
officers, who control the corporations against distribution of nationalized industry or area of business reserved by law
provision of the service profits to its members and officers "is exclusively to Filipino citizens. (SEC Opinion No. 12, series of
bought, have an incentive not supposed to be helpful in such 2002, 21 November 2002).
only to be as efficient as situations because it gives the buyer Nonetheless, the equity requirements when it comes to
possible and thus to some reason to believe that those who nationalization rules would still apply to a corporation when
outperform competitors, but appoint and control the actual operating within the regulated area, for example, even when a
also to take advantage of all providers of service and goods will not true non-stock and non-profit corporation is engaged in a purely
market imperfections. have an incentive to take advantage of eleemosynary purpose, it would not be qualified to hold private
his vulnerability as consumer."3 lands when its membership is not at least 60% held by Filipino
In case of an activity such as In an enterprise such as education, it is citizens.4
the delivery of tangible very difficult to monitor whether the
IV. Delinquency of Membership Dues

1
2 4
CLARK, CORPORATE LAW (Little, Brown and Company, 1986 ed.), at pp. 699-700. Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.
3
CLARK, CORPORATE LAW (Little, Brown and Company, 1986 ed.), at pp. 699-700. (2013 ed.). Manila, Philippines: Rex Book Store.


Section 69 of the Corporation Code refers specifically to unpaid membership shall be terminated in the manner and for causes
subscriptions to capital stock, the sale of which is governed by provided in the articles of incorporation or the by-laws of a non-
Section 68. Indeed, there are fundamental differences that defy stock corporation. Valley Golf & Country Club v. Vda. De
equivalence or even an analogy between sale of delinquent Caram, 585 SCRA 218 (2009).
stock under Section 68 and sale that occurred in this case.
Calatagan Golf Club, Inc. v. Clemente, Jr., 585 SCRA 300 (2009). Valley Golf & Country Club v. Vda. De Caram
Neither Article 1146 or Article 1149 is applicable but Article
1140 of the Civil Code which provides that an action to recover Facts: Valley Golf is a duly constituted non-stock, non-profit corporation
movables shall prescribe in eight (8) years. Calatagan Golf Club, which operates a golf course. The members and their guests are entitled
Inc. v. Clemente, Jr., 585 SCRA 300 (2009). to use its facilities and privileges, provided that the shareholders
The utter bad faith exhibited by Calatagan brings into operation regularly pay their monthly dues. Congressman Fermin Caram, Jr.
Articles 19, 20 and 21 of the Civil Code under the Chapter on owned a golf share since 1961. Due to his delinquency despite collection
Human Relations; The obligation of a corporation to treat every letters, Valley Golf suspended his account and subsequently sold his
person honestly and in good faith extends even to its share in order to collect his outstanding dues, without knowing that
shareholders or members, even if the latter find themselves Caram already died since 1986. It was not until his estate was settled
contractually bound to perform certain obligations to the and the shares given to Vda. De Caram that the heirs were informed of
corporation. Calatagan Golf Club, Inc. v. Clemente, Jr., 585 the sale. She was told that she can only claim the remaining balance out
SCRA 300 (2009). of the sale after deducting the outstanding membership dues that Mr.
A non-stock corporation may seize and dispose of the Caram had not paid. The SEC and CA, ruling in favor of Mrs. Caram,
membership share of a fully-paid member on account of its noted that under Section 67, paragraph 2 of the Corporation Code, a
unpaid debts to the corporation (i.e., unpaid monthly dues) share stock could only be deemed delinquent and sold in an
when it is authorized to do so under the corporate by-laws (not extrajudicial sale at public auction only upon the failure of the
by the articles of incorporation), and in spite of the fact that stockholder to pay the unpaid subscription or balance for the share. The
Section 67 of Corporation Code on delinquency sale pertains to section could not have applied in Carams case since he had fully paid
payment of shares subscription. The right of a non-stock for the Golf Share and he had been assessed not for the share itself but
corporation to expel a member through the forfeiture of such for his delinquent club dues. Also, pursuant to Section 6 of the
members share may be established in the by-laws alone, and Corporation Code, "a provision creating a lien upon shares of stock for
need not be embodied in the articles of incorporation. This is unpaid debts, liabilities, or assessments of stockholders to the
authorized under Section 91 of Corporation Code providing that corporation, should be embodied in the Articles of Incorporation, and


not merely in the by-laws. In the same vein, it was opined that since HOWEVER, In order that the action of a corporation in expelling a
Section 98 of the Corporation Code provides that restrictions on transfer member for cause may be valid, it is essential, in the absence of a
of shares should appear in the articles of incorporation, by-laws and the waiver, that there shall be a hearing or trial of the charge against him,
certificate of stock to be valid and binding on any purchaser in good with reasonable notice to him and a fair opportunity to be heard in his
faith, there was more reason to apply the said rule to club delinquencies defense. If the method of trial is not regulated by the by-laws of the
to constitute a lien on golf shares. association, it should at least permit substantial justice. Valley Golf
acted in clear bad faith when it sent the final notice to Caram under the
Issue: Whether or not a non-stock corporation seize and dispose of the pretense they believed him to be still alive, when in fact they had very
membership share of a fully-paid member on account of its unpaid well known that he had already died. That it was in the final notice that
debts to the corporation when it is authorized to do so under the Valley Golf had perpetrated the duplicity is especially blameworthy,
corporate by-laws but not by the Articles of Incorporation. since it was that notice that carried the final threat that his Golf Share
would be sold at public auction should he fail to settle his account on or
Held: YES. BUT there should have been notice and hearing concerning before 31 May 1987.
his expulsion and therefore the sale was void.
Doctrine: Section 91 of the Corporation Code authorizes the sale of
Under Section 91, membership shall be terminated in the manner and membership shares on account of delinquency if such ground is
for the causes provided in the articles of incorporation or the by-laws. specifically stated in the articles of incorporation or by-laws of the non-
The prevailing rule is that the provisions of the articles of incorporation stock corporation. However, in accordance with public policy, the
or by-laws of termination of membership must be strictly complied with termination of membership in a non-stock corporation should be done
and applied to the letter. Thus, an association whose member fails to in accordance with substantial justice.
pay his membership due and annual due as required in the by-laws, and
which provides for the termination or suspension of erring members as V. Board of Trustees and Corporate Officers
well as prohibits the latter from intervening in any manner in the The second paragraph of Section 108 of the Corporation Code,
operational activities of the association, must be observed because by- although setting the term of the members of the Board of
laws are self-imposed private laws binding on all members, directors Trustees at five years, contains a proviso expressly subjecting
and officers of the corporation. These conditions found in by-laws duly the duration to what is otherwise provided in the articles of
approved by the SEC warrant due respect and we are disinclined to rule incorporation or by-laws of the educational corporationthat
against the validity of the by-law provisions. contrary provision control on the term of office. Barayuga v.
Advestist University of the Philippines, 655 SCRA 640 (2011).


A trustee occupying his office in a hold-over capacity could be more than fifteen (15) in number as may be fixed in their articles of
removed at any time, without cause, upon the election or incorporation or by-laws, shall, as soon as organized, so classify
appointment of his successor. Barayuga v. Advestist University themselves that the term of office of one- third (1/3) of their number
of the Philippines, 655 SCRA 640 (2011). shall expire every year; and subsequent elections of trustees
1. Right and Manner of Voting for Trustees1 comprising one-third (1/3) of the board of trustees shall be held
General Rule: Straight Voting (Section 24, Corporation Code) annually and trustees so elected shall have a term of three (3) years.
Exception: Cumulative voting can apply only in a non-stock Trustees thereafter elected to fill vacancies occurring before the
corporation setting when it is provided for in the articles of expiration of a particular term shall hold office only for the unexpired
incorporation or the by-laws. period.
o However, the language of Section 24 does not
necessarily mean that in the absence of stipulation in No person shall be elected as trustee unless he is a member of the
the articles or by-laws, there is no cumulative voting in a corporation.
non-stock corporation. It is true that a corporation
which has capital stock may by its nature (prohibition to Unless otherwise provided in the articles of incorporation or the by-
distribute profits and eleemosynary purpose) be a non- laws, officers of a non-stock corporation may be directly elected by the
stock corporation according to jurisprudence. members. (n)
Nevertheless, although it fulfills the twin requisites of
non-stock and non-profit corporation, by virtue of the 3. Juridical persons as Members of Board of Trustees
fact that it is a corporation that has capital stock
provided for in its articles of incorporation, Section 24
provides that cumulative voting would apply.
2. Number and Election of Trustees (Section 92)

Section 92. Election and term of trustees.
Unless otherwise provided in the articles of incorporation or the by-
laws, the board of trustees of non-stock corporations, which may be

1


The SEC has also rendered opinions to the effect that juridical to or similar to the one being used in videoconferencing or
persons may become members of the Board of Trustees of a teleconferencing, where a participant can see or hear the actual
non-stock corporation. A non-stock corporation whose proceedings of a board meeting and actively participate in the
membership is composed of juridical persons was allowed to be deliberation of the Board; but that a trustee may not validly
registered, provided that a provision for the classification of vote by email along, which was deemed an inadequate medium
members shall include duly designated or authorized because a user-participants role in such case is passive
representatives of juridical persons as members of the considering that his access to the entire proceedings is limited
corporation, for purposes of qualifying them as members of the to the information in print transmitted through the internet.4
Board of Directors, which shall be provided in the articles of 5. Election of Officers
incorporation or by-laws.1 It is usually the board of trustees that appoints the officers of a
In the case of a condominium corporation where all the non-stock corporation, similar to the rules under stock
members thereof are corporate members or juridical person, corporations. However, in a non-stock corporation, unless
the SEC ruled that an officer or duly authorized agent or trustee otherwise provided for in the articles of incorporation or the by-
who has been designated by a corporate unit owner/member or laws, officers of a non-stock corporation may be elected directly
a condominium corporation as its representative for the express by the members.5
purpose of qualifying him as director, may be eligible to be If the officers in a non-stock corporation are directly elected by
elected as director; since to rule otherwise would create a the members, as allowed under Section 92 of the Corporation
situation when there would be no Board of Directors.2 Code, the power to remove them is vested directly in the
4. Meetings of the Board of Trustees members.6
SEC has ruled that Section 53 applies, which states: meetings of
directors or trustees may be held anywhere in or outside the VI. Conversion of Non-Stock Corporation to Stock Corporation
Philippines, unless the by-laws provide otherwise.3 The conversion of a non-stock educational institution into a
SEC held that a trustee may now be allowed to vote through the stock corporation is not legally feasible, as it violates Section 87
internet, provided that the internet medium to be used is akin of Corporation Code that no part of the income of a non-stock

1 4
SEC Opinion, 12 May 1995, XXIX SEC QUARTERLY BULLETIN 16 (No. 4, Dec. 1995). SEC Opinion No. 26, addressed to Ms. Jaycel E. Sato; SEC Opinion No. 27,
2
SEC Opinion, 16 April 191, citing 2 FLETCHER CYC. OF CORP., 1982 Rev. Vol., Sec. series of 2003, addressed to Mr. Arthur Mar O. Alivio.
5
300 at 93. SEC Opinion, 16 April 191, citing 2 FLETCHER CYC. OF CORP., 1982 Rev. Vol., Sec.
3
SEC Opinion No. 27, series of 2003, addressed to Mr. Arthur Mar O. Alivio; SEC 300 at 93.
6
Opinion No. 26, series of 2003, addressed to Ms. Jaycel E. Sato. SEC Opinion, 24 April 1995, XXIX SEC QUARTERLY BULLETIN 52 (No. 3, Sept. 1995).


corporation may be distributable as dividends to its members, essentially non-stock corporations governed by the same Title XI
trustees or officers. Thus, the Commission has previously ruled of the Code. What therefore makes foundations different from
that a non-stock corporation cannot be converted into a stock regular non-stock corporations are the privileges granted to it
corporation by a mere amendment of the Articles of by special laws, essentially in the field of Taxation.
Incorporation. For purposes of transformation, it is fundamental 2. Tax-Exempt Status
that the non-stock corporation be dissolved first under any of
the methods specified Title XIV of the Corporation Code. NATIONAL INTERNAL REVENUE CODE
Thereafter, the members may organize as a stock corporation Sec. 30. Exemptions from Tax on Corporations.
directed to bring profits or pecuniary gains to themselves. (SEC The following organizations shall not be taxed under this Title in
Opinion dated 24 February 2003; SEC Opinion dated 10 respect to income received by them as such:
December 1992).
The conversion of an existing "non-stock non-profit" (A) Labor, agricultural or horticultural organization not organized
corporation into a "stock corporation" without dissolving it first principally for profit;
would be tantamount to distribution of its assets or income to
its members inasmuch as after its conversion, the assets of the (B) Mutual savings bank not having a capital stock represented by
non-stock corporation would now be treated as payment to the shares, and cooperative bank without capital stock organized and
subscriptions of the members who will now become the operated for mutual purposes and without profit;
stockholders of the stock corporation.1
(C) A beneficiary society, order or association, operating fort he
VII. What Is a Foundation? (Sections 30 and 34(H), NIRC of 1997; exclusive benefit of the members such as a fraternal organization
Section 24, Rev. Reg. No. 2; BIR-NEDA Regulations No. 1-81, as operating under the lodge system, or mutual aid association or a non-
amended) stock corporation organized by employees providing for the payment
of life, sickness, accident, or other benefits exclusively to the members
1. Foundations Not a Special Category under Corporation Code of such society, order, or association, or non-stock corporation or their
The Corporation Code contains no separate provisions, nor does dependents;
it even refer to "foundations" as separate types of corporations
different from non-stock corporations. Foundations are (D) Cemetery company owned and operated exclusively for the benefit
of its members;
1
SEC Opinion, 24 February 1989, SEC QUARTERLY BULLETIN (No. 2, June 1989); SEC
Opinion, 13 May 1992, XXVI SEC QUARTERLY BULLETIN 12 (No. 3, Sept. 1992).


(E) Non-stock corporation or association organized and operated Notwithstanding the provisions in the preceding paragraphs, the
exclusively for religious, charitable, scientific, athletic, or cultural income of whatever kind and character of the foregoing organizations
purposes, or for the rehabilitation of veterans, no part of its net from any of their properties, real or personal, or from any of their
income or asset shall belong to or inures to the benefit of any activities conducted for profit regardless of the disposition made of
member, organizer, officer or any specific person; such income, shall be subject to tax imposed under this Code.

(F) Business league chamber of commerce, or board of trade, not Section 34. Deductions from Gross Income
organized for profit and no part of the net income of which inures to x x x
the benefit of any private stock-holder, or individual; (H) Charitable and Other Contributions.

(G) Civic league or organization not organized for profit but operated (1) In General. - Contributions or gifts actually paid or made within the
exclusively for the promotion of social welfare; taxable year to, or for the use of the Government of the Philippines or
any of its agencies or any political subdivision thereof exclusively for
(H) A non-stock and nonprofit educational institution; public purposes, or to accredited domestic corporation or associations
organized and operated exclusively for religious, charitable, scientific,
(I) Government educational institution; youth and sports development, cultural or educational purposes or for
the rehabilitation of veterans, or to social welfare institutions, or to
(J) Farmers' or other mutual typhoon or fire insurance company, non-government organizations, in accordance with rules and
mutual ditch or irrigation company, mutual or cooperative telephone regulations promulgated by the Secretary of finance, upon
company, or like organization of a purely local character, the income recommendation of the Commissioner, no part of the net income of
of which consists solely of assessments, dues, and fees collected from which inures to the benefit of any private stockholder or individual in
members for the sole purpose of meeting its expenses; and an amount not in excess of ten percent (10%) in the case of an
individual, and five percent (5%) in the case of a corporation, of the
(K) Farmers', fruit growers', or like association organized and operated taxpayer's taxable income derived from trade, business or profession
as a sales agent for the purpose of marketing the products of its as computed without the benefit of this and the following
members and turning back to them the proceeds of sales, less the subparagraphs.
necessary selling expenses on the basis of the quantity of produce
finished by them; (2) Contributions Deductible in Full. - Notwithstanding the provisions
of the preceding subparagraph, donations to the following institutions


or entities shall be deductible in full; domestic corporation:

(a) Donations to the Government. - Donations to the (1) Organized and operated exclusively for scientific,
Government of the Philippines or to any of its agencies or research, educational, character-building and youth
political subdivisions, including fully-owned government and sports development, health, social welfare,
corporations, exclusively to finance, to provide for, or to be cultural or charitable purposes, or a combination
used in undertaking priority activities in education, health, thereof, no part of the net income of which inures to
youth and sports development, human settlements, science the benefit of any private individual;
and culture, and in economic development according to a
National Priority Plan determined by the National Economic (2) Which, not later than the 15th day of the third
and Development Authority (NEDA), In consultation with month after the close of the accredited
appropriate government agencies, including its regional nongovernment organizations taxable year in which
development councils and private philantrophic persons and contributions are received, makes utilization directly
institutions: Provided, That any donation which is made to the for the active conduct of the activities constituting the
Government or to any of its agencies or political subdivisions purpose or function for which it is organized and
not in accordance with the said annual priority plan shall be operated, unless an extended period is granted by the
subject to the limitations prescribed in paragraph (1) of this Secretary of Finance in accordance with the rules and
Subsection; regulations to be promulgated, upon recommendation
of the Commissioner;
(b) Donations to Certain Foreign Institutions or International
Organizations. - donations to foreign institutions or (3) The level of administrative expense of which shall,
international organizations which are fully deductible in on an annual basis, conform with the rules and
pursuance of or in compliance with agreements, treaties, or regulations to be prescribed by the Secretary of
commitments entered into by the Government of the Finance, upon recommendation of the Commissioner,
Philippines and the foreign institutions or international but in no case to exceed thirty percent (30%) of the
organizations or in pursuance of special laws; total expenses; and

(c) Donations to Accredited Nongovernment Organizations. - (4) The assets of which, in the even of dissolution,
the term 'nongovernment organization' means a non profit would be distributed to another nonprofit domestic


corporation organized for similar purpose or purposes, years, and the project is one which can be better accomplished by
or to the state for public purpose, or would be setting aside such amount than by immediate payment of funds.
distributed by a court to another organization to be
used in such manner as in the judgment of said court (3) Valuation. - The amount of any charitable contribution of property
shall best accomplish the general purpose for which other than money shall be based on the acquisition cost of said
the dissolved organization was organized. property.

Subject to such terms and conditions as may be prescribed by (4) Proof of Deductions. - Contributions or gifts shall be allowable as
the Secretary of Finance, the term 'utilization' means: deductions only if verified under the rules and regulations prescribed
by the Secretary of Finance, upon recommendation of the
(i) Any amount in cash or in kind (including Commissioner.
administrative expenses) paid or utilized to accomplish
one or more purposes for which the accredited (Important Points from the Provision Summary from CLV Book)
nongovernment organization was created or Under Section 30 of the National Internal Revenue Code of 1997
organized. ("NIRC"), the following corporations, among others, are exempt
from corporate income taxation:
(ii) Any amount paid to acquire an asset used (or held a. Non-stock corporations or associations organized and
for use) directly in carrying out one or more purposes operated exclusively for religious, charitable, scientific,
for which the accredited nongovernment organization athletic, or cultural purposes, or for the rehabilitation of
was created or organized. veterans, no part of its net income or asset shall belong
to or inure to the benefit of any member, organizer,
An amount set aside for a specific project which comes within one or officer or any specific person;
more purposes of the accredited nongovernment organization may be b. Business leagues, chamber of commerce, or board of
treated as a utilization, but only if at the time such amount is set aside, trade, not organized for profit and no part of the net
the accredited nongovernment organization has established to the income of which inures to the benefit of any private
satisfaction of the Commissioner that the amount will be paid for the stockholder or individual;
specific project within a period to be prescribed in rules and c. Civic league or organization not organized for profit but
regulations to be promulgated by the Secretary of Finance, upon operated exclusively for the promotion of social
recommendation of the Commissioner, but not to exceed five (5) welfare;


d. Non-stock and non-profit educational institution; benefit of any private stockholder or individual.1 It has been
Therefore both a regular non-stock corporation and a held, however, in Collector v. V.G. Sinco Educational
foundation are tax-exempt institution under Section 30 of the Corporation, 2 that the formal requirements of Revenue
NIRC when they are organized for the eleemosynary purposes Regulations No. 2 are not mandatory and that an entity
specified therein and no profit inures to the benefit of their concerned may, in the absence of compliance with such
members, officers and trustees. Nevertheless, the same section requirements, still show that it falls under the provisions of
provides that the income of whatever kind and character of the Section 26 of the NIRC.
foregoing organizations from any of their properties, real or From the point of view of tax-exemption, foundations enjoy the
personal, or from any of their activities conducted for profit, same privilege, and must undertake the same application
regardless of the disposition made of such income, shall be process with the BIR to enjoy such privilege, as with regular
subject to tax imposed under this Code." non-stock corporations.
Under Section 34(H)(2)(c) of the NIRC, the definition of 3. Tax Deductibility of Charitable Contributions3
foundation is preceded by the qualifying term "non government Under Section 34(H)(1) of the NIRC governing the computation
organization" which means a non-profit domestic corporation. of taxable net income, taxpayers are allowed to deduct from
This tax-exempt status of ordinary non-stock corporations and their taxable gross income contributions and gifts actually paid
foundations only pertain to income earned from pursuing their and made within the taxable year "to domestic corporations or
eleemosynary purposes, and not to other profit-seeking venture associations organized and operated exclusively for religious,
outside of their main purpose. charitable, scientific, youth and sports development, cultural or
Under existing revenue regulations, in order for regular non- educational purposes or for the rehabilitation of veterans, or to
stock corporations and foundations to establish their tax- social welfare institutions, no part of the net income of which
exempt status, and thus be relieved of the duty of filing income inures to the benefit of any private stockholder or individual."
tax returns and paying income tax, it is necessary that they file The extent by which a taxpayer may deduct from his taxable net
an affidavit with the Commissioner of Internal Revenue showing income the charitable contributions and gifts to regular non-
the character of their organizations, the purpose for which they stock corporations organized for any of the purposes
are organized, their actual activities, the source of their income enumerated in Section 34(H)(1) is as follows:
and the disposition thereof, and whether or not any of the

income is credited to surplus or inures or may inure to the 1
Section 24, Revenue Regulations No. 2.
2
100 Phil. 127 (1956).
3


a. For individual taxpayer, 10% of his taxable net income to be prescribed by the Secretary of Finance but in no
derived from business; and case to exceed thirty percent (30%) of the total
b. For corporate taxpayers, 5% of taxable net income expenses; and
derived from business. e. The assets of which in the event of dissolution would be
On the other hand, under Section 34(H)(2)(c) contributions and distributed to another non-profit domestic corporation
gifts made to "foundations" or nongovernment organization organized for similar purpose or purposes or to the
may be deductible in full by the taxpayer from his taxable gross State for public purpose, or would be distributed by a
income. It actually is Section 34(H)(2)(c), which now refers to court to another organization to be used in such
"foundations" as "accredited nongovernment organizations," manner as in the judgment of said court shall best
and defines and distinguishes them from other corporate accomplish the general purpose for which the dissolved
entities, as follows: organization was organized.
a. Non-profit domestic corporation, formed and organized It will be noted therefore that a foundation or accredited
under Philippine laws nongovernment organization is for practical purposes a creature
b. Organized and operated exclusively for scientific, fashioned under NIRC for purposes of tax administration. The
research, educational, character-building and youth and requirements laid-down by Section 34(H)(2)(c) put more
sports development, health, social welfare, cultural or stringent requirements on the foundation as compared to a
charitable purposes, or a combination thereof, no part regular non-stock corporation, namely:
of the net income of which inures to the benefit of any a. The limitation of administration expenses to 30% of the
private individual; corporation's total expenses; and
c. Which, not later than the 15th day of the third month b. The strict form of distribution of the net assets of the
after the close of the corporation's taxable year in corporation in the event of dissolution to similar non-
which contributions are received, makes utilization stock corporations or to the State (whereas, it is legal
directly for the active conduct of the activities for regular non-stock corporation to distribute their net
constituting the purposes or function for which it is assets to the members or event other entities organized
organized and operated, unless an extended period is for profit).
granted by the Secretary of Finance in accordance with In exchange for such stringent requirements, donations,
the rules and regulations promulgated; contributions and gifts to foundations are totally deductible by
d. The level of administration expense of which, shall on the taxpayer from his tax gross income, while those to regular
an annual basis, conform with the rules and regulations non-stock corporation are subject to the 10%-5% limitations for


their deduction from the taxable gross income of a taxpayer. SECTION 24. Proof of exemption.
Theoretically therefore, taxpayers would have greater In order to establish its exemption, and thus be relieved of the duty of
motivations to donate and contribute to foundations than to filing returns of income and paying the tax, it is necessary that every
regular non-stock corporation because of the greater tax organization claiming exemption file an affidavit with the
benefits to them. Commissioner of Internal Revenue, showing the character of the
The direct benefit granted under Section 34(H)(2)(c) is to the organization, the purpose for which it was organized, its actual
contributing or donating taxpayer and not to the foundation activities, the sources of its income and its disposition, whether or not
itself. Whether the entity is a foundation or a regular non-stock any of its income is credited to surplus or inures or may inure to the
corporation does not really matter since all donations to them benefit of any private shareholder or individual, and in general, all
are equally tax-exempt. In fact, the foundation is at a greater facts relating to its operations which affect its right to exemption. To
disadvantage as compared to a regular non-stock corporation, such affidavit should be attached a copy of the charter or articles of
since a foundation is subject to the 30% limitation on its incorporation, the by-laws of the organization, and the latest financial
administration expenses, whereas a regular non-stock statement showing the assets, liabilities, receipts, and disbursement of
corporation is not saddled by such limitation. In addition, a the organization.
foundation is mandated with greater reportorial obligations to Upon receipt of the affidavit and other papers by the Commissioner of
the BIR than the regular non-stock corporation since it has to Internal Revenue, the organization will be informed whether or not it
make not later than the 15th of the third month after the close is exempt. When an organization has established its right to
of its taxable year a detailed report. exemption, it need not thereafter make and file a return of income as
In addition, unlike in the ordinary non-stock corporation where required under Section 46 of the Tax Code. However, the organization
it is possible upon dissolution for the net assets to be should file on or before April 15 of each year, an annual information
distributed to the members, for foundations, the net assets are return under oath, stating its gross income and expenses incurred
required to be distributed to another non-profit domestic during the preceding year, and a certificate showing that there has not
corporation organized for similar purpose or purposes, or to the been any substantial change in its By-Laws, Articles of Incorporation,
State for public purpose, or would be distributed by a court to manner of operation and activities as well as sources and disposition
another organization to be used in such manner as in the of income. (As amended by Revenue Regulations No. 7-64, approved
judgment of said court shall best accomplish the general November 25, 1964.)
purpose for which the dissolved organization was organized.
Formal requirements of Rev. Reg. No. 2 are not mandatory and
REVENUE REGULATION NO. 2 an entity may, in the absence of compliance with such


requirements, still show that it falls under the provisions of non-stock corporations. In fact, a foundation would suffer a
Section of NIRC. Collector v. V.G. Sinco Educational Corp., 100 diminution of the extent of power by which to distribute its net
Phil. 127 (1956). assets in the event of dissolution, as compared to a regular non-
4. Registration as Qualified Donee-Institutions1 stock corporation.
In the realm of income taxation, both a foundation and a non-
BIR-NEDA Regulations No. 1-81, as amended stock corporation can equally enjoy tax-exempt status.
When it comes to charitable contributions, a foundation is
For a foundation to qualify for full deduction, under BIR-NEDA limited in the manner by which it disburses the same by the
Regulations No. 1-81, as amended, it must file with the 30% limitation on its administrative expenses, whereas no such
Government and Tax Exempt Corporation Division of the BIR a limitation applies to regular non-stock corporations. In addition,
sworn statement showing the character or the organization, the both the donors to, and the management of, foundations are
purpose for which it is organized, its actual activities, the saddled with reportorial requirements on donations given and
sources of income and its disposition; and other facts relating to received, as the case may be. On the other hand, because
their operations which are relevant to their qualification as donations to foundations which have qualified as donee-
donee institutions. Once the foundation is qualified as a donee institutions are deductible in full, there may be greater
institution by the issuance of BIR Certificate of Registration, it motivation from benefactors to give to foundations rather than
must issue certificates of donations in the form prescribed by to a regular non-stock corporation.
the BIR on every donation or gift it receives within thirty (30)
days from receipt of the donation. VIII. Dissolution: Right of Members to Proportionate Share of
5. In Summary2 Remaining Assets (Sections 94 and 95; Section 34(H)(2)(c), 1997 NIRC).
For purposes of Corporate Law, with respect to corporate
powers and capabilities, and rules on internal management and Section 94. Rules of distribution.
membership relations, there are no distinctions between In case dissolution of a non-stock corporation in accordance with the
foundations and regular non-stock corporations, and there is no provisions of this Code, its assets shall be applied and distributed as
advantage enjoyed in this realm by foundations over regular follows:

1
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. 1. All liabilities and obligations of the corporation shall be paid,
(2013 ed.). Manila, Philippines: Rex Book Store. satisfied and discharged, or adequate provision shall be made
2
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. therefore;


the provisions of this Title, may be adopted by a non-stock corporation
2. Assets held by the corporation upon a condition requiring return, in the process of dissolution in the following manner:
transfer or conveyance, and which condition occurs by reason of the
dissolution, shall be returned, transferred or conveyed in accordance The board of trustees shall, by majority vote, adopt a resolution
with such requirements; recommending a plan of distribution and directing the submission
thereof to a vote at a regular or special meeting of members having
3. Assets received and held by the corporation subject to limitations voting rights. Written notice setting forth the proposed plan of
permitting their use only for charitable, religious, benevolent, distribution or a summary thereof and the date, time and place of such
educational or similar purposes, but not held upon a condition meeting shall be given to each member entitled to vote, within the
requiring return, transfer or conveyance by reason of the dissolution, time and in the manner provided in this Code for the giving of notice
shall be transferred or conveyed to one or more corporations, of meetings to members. Such plan of distribution shall be adopted
societies or organizations engaged in activities in the Philippines upon approval of at least two-thirds (2/3) of the members having
substantially similar to those of the dissolving corporation according to voting rights present or represented by proxy at such meeting. (n)
a plan of distribution adopted pursuant to this Chapter;
As provided for under Sections 94 and 95 of Corporation Code,
4. Assets other than those mentioned in the preceding paragraphs, if in the event of dissolution of a non-stock corporation, its assets
any, shall be distributed in accordance with the provisions of the shall be distributed in accordance with the rules. Unless, it is so
articles of incorporation or the by-laws, to the extent that the articles provided in the Articles of Incorporation or By-Laws, the
of incorporation or the by-laws, determine the distributive rights of members are not entitled to any beneficial or vested interest
members, or any class or classes of members, or provide for over the assets of the non-stock corporation. In other words,
distribution; and non-stock, non-profit corporations hold their funds in trust for
the carrying out of the objectives and purposes expressed in its
5. In any other case, assets may be distributed to such persons, charter. (SEC Opinion dated 24 February 2003; SEC Opinion
societies, organizations or corporations, whether or not organized for dated 13 May 1992).
profit, as may be specified in a plan of distribution adopted pursuant
to this Chapter. (n)

Section 95. Plan of distribution of assets.
A plan providing for the distribution of assets, not inconsistent with


FOREIGN CORPORATIONS branch with regard to external matters, but the
governing law for internal matters would be the law of

their home country (e.g. where foreign company
I. Definition; Nature of a Foreign Corporation
decides to sell all its Philippine assets, such cannot be

questioned because it is an internal matter that is
A. Definition (Section 123)
governed by the laws of the home country of the

foreign corporation.)
Section 123. Definition and rights of foreign corporations.

For the purposes of this Code, a foreign corporation is one formed,
B. Two requirements to be considered a foreign corporation:
organized or existing under any laws other than those of the
1. Organized in another country.
Philippines and whose laws allow Filipino citizens and corporations to
o Regardless of the ownership (e.g. a corporation
do business in its own country or state. It shall have the right to
organized under foreign laws even if wholly owned by
transact business in the Philippines after it shall have obtained a
Filipinos)
license to transact business in this country in accordance with this
2. The laws of the corporations home state allows for Filipino
Code and a certificate of authority from the appropriate government
citizens and corporations to do business thereat (policy of
agency. (n)
reciprocity).

o The presence of absence of reciprocity affects its
A foreign corporation is one which owes its existence to the
capacity to do business in the Philippines.
laws of another state, and generally, has no legal existence

within the State in which it is foreign. Avon Insurance PLC v.
C. Nature of the Corporate Creature
Court of Appeals, 278 SCRA 312 (1997)
A corporation is essentially a creature of the state under the
Atty. Hofilea this part of the Corporation Code deals with
laws of which it has been granted its juridical personality; and
foreign corporations who establish a presence here on their
strictly speaking, beyond the territories of such creating state, a
own as such (i.e. branch), thereby, there is only one juridical
corporation has no legal existence, since the powers of the
entity. This does not contemplate situations wherein the foreign
creating laws do not extend beyond the territorial jurisdiction of
corporation establishes a domestic corporation as its subsidiary,
the state under which it is created.1
thereby, there are two juridical entities.
o Foreign Corporations who apply for a license would
thereby establish a branch. It does not acquire a new

personality. The Corporation Code will apply on the 1
Marshall-Wells Co. v. Henry W. Elser & Co., 46 Phil. 70, at p. 74 (1924).


A foreign corporation is one which owes its existence to the o Consent, as a requisite for jurisdiction over foreign
laws of another state, and generally, has no legal existence corporations, is founded on considerations of due
within the state in which it is foreign.1 process and fair play.
It is a fundamental rule of international jurisdiction that no state o A foreign corporation may be subjected to jurisdiction
can by its laws, and no court (which is only a creature of the by reason of consent, ownership of property within the
state) can by its judgments or decrees, directly bind or affect State, or by reason of activities within or having an
property or persons beyond the limits of that state.2 However, effect within the state.7 For example, the filing of an
under the doctrine of comity in international laws, "a action by a foreign corporation before Philippine courts
corporation created by the laws of one state is usually allowed would mean that by voluntary appearance, the local
to transact business in other states and to sue in the courts of courts have actually obtained jurisdiction over the
the forum."3 "person" of the foreign corporation.8
1. Consent. The legal standing of foreign corporations in the host 2. Doctrine of "doing business" within the territorial jurisdiction
state therefore is founded on international law on the basis of of the host state. It is an established doctrine that when a
consent,4 and the extent by which a hosting state can enforce its foreign corporation undertakes business activities within the
laws and jurisdiction over corporations created by other states territorial jurisdiction of a host state, then it ascribes to the host
has been the subject of jurisprudential rules and municipal states laws, rules and regulations. In the same manner, in order
legislations, especially in the fields of taxation, 5 foreign to regulate the basis by which a foreign corporation seeks to do
investments, and capacity to obtain reliefs in local courts and business and the manner by which it would seek redress within
administrative bodies.6 the judicial and administrative authorities within the host state,
have given rise to the requirement that a license be obtained

1
Avon Insurance PLC v. Court of Appeals, 278 SCRA 312, 86 SCAD 401 (1997). under the penalty that failure to do so would not give it legal
2
Times, Inc. v. Reyes, 39 SCRA 303 (1971), citing Perkins v. Dizon, 69 Phil. 186 standing to sue in local courts and administrative bodies
(1939). exercising quasi-judicial powers.9
3
Times, Inc. v. Reyes, 39 SCRA 303 (1971), citing Paul v. Virginia, 8 Wall. 168
(1869); Sioux Remedy Co. v. Cape and Cope, 235 U.S. 197 (1914); Cyclone
Mining Co. v. Baker Light & Power Co., 165 Fed. 996 (1908).
4
SALONGA, PRIVATE INTERNATIONAL LAW, 1979 ed., p. 344.
5 7
The chapter does not cover nor discuss the concept of "doing business" in the SALONGA, supra, citing Goodrich (Scoles), 136.
8
field of taxation, as the subject is itself a technical matter that deserves a Communication Materials and Design, Inc. v. Court of Appeals, 260 SCRA 673,
separate discussion. 73 SCAD 374 (1996).
6 9


o On the other hand, when a foreign corporation's copy of its articles of incorporation and by-laws, certified in
activities within the host state do not fall within the accordance with law, and their translation to an official language of
concept of "doing business," the requirements of the Philippines, if necessary. The application shall be under oath and,
obtaining a license to engage in business are generally unless already stated in its articles of incorporation, shall specifically
not applicable to it, and it would still have legal standing set forth the following:
to sue in local courts and administrative agencies to
obtain relief. In such an instance, the jurisdiction by 1. The date and term of incorporation;
local courts and administrative bodies over a foreign
corporation seeking relief would be the clear consent 2. The address, including the street number, of the principal office of
manifested by the filing of the suit.1 the corporation in the country or state of incorporation;

II. License to Do Business in the Philippines 3. The name and address of its resident agent authorized to accept
summons and process in all legal proceedings and, pending the
A. Application for License (Sections 124 and 125; Art. 48, Omnibus establishment of a local office, all notices affecting the corporation;
Investment Code)
4. The place in the Philippines where the corporation intends to
Section 124. Application to existing foreign corporations. operate;
Every foreign corporation which on the date of the effectivity of this
Code is authorized to do business in the Philippines under a license 5. The specific purpose or purposes which the corporation intends to
therefore issued to it, shall continue to have such authority under the pursue in the transaction of its business in the Philippines: Provided,
terms and condition of its license, subject to the provisions of this That said purpose or purposes are those specifically stated in the
Code and other special laws. (n) certificate of authority issued by the appropriate government agency;

Section 125. Application for a license. 6. The names and addresses of the present directors and officers of the
A foreign corporation applying for a license to transact business in the corporation;
Philippines shall submit to the Securities and Exchange Commission a
7. A statement of its authorized capital stock and the aggregate
number of shares which the corporation has authority to issue,
1
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. itemized by classes, par value of shares, shares without par value, and


series, if any; and liabilities of the corporation as of the date not exceeding one (1)
year immediately prior to the filing of the application.
8. A statement of its outstanding capital stock and the aggregate
number of shares which the corporation has issued, itemized by Foreign banking, financial and insurance corporations shall, in addition
classes, par value of shares, shares without par value, and series, if to the above requirements, comply with the provisions of existing laws
any; applicable to them. In the case of all other foreign corporations, no
application for license to transact business in the Philippines shall be
9. A statement of the amount actually paid in; and accepted by the Securities and Exchange Commission without previous
authority from the appropriate government agency, whenever
10. Such additional information as may be necessary or appropriate in required by law. (68a)
order to enable the Securities and Exchange Commission to determine
whether such corporation is entitled to a license to transact business
in the Philippines, and to determine and assess the fees payable. B. Rationale for Requiring License:
Section 69 of old Corporation Law was intended to subject the
Attached to the application for license shall be a duly executed foreign corporation doing business in the Philippines to the
certificate under oath by the authorized official or officials of the jurisdiction of our courts and not to prevent the foreign
jurisdiction of its incorporation, attesting to the fact that the laws of corporation from performing single acts, but to prevent it from
the country or state of the applicant allow Filipino citizens and acquiring domicile for the purpose of business without taking
corporations to do business therein, and that the applicant is an the necessary steps to render it amenable to suit in the local
existing corporation in good standing. If such certificate is in a foreign courts. Marshall-Wells v. Elser, 46 Phil. 71 (1924).
language, a translation thereof in English under oath of the translator
shall be attached thereto. Marshall-Wells v. Elser

The application for a license to transact business in the Philippines Facts: Marshall-Wells Company (an Oregon, U.S. corporation) sued
shall likewise be accompanied by a statement under oath of the Henry W. Elser & Co., Inc. (a domestic corporation) in CFI Manila for the
president or any other person authorized by the corporation, showing unpaid balance on goods it sold to the latter. Henry W. Elser & Co., Inc.
to the satisfaction of the Securities and Exchange Commission and averred that Marshall-Wells Company has no legal capacity to sue since
other governmental agency in the proper cases that the applicant is there is no showing that it has complied with the laws of Philippines,
solvent and in sound financial condition, and setting forth the assets particularly Section 69 of the Corporation Law where it states: No


foreign corporation shall be permitted to maintain by itself or assignee The same danger does not exist among foreign corporations
any suit for the recovery of any debt, claim, or demand whatever, unless that are indubitably not doing business in the Philippines: there
it shall have the license prescribed in section 68 of the law. would be no reason for it to be subject to the States regulation;
for in so far as the State is concerned, such foreign corporation
Issue: Whether or not the obtaining of the license prescribed in section has no legal existence. Therefore, to subject such foreign
68, as amended, of the Corporation Law is a condition precedent to the corporation to the local courts jurisdiction would violate the
maintaining of any kind of action in the courts of the Philippine Islands essence of sovereignty of the creating state. Avon Insurance
by a foreign corporation. PLC v. Court of Appeals, 278 SCRA 312 (1997).

Held: NO. The SC decided in favor of Marshall Wells Co. The implication C. Appointment of a Resident Agent (Section 127 and 128)
of the law is that it was never the purpose of the Legislature to exclude
a foreign corporation which happens to obtain an isolated order for Section 127. Who may be a resident agent.
business from the Philippines, from securing redress in the Philippine A resident agent may be either an individual residing in the Philippines
courts, and thus, in effect, to permit persons to avoid their contracts or a domestic corporation lawfully transacting business in the
made with such foreign corporations. Philippines: Provided, That in the case of an individual, he must be of
good moral character and of sound financial standing. (n)
Doctrine: The effect of the statute preventing foreign corporations from
doing business and from bringing actions in the local courts, except on Section 128. Resident agent; service of process.
compliance with elaborate requirements, must not be unduly extended The Securities and Exchange Commission shall require as a condition
or improperly applied. It should not be construed to extend beyond the precedent to the issuance of the license to transact business in the
plain meaning of its terms, considered in connection with its object, and Philippines by any foreign corporation that such corporation file with
in connection with the spirit of the entire law. the Securities and Exchange Commission a written power of attorney
designating some person who must be a resident of the Philippines, on
Otherwise, a foreign corporation illegally doing business here whom any summons and other legal processes may be served in all
because of its refusal or neglect to obtain the required license actions or other legal proceedings against such corporation, and
to do business may successfully though unfairly plead such consenting that service upon such resident agent shall be admitted
neglect or illegal act so as to avoid service and thereby impugn and held as valid as if served upon the duly authorized officers of the
the jurisdiction of the local courts. Avon Insurance PLC v. Court foreign corporation at its home office. Any such foreign corporation
of Appeals, 278 SCRA 312 (1997). shall likewise execute and file with the Securities and Exchange


Commission an agreement or stipulation, executed by the proper Being a resident agent of a foreign corporation does not mean
authorities of said corporation, in form and substance as follows: that he is authorized to execute the requisite certification
against forum shoppingwhile a resident agent may be aware
"The (name of foreign corporation) does hereby stipulate and agree, in of actions filed against his principal (a foreign corporation doing
consideration of its being granted by the Securities and Exchange business in the Philippines), he may not be aware of actions
Commission a license to transact business in the Philippines, that if at initiated by its principal, whether in the Philippines or abroad.
any time said corporation shall cease to transact business in the Expertravel & Tours, Inc. v. Court of Appeals, 459 SCRA 147
Philippines, or shall be without any resident agent in the Philippines (2005).
on whom any summons or other legal processes may be served, then A complaint filed by a foreign corporation is fatally defective for
in any action or proceeding arising out of any business or transaction failing to allege its duly authorized representative or resident
which occurred in the Philippines, service of any summons or other agent in Philippine jurisdiction. New York Marine Managers,
legal process may be made upon the Securities and Exchange Inv. c. Court of Appeals, 249 SCRA 416 (1995).
Commission and that such service shall have the same force and effect When a corporation has designated a person to receive service
as if made upon the duly-authorized officers of the corporation at its of summon pursuant to the Corporation Code, the designation
home office." is exclusive and service of summons on any other person is
inefficacious. H.B. Zachry Company Intl v. Court of Appeals,
Whenever such service of summons or other process shall be made 232 SCRA 329 (1994)
upon the Securities and Exchange Commission, the Commission shall,
within ten (10) days thereafter, transmit by mail a copy of such D. Issuance of License (Section 126; Art. 49, Omnibus Investment
summons or other legal process to the corporation at its home or Code)
principal office. The sending of such copy by the Commission shall be
necessary part of and shall complete such service. All expenses Section 126. Issuance of a license.
incurred by the Commission for such service shall be paid in advance If the Securities and Exchange Commission is satisfied that the
by the party at whose instance the service is made. applicant has complied with all the requirements of this Code and
other special laws, rules and regulations, the Commission shall issue a
In case of a change of address of the resident agent, it shall be his or license to the applicant to transact business in the Philippines for the
its duty to immediately notify in writing the Securities and Exchange purpose or purposes specified in such license. Upon issuance of the
Commission of the new address. (72a; and n) license, such foreign corporation may commence to transact business
in the Philippines and continue to do so for as long as it retains its


authority to act as a corporation under the laws of the country or state additional securities deposited with it if the gross income of the
of its incorporation, unless such license is sooner surrendered, licensee has decreased, or if the actual market value of the total
revoked, suspended or annulled in accordance with this Code or other securities on deposit has increased, by more than ten (10%) percent of
special laws. the actual market value of the securities at the time they were
deposited. The Securities and Exchange Commission may, from time to
Within sixty (60) days after the issuance of the license to transact time, allow the licensee to substitute other securities for those already
business in the Philippines, the license, except foreign banking or on deposit as long as the licensee is solvent. Such licensee shall be
insurance corporation, shall deposit with the Securities and Exchange entitled to collect the interest or dividends on the securities deposited.
Commission for the benefit of present and future creditors of the In the event the licensee ceases to do business in the Philippines, the
licensee in the Philippines, securities satisfactory to the Securities and securities deposited as aforesaid shall be returned, upon the licensee's
Exchange Commission, consisting of bonds or other evidence of application therefor and upon proof to the satisfaction of the
indebtedness of the Government of the Philippines, its political Securities and Exchange Commission that the licensee has no liability
subdivisions and instrumentalities, or of government-owned or to Philippine residents, including the Government of the Republic of
controlled corporations and entities, shares of stock in "registered the Philippines. (n)
enterprises" as this term is defined in Republic Act No. 5186, shares of
stock in domestic corporations registered in the stock exchange, or A foreign corporation licensed to do business should be
shares of stock in domestic insurance companies and banks, or any subjected to no harsher rules that is required of domestic
combination of these kinds of securities, with an actual market value corporation and should not generally be subject to attachment
of at least one hundred thousand (P100,000.) pesos; Provided, on the pretense that such foreign corporation is not residing in
however, That within six (6) months after each fiscal year of the the Philippines. Claude Neon Lights v. Phil. Advertising Corp.,
licensee, the Securities and Exchange Commission shall require the 57 Phil. 607 (1932).
licensee to deposit additional securities equivalent in actual market
value to two (2%) percent of the amount by which the licensee's gross E. Effects of Being Issued License
income for that fiscal year exceeds five million (P5,000,000.00) pesos. The Corporation Code therefore takes pain to ensure that in
The Securities and Exchange Commission shall also require deposit of allowing a foreign corporation to engage in business activities in
additional securities if the actual market value of the securities on the Philippines, proper safeguards are taken to allow obtaining
deposit has decreased by at least ten (10%) percent of their actual jurisdiction over such foreign corporation in case of suit and
market value at the time they were deposited. The Securities and that proper securities are present within Philippine jurisdiction
Exchange Commission may at its discretion release part of the to answer for a foreign corporation's obligations to locals. The


Supreme Court has held: "The purpose of the law is to subject Philippines shall obtain an amended license in the event it changes its
the foreign corporation doing business in the Philippines to the corporate name, or desires to pursue in the Philippines other or
jurisdiction of our courts. It is not to prevent the foreign additional purposes, by submitting an application therefor to the
corporation from performing single or isolated acts, but to bar it Securities and Exchange Commission, favorably endorsed by the
from acquiring a domicile for the purpose of business without appropriate government agency in the proper cases. (n)
first taking steps necessary to render it amenable to suits in the
1
local courts." G. Effects of Failure to Obtain License:
1. Licensed Foreign Corporation Deemed Domesticated 1. On the Contract Entered Into: Home Insurance Co. v. Eastern
The harmony and balance sought to be achieved by our "doing Shipping Lines, 123 SCRA 424 (1983).
business" requirements for obtaining license are best
exemplified by the fact that once a foreign corporation has Home Insurance Co. v. Eastern Shipping Lines
obtained a license to do business, then it is deemed
domesticated, and should be subject to no harsher rules that is Facts: S. Kajita & Co., on behalf of Atlas Consolidated Mining &
required of domestic corporations.2 Development Corporation, shipped on board the SS Eastern Jupiter
(owned by Eastern Shipping Lines) from Osaka, Japan, 2,361 coils of
F. Amendment of License (Section 131) Black Hot Rolled Copper Wire Rods. The shipment was insured with the
Home Insurance Company against all risks in favor of the recipient of the
Section 131. Amended license. shipment, Phelps Dodge Copper Products Corporation of the Philippines
A foreign corporation authorized to transact business in the at Manila. The coils discharged from the ship were in bad order. Home
Insurance paid the Phelps Dodge under its insurance policy by virtue of

1
Eriks Pte. Ltd. v. Court of Appeals, 267 SCRA 567, 76 SCAD 70 (1997). The which Home Insurance became subrogated to the rights and actions of
Court also held in that case: "It was never the intent of the legislature to bar the Phelps Dodge. Home Insurance made demands for payment against
court access to a foreign corporation or entity which happens to obtain an the Eastern Shipping and the Angel Jose Transportation for
isolated order for business in the Philippines. Neither, did it intend to shield
debtors from their legitimate liabilities or obligations. But it cannot allow reimbursement of the aforesaid amount but each refused to pay.
foreign corporations or entities which conduct regular business any access to
courts without the fulfillment by such corporation of the necessary requisites Issue: Whether or not Home Insurance, a foreign corporation licensed
to be subjected to our government's regulation and authority. By securing a
license, the foreign entity would be giving assurance that it will abide by the to do business at the time of the filing of the case, has the capacity to
decisions of our courts, even if adverse to it." sue for claims on contracts made when it has no license yet to do
2
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. business in the Philippines.


"[t]he requirement of registration affects only the remedy," and
Held: YES. The lack of capacity at the time of the execution of the that "the lack of capacity at the time of the execution of the
contracts was cured by the subsequent registration is also strengthened contracts was cured by the subsequent registration." 1
by the procedural aspects of these cases. Home Insurance averred in its 2. Standing to Sue (Section 133)
complaints that it is a foreign insurance company, that it is authorized to
do business in the Philippines, that its agent is Mr. Victor H. Bello, and Section 133. Doing business without a license.
that its office address is the Oledan Building at Ayala Avenue, Makati. No foreign corporation transacting business in the Philippines without
These are all the averments required by Section 4, Rule 8 of the Rules of a license, or its successors or assigns, shall be permitted to maintain or
Court. Home Insurance sufficiently alleged its capacity to sue. intervene in any action, suit or proceeding in any court or
administrative agency of the Philippines; but such corporation may be
Doctrine: The Corporation Law is silent on whether or not the contract sued or proceeded against before Philippine courts or administrative
executed by a foreign corporation with no capacity to sue is null and tribunals on any valid cause of action recognized under Philippine
void ab initio. Still, there is no question that the contracts are laws. (69a)
enforceable. The requirement of registration affects only the remedy.
Significantly, Batas Pambansa 68, the Corporation Code of the It seems clearly implied from the languages of both Sections 133
Philippines has corrected the ambiguity caused by the wording of and 134, that the failure of a foreign corporation to obtain a
Section 69 of the old Corporation Law. license to do business when one is required, does not affect the
Section 133 of the present Corporation Code provides that: No validity of the transactions of such foreign corporation, but
foreign corporation transacting business in the Philippines simply removes the legal standing of such foreign corporation to
without a license, or its successors or assigns, shall be permitted sue. Although such foreign corporation may still be sued, the
to maintain or intervene in any action, suit or proceeding in any Corporation Code fails to indicate that once sued, if such foreign
court or administrative agency in the Philippines; but such corporation can interpose counterclaims in the same suit.2
corporation may be sued or proceeded against before Philippine 3. Criminal Liability under Section 144: Home Insurance Co. v.
courts or administrative tribunals on any valid cause of action Eastern Shipping Lines, 123 SCRA 424 (1983).
recognized under Philippine laws.

Home Insurance Company therefore held that contracts entered 1
into by a foreign corporation doing business in the Philippines (2013 ed.). Manila, Philippines: Rex Book Store.
2
without the requisite license remain valid and enforceable and Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.


Section 144. Violations of the Code. license, it can sue before Philippine courts on any transaction.
Violations of any of the provisions of this Code or its amendments not MR. Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002).1
otherwise specifically penalized therein shall be punished by a fine of
not less than one thousand (P1,000.00) pesos but not more than ten III. Concepts of Doing Business in the Philippines; Effects of Not
thousand (P10,000.00) pesos or by imprisonment for not less than Obtaining the License
thirty (30) days but not more than five (5) years, or both, in the
discretion of the court. If the violation is committed by a corporation, A. Statutory Concept of Doing Business (R.A. No. 7042, Foreign
the same may, after notice and hearing, be dissolved in appropriate Investment Act of 1991).
proceedings before the Securities and Exchange Commission:
Provided, That such dissolution shall not preclude the institution of FOREIGN INVESTMENT ACT OF 1991
appropriate action against the director, trustee or officer of the Section 3. Definitions.
corporation responsible for said violation: Provided, further, That x x x
nothing in this section shall be construed to repeal the other causes d) The praise "doing business" shall include soliciting orders, service
for dissolution of a corporation provided in this Code. (190 1/2 a) contracts, opening offices, whether called "liaison" offices or
branches; appointing representatives or distributors domiciled in the
4. Summary of Rulings on Doing Business: The principles Philippines or who in any calendar year stay in the country for a period
regarding the right of a foreign corporation to bring suit in or periods totalling one hundred eighty (180) days or more;
Philippine courts may thus be condensed in four statements: (1) participating in the management, supervision or control of any
if a foreign corporation does business in the Philippines without domestic business, firm, entity or corporation in the Philippines; and
a license, it cannot sue before Philippine courts; (2) if a foreign any other act or acts that imply a continuity of commercial dealings or
corporation is not doing business in the Philippines, it needs no arrangements, and contemplate to that extent the performance of
license to sue before Philippine courts on an isolated acts or works, or the exercise of some of the functions normally
transaction or on a cause of action entirely independent of any incident to, and in progressive prosecution of, commercial gain or of
business transaction; (3) if a foreign corporation does business the purpose and object of the business organization: Provided,
in the Philippines without a license, a Philippine citizen or entity however, That the phrase "doing business: shall not be deemed to
which has contracted with said corporation may be estopped include mere investment as a shareholder by a foreign entity in
from challenging the foreign corporations corporate personality
in a suit brought before the Philippine courts; and (4) if a foreign
1
corporation does business in the Philippines with the required Agilent Technologies Singapore (PTE) Ltd. v. Integrated Silicon Technology
Phil. Corp., 427 SCRA 593 (2004).


domestic corporations duly registered to do business, and/or the foreign corporation, for its own name and its own
exercise of rights as such investor; nor having a nominee director or account, the latter cannot be considered to be doing
officer to represent its interests in such corporation; nor appointing a business in the Philippines. Steelcase, Inc. v. Design
representative or distributor domiciled in the Philippines which International Selections, Inc., 670 SCRA 64 (2012).
transacts business in its own name and for its own account; o Atty. Hofilea The Foreign Investments Act of 1991
x x x provided the standards and/or guidelines for identifying
what constitutes doing business. Case law provides
Under Section 123 of Corporation Code, a foreign corporation for the proper interpretation.
must first obtain a license and a certificate from the appropriate The DTI Implementing Rules and Regulations, in defining "doing
government agency before it can transact business in the business," not only carry the same language as appearing in the
Philippines. Where a foreign corporation does business in the Act, but also includes the following items as not being included
Philippines without the proper license, it cannot maintain any in the term "doing business":
action or proceeding before Philippine courts as provided in a. The publication of a general advertisement through any
Section 133 of the Corporation Code. Cargill, Inc. v. Intra Strata print or broadcast media;
Assurance Corp., 615 SCRA 304 (2010). b. Maintaining a stock of goods in the Philippines solely for
The Foreign Investments Act of 1991, repealed Articles 44-56 of the purpose of having the same processed by another
Book II of the Omnibus Investments Code of 1987, enumerated entity in the Philippines;
in Section 3(d) not only the acts or activities which constitute c. Consignment by a foreign entity of equipment with a
doing business but also those activities which are not deemed local company to be used in the processing of products
doing business. Cargill, Inc. v. Intra Strata Assurance Corp., for export;
615 SCRA 304 (2010). d. Collecting information in the Philippines; and
o Under Section 3(d) of the Foreign Investments Act of e. Performing services auxiliary to an existing isolated
1991, as supplemented by Rule I, Section 1(f) of its contract of sale which are not on a continuing basis,
Implementing Rules and Regulations, the appointment such as installing in the Philippines machinery it has
of a distributor in the Philippines is not sufficient to manufactured or exported to the Philippines, servicing
constitute doing business unless it is under the full the same, training domestic workers to operate it, and
control of the foreign corporation. In the same manner, similar incidental services.
if the distributor is an independent entity which buys
and distributes products, other than those of the


B. Jurisprudential Concepts of Doing Business: It implies a continuity commercial dealings and arrangement in the Philippines
of commercial dealings and arrangements and the performance of acts as to distinguish it from an isolated transaction.
or works or the exercise of some of the functions normally incident to
the purpose or object of a foreign corporations organization. Mentholatum v. Mangaliman
Mentholatum v. Mangaliman, 72 Phil. 525 (1941).
The characterization by Mentholatum of "doing business" in the Facts: The Mentholatum Co., Inc., is a Kansas corporation which
Philippines covers transactions or series of transactions in manufactures "Mentholatum," a medicament and salve for the
pursuit of the main business goals of the corporation, and done treatment of irritation and other external ailments of the body. The
with intent to continue the same in the Philippines. 1 Philippine-American Drug Co., Inc. is its exclusive distributing agent in
the Philippines authorized by it to look after and protect its interests. On
1. Twin Characterization Test.2 26 June 1919 and on 21 January 1921, the Mentholatum Co., Inc.,
a. Nature of the act or transaction: the performance of registered with the Bureau of Commerce and Industry the word,
acts or works or the exercise of some of the functions "Mentholatum", as trademark for its products.
normally incident to, and in progressive prosecution of
the purpose and object of its organization and The Mangaliman brothers prepared a medicament and salve named
considered as the true test of doing business in the "Mentholiman" which they sold to the public packed in a container of
Philippines is whether a foreign corporation is the same size, color and shape as "Mentholatum." As a consequence,
maintaining or continuing in the Philippines "the body Mentholatum, etc. suffered damages from the diminution of their sales
or substance of the business or enterprise for which it and the loss of goodwill and reputation of their product in the market.
was organized or whether is has substantially retired On 1 October 1935, the Mentholatum Co., Inc., and the Philippine-
from it and turned it over to another. American Drug, Co., Inc. instituted an action in the Court of First
b. Existence of Continuing Intent: In doing the act or Instance (CFI) of Manila against Anacleto Mangaliman, Florencio
transaction there was an intent on the part of the Mangaliman and the Director of the Bureau of Commerce for
foreign corporation to undertake a continuity of infringement of trademark and unfair competition.

Issue: Whether or not Mentholatum, etc. could prosecute the instant

1
action without having secured the license required in Section 69 of the
(2013 ed.). Manila, Philippines: Rex Book Store. Corporation Law.
2


Held: NO. Mentholatum Co., Inc., being a foreign corporation doing activity undertaken in the Philippines amounts to doing business
business in the Philippines without the license required by section 68 of as to require the foreign corporation to obtain such license.1
the Corporation Law, it may not prosecute this action for violation of o Isolated transactions, even when perfected and/or
trade mark and unfair competition. Neither may the Philippine- consummated within Philippine territory, do not
American Drug Co., Inc., maintain the action here for the reason that constitute doing business in the Philippines, and do
the distinguishing features of the agent being his representative not constitute the essential element of presence
character and derivative authority, it cannot now, to the advantage of required under due process considerations. The legal
its principal, claim an independent standing in court. basis by which local courts can legally obtain jurisdiction
over the person of a foreign corporation on an isolated
Doctrine: No general rule or governing principle can be laid down as to transaction would be consent or the voluntary
what constitutes "doing" or "engaging in" or "transacting" business. surrender of tis person to the jurisdiction of the courts.2
Indeed, each case must be judged in the light of its peculiar Where a single act or transaction, however, is not merely
environmental circumstances. The true test, however, seems to be incidental or casual but indicates the foreign corporation's
whether the foreign corporation is continuing the body or substance of intention to do other business in the Philippines, said single act
the business or enterprise for which it was organized or whether it has or transaction constitutes doing business. Far East Int'l. v.
substantially retired from it and turned it over to another. The term Nankai Kogyo, 6 SCRA 725 (1962).
implies a continuity of commercial dealings and arrangements, and o It is not really the fact that there is only a single act
contemplates, to that extent, the performance of acts or works or the done that is material for determining whether a
exercise of some of the functions normally incident to, and in corporation is engaged in business in the Philippines,
progressive prosecution of, the purpose and object of its organization. since other circumstances must be considered. Where a
single act or transaction of a foreign corporation is not
2. Single Transaction Whether a foreign corporation needs to merely incidental or casual but is of such character as
obtain a license, and fails to do so, whether it should be denied distinctly to indicate a purpose on the part of the
legal standing to obtain remedies from local courts and foreign corporation to do other business in the state,
administrative agencies, depends therefore on the issue such act will be considered as constituting business.
whether it will engage in business in the Philippines. Not every

1
2


Litton Mills, Inc. v. Court of Appeals, 256 SCRA 696 Facts: Pursuant to a contract, Angel Singzon promised to sell to Pacific
(1996). Vegetable Oil Corporation, a foreign corporation, copra. Singzon failed
Participating in a bidding process constitutes doing business to deliver, but promised to do so in the amicable settlement it executed
because it shows the foreign corporations intention to engage with Pacific. Failure would entitle Pacific to damages from Singzon.
in business in the Philippines. In this regard, it is the However, Singzon again failed to deliver and announced by telegram
performance by a foreign corporation of the acts for which it that he would not be able to ship said copra. As such, Pacific filed for
was created, regardless of volume of business, that determines damages but Singzon filed a motion to dismiss on the ground that
whether a foreign corporation needs a license or not. Pacific failed to obtain a license to transact business in the Philippines
European Resources and Technologies, Inc. v. Ingenieuburo and consequently, it had no personality to file the action. The trial court
Birkhanh + Nolte, 435 SCRA 246 (2004). held that Pacific had no personality to institute the present case even if
Atty. Hofilea At the moment, the Court has ruled
o it afterwards obtained a license to transact business upon the theory
that at the time one bids, you need to have a license that this belated act did not have the effect of curing the defect that
under the presumption that you bid because you want existed when the case was instituted.
to pursue your business here. Disagrees, because the
act of doing business begins when you actually win the Issue: Whether or not Pacific can maintain the present action
bidding.
3. Territoriality Rule (Contract Test1) Held: YES. The agreement between Singzon and Pacific was c.i.f. Pacific
To be doing business in the Philippines requires that the Coast. This means that the vendor was to pay not only the cost of the
contract must be perfected or consummated in Philippine soil. A goods, but also the freight and insurance expenses and, as it was
c.i.f. West Coast arrangement makes delivery outside of the judicially interpreted, this is to indicate that the delivery is to be made
Philippines. Pacific Vegetable Oil Corp. v. Singson, Advanced at the port of destination. It follows that the appellant corporation has
Decision Supreme Court, April 1955 Vol., p. 100-A; Aetna not transacted business in the Philippines in contemplation of Section
Casualty & Surety Co. v. Pacific Star Line, 80 SCRA 635 (1977).2 68 and 69 of the Corporation Law. It appearing that appellant
corporation has not transacted business in the Philippines and as such is
Pacific Vegetable Oil Corp. v. Singson not required to obtain a license before it could have personality to bring
a court action, it may be stated that said appellant, even if a foreign
corporation, can maintain the present action because as aptly said by
1
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law. this Court, it was never the purpose of the Legislature to exclude a
(2013 ed.). Manila, Philippines: Rex Book Store. foreign corporation which happens to obtain an isolated order for
2
Universal Shipping Lines, Inc. v. IAC, 188 SCRA 170 (1990).


business from the Philippines, from securing redress in the Philippine Defendants refused to pay for the damage, so the surety company paid.
courts, and this, in effect, to permit persons to avoid their contracts
made with such foreign corporation. Defendants Manila Port Service and Manila Railroad Company, Inc.
alleged that the plaintiff, Aetna casualty & Surety Company, is a foreign
Doctrine: CLV OPINION: The Pacific Vegetable Oil doctrine does consider corporation not duly licensed to do business in the Philippines and,
the twin characterization tests of Mentholatum of substance of the therefore without capacity to sue and be sued. This was supported by
transactions pertaining to the main business and the continuity or intent certifications from the Office of the Insurance Commission and the
to continue such activities. It would seem that even if the twin Securities and Exchange Commission showing that the Aetna Casualty
characterization tests of Mentholatum obtained in a case, under the and Surety Company has not been licensed nor incorporated to do
Pacific Vegetable doctrine, so long as the perfection and consummation business in the Philippines as foreign corporation. The trial court ruled
of a series of transactions are done outside the Philippine jurisdiction, against surety company on the ground that it has been doing business in
the same would not constitute doing business in the Philippines, even if numerous the Philippines contrary to Philippine laws.
the products themselves should be manufactured or processed in the
Philippines by locals. The implication of this doctrine is that if the salient Issue: Whether or not the appellant, Aetna Casualty & Surety Company,
points of a contract do not find themselves in the Philippines, Philippine has been doing business in the Philippines.
authorities have no business subjecting the parties to local registration
and licensing requirements. Held: NO. It is merely collecting a claim assigned to it by the consignee,
it is not barred from filing the instant case although it has not secured a
Aetna Casualty & Surety Co. v. Pacific Star Line license to transact insurance business in the Philippines. While plaintiff
is a foreign corporation without license to transact business in the
Facts: I. Shalom & Co. Inc. were supposed to receive a shipment of Philippines, it does not follow that it has no to bring the present action.
goods carried on board SS Ampal whose operator was Pacific Star Line. Such license is not necessary because it is not engaged in business in the
The Bradman Co. Inc., was the ship agent in the Philippines for the SS Philippines.
Ampal, while the Manila Railroad Co. Inc. and Manila Port Service were
the arrastre operators in the port of Manila and were authorized to Doctrine: Object of Sections 68 and 69 of the Corporation Law was not
delivery cargoes discharged into their custody. Aetna Surety Casualty & to prevent the foreign corporation from performing single acts, but to
Surety Co. Inc. insured the cargo in for I. Shalom. The SS Ampal arrived prevent it from acquiring a domicile for the purpose of business without
in Manila but due to the negligence of the defendants, the shipment taking the steps necessary to render it amenable to suit in the local
sustained damages representing pilferage and seawater damage. courts. It was never the purpose of the Legislature to exclude a foreign


corporation which happens to obtain an isolated order for business business. standard in the FIA requires physical
from the Philippines, from securing redress in the Philippine courts. presence
Issue: What about in the time of internet and
o To be transaction business in the Philippines for telephone solicitations where there is no
purposes of Section 133 of the Corporation Code, the physical presence in the state?
foreign corporation must actually transact business in 4. Transactions Seeking Profit Although each case must be
the Philippines, that is, perform specific business judged in light of its attendant circumstances, jurisprudence has
transactions within the Philippine territory on a evolved several guiding principles for the application of these
continuing basis in its own name and for its own tests. By and large, to constitute doing business, the activity
account. B. Van Zuiden Bros., Ltd v. GTVL to be undertaken in the Philippines is one that is for profit-
Manufacturing Industries, Inc., 523 SCRA 233 (2007), making. Agilent Technolgies Singapore (PTE) Ltd. v. Integrated
citing VILLANUEVA, PHILIPPINE CORPORATE LAW 813 Silicon Technology Phil. Corp., 427 SCRA 593 (2004), citing
(2001). VILLANUEVA, PHILIPPINE CORPORATE LAW 596 et seq. (1998
Exception: Acts of Solicitations Solicitation of business ed.); Cargill, Inc. v. Intra Strata Assurance Corp., 615 SCRA 304
contracts constitutes doing business in the Philippines. (2010), citing VILLANUEVA, PHILIPPINE CORPORATE LAW 801-
Marubeni Nederland B.V. v. Tensuan, 190 SCRA 105. 802 (2001).
Examples: (Atty. Hofilea)
o Where a domestic corporation initiated a supply Agilent Technolgies Singapore (PTE) Ltd. v. Integrated Silicon
agreement with a foreign corporation and all of it was Technology Phil. Corp
executed abroad, there is no doing business because
there no act of solicitation on the part of the foreign Facts: Integrated Silicon entered into a Value Added Assembly Services
company and in accordance with the territoriality rule, Agreement ("VAASA"), with HP-Singapore. Under the contract,
none of it happened here. Integrated Silicon was to locally manufacture and assemble fiber optics
o Where the negotiations happened here upon request of for export to HP-Singapore, who in turn would provide raw materials
the domestic corporation, that is still not doing and machinery and pay Integrated Silicon the purchase price of the
business within the contemplation of the law. finished products. The VAASA had a five-year term, with a provision for
o Where the foreign corporation sends a representative annual renewal by mutual written consent. In 1999, with the consent of
to approach a domestic corporation to offer a Integrated Silicon, HP-Singapore assigned all its rights and obligations in
transaction, such would be considered as doing the VAASA to Agilent. Agilent is not licensed to do business here.


transaction or on a cause of action entirely independent of any
In 2001, Integrated Silicon filed a complaint for "Specific Performance business transaction;
and Damages" against Agilent, alleging that Agilent breached the 3. If a foreign corporation does business in the Philippines without
parties oral agreement to extend the VAASA. Agilent filed a separate a license, a Philippine citizen or entity which has contracted
replevin case against Integrated Silicon, praying that the defendants be with said corporation may be estopped from challenging the
ordered to immediately return its equipment, machineries and the foreign corporations corporate personality in a suit brought
materials to be used for fiber-optic components which were left in the before Philippine courts; and
plant of Integrated Silicon. Integrated Silicon argues that since Agilent is 4. If a foreign corporation does business in the Philippines with the
an unlicensed foreign corporation doing business in the Philippines, it required license, it can sue before Philippine courts on any
lacks the legal capacity to file suit. The replevin case was dismissed. transaction.

Issue: Whether or not the Agilent has legal capacity to sue. Examples:
o Insurance Business A foreign corporation with a
Held: YES. By the clear terms of the VAASA, Agilents activities in the settling agent in the Philippines which issues twelve
Philippines were confined to (1) maintaining a stock of goods in the marine policies covering different shipments to the
Philippines solely for the purpose of having the same processed by Philippines is doing business in the Philippines. General
Integrated Silicon; and (2) consignment of equipment with Integrated Corp. of the Phil. v. Union Insurance Society of Canton,
Silicon to be used in the processing of products for export. As such, we Ltd., 87 Phil. 313 (1950).
hold that, based on the evidence presented thus far, Agilent cannot be o A foreign corporation which had been collecting
deemed to be "doing business" in the Philippines. As a foreign premiums on outstanding policies is doing business in
corporation not doing business in the Philippines, it needed no license the Philippines. Manufacturing Life Ins. v. Meer, 89
before it can sue before our courts. Phil. 351 (1951).
o Air Carriers Off-line air carriers having general sales
Doctrine: The principles regarding the right of a foreign corporation to agents in the Philippines are engaged in business in the
bring suit in Philippine courts may be condensed in four statements: Philippines and that their income from sales of passage
1. If a foreign corporation does business in the Philippines without here (i.e., uplifts of passengers and cargo occur to or
a license, it cannot sue before the Philippine courts; from the Philippines) is income from within the
2. If a foreign corporation is not doing business in the Philippines, Philippines. South African Airways v. Commissioner of
it needs no license to sue before Philippine courts on an isolated Internal Revenue, 612 SCRA 665 (2010).


Exception: Transactions with Agents and Brokers Granger Held: NO. We are convinced from an examination of the terms and
Associates v. Microwave Systems, Inc., 189 SCRA 631 (1990).1 conditions of the contracts and agreements entered into between
Granger and MSI indicate that they established within our country a
Granger Associates v. Microwave Systems, Inc. continuous business, and not merely one of a temporary character. Such
agreements did not constitute only one isolated transaction, as Granger
Facts: Granger Associates (foreign corporation) sued Microwave contends, but a succession of acts signifying the intent of Granger to
Systems, Inc. (domestic corporation) for recovery of a sum of money extend its operations in the Philippines.
arising from a series of agreements concluded between the two. In the
principal contract, Granger licensed MSI to manufacture and sell its Doctrine: The purpose of the rule requiring foreign corporations to
products in the Philippines and extended to the latter certain loans, secure a license to do business in the Philippines is to enable us to
equipment and parts, a contract for the sale of equipment. Payment of exercise jurisdiction over them for the regulation of their activities in
these contracts not having been made as agreed upon, Granger filed a this country, If a foreign corporation operates in the Philippines without
complaint against MSI and the other private respondents. In its answer, submitting to our laws, it is only just that it not be allowed to invoke
MSI alleged the affirmative defense that the plaintiff had no capacity to them in our courts when it should need them later for its own
sue in accordance with Section 133 of the Corporation Code. Granger protection. While foreign investors are always welcome in this land to
insists that it has dealt only with MSI and not the general public and collaborate with us for our mutual benefit, they must be prepared as an
contends that dealing with the public itself is an indispensable indispensable condition to respect and be bound by Philippine law in
ingredient of transacting business. It contends that its various proper cases, as in the one at bar.
transactions with MSI were mere facets of the basic agreement licensing
MSI to manufacture and sell Granger's products in the Philippines. All C. The Special Cases on Infringement of Business Names and
subsequent agreements were merely auxiliary to that first. Trademarks: Western Equipment & Supply Co. v. Reyes, 51 Phil. 115
(1927).
Issue: Whether Grangers agreements with MSI covered only one
isolated transaction for which it did not have to secure a license to be Western Equipment & Supply Co. v. Reyes
able to file its complaint.
Facts: Western Equipment and Western Electric are both foreign
corporation organized under the laws of the State of Nevada and New
1
La Chemise Lacoste, S.A. v. Fernandez, 129 SCRA 373 (1984); Schmid & Oberly York, respectively. Western Equipment is engaged in the selling and
v. RJL, 166 SCRA 493 (1988); Wang Laboratories, Inc. v. Mendoza, 156 SCRA 44 importing electrical and telephone apparatus and supplies
(1974).


manufactured by Western Electric. manufactured articles, and it is very apparent that the whole purpose
and intent of the defendants in seeking to incorporate another
Herman, OBrien, Diaz, Mapoy and Zamora (defendants) were residents corporation under the identical name of Western Electric Company,
of the Philippines. They filed articles of incorporation of a domestic Inc., and for the same identical purpose as that of Western Electric, is
corporation to be known as Western Electric Company, Inc. for the to trespass upon and profit by its good name and business reputation.
purpose of principally of manufacturing, buying, selling and generally The very fact that the defendants have sought the use of that particular
dealing in electrical and telephone apparatus and supplies. Smith, who name for that identical purpose is conclusive evidence of the fraudulent
was authorized by the Board of Directors of Western Electric to process intent with which it is done.
all legal proceedings for the corporation, lodged a complaint with the
Bureau his protest against the attempted incorporation. It was alleged Doctrine: It is well accepted that the right to the use of corporate name
that the corporate name by which said defendants desire to be known, and trade name is a property right a right in rem, which may assert and
being identical with that of the plaintiff Western Equipment, will protect against all the world, in any of the courts of the world even in
deceive and mislead the public purchasing electrical and telephone jurisdictions where it does not transact business.
apparatus and supplies.
Infringement of trade name. General Garments Corp. v.
Issue: Whether or not Western Equipment has a right to maintain an Director of Patens, 41 SCRA 50 (1971); Universal Rubber
action to restrain residents of the Philippines from organizing a Products, Inc. v. Court of Appeals, 130 SCRA 104 (1988).
corporation bearing the same name as such foreign corporation 1. Under the Trademark Law
The matter as to trademarks and tradenames had become moot
Held: YES. It is true that Western Electric had never done business in the with the adoption of Section 21-A 1 of then Republic Act 166
Philippines and had not obtained license to do business in the (The Trademark Law), which expressly provided that a foreign
Philippines. However, it is not here seeking to enforce any legal or
1
contract rights arising from, or growing out of, any business which it has Section 21-A states: "Any foreign corporation or juristic person to which a
mark or tradename has been registered or assigned under this Act may bring an
transacted in the Philippines. The sole purpose of the action is to action hereunder for infringement, for unfair competition, or false designation
protect its reputation, its corporate name and goodwill. of origin and false description, whether or not it has been licensed to do
business in the Philippines under Act numbered Fourteen Hundred and Fifty-
Nine, as amended, otherwise known as the Corporation Law, at the time it
Western Electric has been in existence as a corporation for over fifty brings the complaint; Provided, That the country of which the said foreign
years, during which time it has established a reputation all over the corporation or juristic person is a citizen, or in which it is domiciled, by treaty,
world including the Philippine Islands, for the kind and quality of its convention or law, grants a similar privilege to corporate or juristic persons of
the Philippines."


corporation, whether licensed to do business or not in the Trademark Law, and the new qualification that such
Philippines, with a mark or tradename registered in the foreign corporation must not be engaged in business in
Philippines, may bring an action before Philippine courts for the Philippines contradicts the provision that dispenses
infringement, unfair competition, false designation of origin and with the need to obtain a license to do business in the
false description, if the country of which the foreign corporation Philippines to qualify a foreign corporation to seek
is a citizen, or in which it is domiciled, by treaty, convention, or remedy under the Code. It can therefore be reasonably
law, grants a similar privilege to corporations or juristic persons anticipated that the courts will eventually interpret
of the Philippines.1 Section 160 of the Code to have the same meaning and
2. Under the Intellectual Property Code application as Section 21-A of The Trademark Law,
In 1997, the Intellectual Property Code was promulgated to which would qualify any foreign corporation, even when
consolidate all laws relating to intellectual properties. Section doing business in the Philippines without appropriate
160 of the Code, which effectively replaced Section 21-A of The license, to be able to obtain remedies and reliefs under
Trademark Law, provides that Any foreign national or judicial the Code.
person who meets the requirements of Section 32 of this Act
and does not engage in business in the Philippines may bring a D. Doctrine on Unrelated or Isolated Transactions:
civil or administrative action hereunder for opposition, In one case, the Court held that the phrase "isolated
cancellation, infringement, unfair competition, or false transaction" has a definite and fixed meaning, i.e., "a
designation of origin and false description, whether or not it is transaction or series of transactions set apart from the common
licensed to do business in the Philippine under existing laws. business of a foreign enterprise in the sense that there is no
o CLV Comment: The wordings of Section 160 do not intention to engage in a progressive pursuit of the purpose and
seem to comprehend the thrust of Section 21-A of The object of the business organization."3
Antam Consolidated v. Court of Appeals, 143 SCRA 288 (1986).4
1
2
Section 3 provides: . . .Any person who is a national or who is domiciled or Antam Consolidated v. Court of Appeals
has a real and effective industrial establishment in a country which is a party to
any convention, treaty or agreement relating to intellectual property rights or Facts: Stokely Van Camp and Capital City Product Company are foreign
the repression of unfair competition, to which the Philippines is also a party, or
extends reciprocal rights to nationals of the Philippines by law, shall be entitled
to benefits to the extent necessary to give effect to any provision of such
3
convention, treaty or reciprocal law, in addition to the rights to which any Ericks Pte. Ltd. v. Court of Appeals, 267 SCRA 567, 76 SCAD 70 (1997).
4
owner of an intellectual property right is otherwise entitled by this Act. Eastboard Navigation, Ltd. v. Juan Ysmael and Co., Inc., 102 Phil. 1 (1957).


corporations not engaged in business in the Philippines and not petitioners to deliver the crude coconut oil under the first transaction
licensed. Capital City entered into a contract with Coconut Oil and in order to give the latter a chance to make good on their
Manufacturing (Comphil) wherein Comphil undertook to sell and deliver obligation.1
and Capital City agreed to buy 500 long tons of crude coconut oil to be
delivered at c.i.f. price. but Comphil failed to deliver the coconut oil so Doctrine: The doctrine of lack of capacity to sue based on failure to first
that Capital City sustained a loss. As a result, herein respondents acquire a local license is based on consideration of sound public policy.
entered into two more contracts in an attempt to recover the loss they It was never intended to favor domestic corporations who enter into
sustained from the first one. Stokely prayed that a writ of attachment solitary transactions with unwary foreign firms and then repudiate their
be issued against any and all the properties of the petitioners in an obligations simply because the latter are not licensed to do business in
amount sufficient to satisfy any lien of judgment that the respondent this country.2
may obtain in its action. Herein petitioners alleged that the respondent
has no personality to sue. Petitioners argue that to maintain the suit A foreign corporation needs no license to sue before Philippine
filed with the trial court, the respondent should have secured the courts on an isolated transaction. Lorenzo Shipping v. Chubb
requisite license to do business in the Philippines because, in fact, it is and Sons, Inc., 431 SCRA 266 (2004).
doing business. Single or isolated acts, contracts, or transactions of foreign
corporations are not regarded as a carrying on of business.
Issue: Whether or not the respondent should have secured the requisite Typical examples of these are the making of a single contract,
license because it was doing business in the Philippines. sale with the taking of a note and mortgage in the state to
secure payment thereof, purchase, or note, or the mere
Held: NO. The Supreme Court sustained the lower court in not commission of a tort. In these instances, there is no purpose to
dismissing a complaint filed by a foreign corporation on the basis of do any other business within the country. MR. Holdings, Ltd. V.
three contracts of purchase and sale of coconut oil from local Bajar, 380 SCRA 617 (2002).
companies. The Court found that from the facts alone it could be o Even a series of transactions which are occasional,
deduced that there was only one agreement between the petitioners incidental and casualnot of a character to indicate a
and the respondent and that was the delivery by the former of 500 long purpose to engage in businessdo not constitute the
tons of crude coconut oil to the latter, who in turn, must pay the

corresponding price for the same. The only reason why the respondent 1
entered into the second and third transactions with the petitioners was (2013 ed.). Manila, Philippines: Rex Book Store.
2
because it wanted to recover the loss it sustained from the failure of the Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.


doing or engaging in business as contemplated by law. sue in our courts: "Otherwise we will be hampering the
Lorenzo Shipping v. Chubb and Sons, Inc., 431 SCRA 266 growth and development of business relations between
(2004). Filipino citizens and foreign nationals. Worse, we will be
Case-Law Examples of Isolated Transactions: allowing the law to serve as a protective shield for
o Recovery on the collision of two vessels at the Manila unscrupulous Filipino citizens who have business
Harbor. Dampfschieffs Rhederei Union v. La Campaia relationships abroad."1
Transatlantica, 8 Phil. 766 (1907).
o Loss of goods bound for Hongkong but erroneously DOING BUSINESS SYNTHESIS: (Atty. Hofilea)
discharged in Manila. The Swedish East Asia Co., Ltd. v. If you pursue your business in a continuous basis showing an
Manila Port Service, 25 SCRA 633 (1968). intent to pursue your line of business in the Philippines
o Recovery of damages sustained by cargo shipped to the Even if you intend to derive profit, there must be some
Philippines. Bulakhidas v. Navarro, 142 SCRA 1 (1986). connection with your business. Just because youre being paid
o Sale of construction equipment to the Government with for an activity does not mean you are doing business in the
no intent of continuity of transaction. Gonzales v. Philippines.
Raquiza, 180 SCRA 254 (1989). o Doing business is generating income from the
o Recovery on a Hong Kong judgment against a Manila Philippines (Agilent v. Integrated Silicon)
resident. Hang Lung Bak v. Saulog, 201 SCRA 137 o If its a cost on the part of the foreign company, such
(1991). transaction is not considered as doing business
o Appointment of local lawyer by foreign movie If you dont want to be accused of doing business, bring out as
companies who have registered intellectual property much of the business abroad as much as possible.
rights over their movies in the Philippines, to protect Isolated Transaction v. Continuity of Actions
such rights for piracy: We fail to see how exercising o There are cases where the Court forgave the
one's legal and property rights and taking steps for the corporations who did business at least once.
vigilant protection of said rights, particularly the o However, there are cases that due to the volume or
appointment of an attorney-in-fact, can be deemed by magnitude of the matter involved, that the Court has
and of themselves to be doing business here. Columbia ruled as constituting doing business
Pictures Inc. v. Court of Appeals, 261 SCRA 144 (1996). Where a corporation wants to do business in the Philippines, it
o Rationale: rationale for the allowing foreign
corporations not doing business in the Philippines to
1
Hang Lung Bank, Ltd. v. Saulog, 201 SCRA 137 (1991).


should get a license. corporation has property here, you can attach the
o Where a party contracts with a foreign corporation property and thereby bind the FC.
which is without a license, and such party has derived What if hes gone completely or he has no
benefits, such party will be estopped from posing such property at all in the Philippines you wont
lack of license as a defense from a suit initiated by the be able to acquire jurisdiction over him. BUT
corporation. you can go to the FCs home country and file an
If a foreign corporation is not considered doing business in the action there subject to the rules of their
Philippines, can the foreign corporation sue in Philippine jurisdiction.
Courts? o Jurisdiction may also be acquired if the FC voluntarily
o YES. If youre not deemed to be doing business in the submits to the jurisdiction of our Courts such as by
Philippines, but you have certain transactions in the appearance through counsel.
country, such foreign corporation may still sue in Remember that not all appearances are
Philippine Courts. In this case, the corporations only submissions to the jurisdiction, such as when
connection with the Philippines may be that it you appear precisely to question the jurisdiction
contracted with a Philippine citizen. of the court.
Can suits against foreign corporations be filed and prosper in
Philippine Courts? IV. Suits Brought by Foreign Corporations
o YES. Foreign Corporations doing a business without a
can be sued regardless of whether they have a license A. Need to Allege Capacity to Sue: The fact that a foreign corporation is
or not. not doing business in the Philippines must be alleged if a foreign
Service of Summons in order to acquire jursdiction corporation desires to sue in Philippines courts under the isolated
o FC doing business in the Philippines with a license transactions rule. In this case, although the Supreme Court sustained
summons shall be served either on the resident agent the principle upon which the plaintiffs appealed the dismissal, it
or in the absence thereof, to the SEC. nevertheless upheld the dismissal since the complaint filed with the
o FC doing business in the Philippines with a license lower court only alleged that the plaintiffs are foreign corporation,
summons shall be served either through an agent, without further indicating that they are exempt from the requisite of a
publication, or courts in the corporations home country
with the assistance of the DFA.
o FC not doing business in the Philippines if the


license because they are not engaged in business in the Philippines. appellants alone, and it would be unfair to impose upon appellee the
Atlantic Mutual Inc. Co. v. Cebu Stevedoring Co., 17 SCRA 1037 (1966).1 burden of asserting and proving the contrary. It is enough that foreign
corporations are allowed by law to seek redress in our courts under
Atlantic Mutual Inc. Co. v. Cebu Stevedoring Co certain conditions: the interpretation of the law should not go so far as
to include, in effect, an inference that those conditions have been met
Facts: Atlantic Mutual Insurance Company and Continental Insurance from the mere fact that the party suing is a foreign corporation.
Company (Atlantic), both foreign corporations sued Cebu Stevedoring
Co., Inc. (Cebu), a domestic corporation, for recovery of a sum of money Doctrine:
alleging that Cebu undertook to carry a shipment of copra and that
upon discharge, a portion of the copra was found damaged; that since o In any event, Rule 8, Section 4, of the 1997 Rules of Civil
the copra had been insured with Atlantic they paid the shipper and/or Procedure now require that in case of foreign corporations,
consignee; and that as subrogee to the shipper's and/or consignee's "facts showing the capacity of a party to sue or be sued . . . must
rights, Atlantic demanded, but Cebu did not pay. Cebu moved to dismiss be averred." 2
based on: (a) that Atlantic had "no legal personality and with no
capacity to sue;" and (b) that the complaint did not state a cause of B. Estoppel Doctrine: Under the principle of estoppel, a foreign
action. corporation doing business in the Philippines may sue in Philippine
courts even without license to do business against a Philippine citizen
Issue: Whether or not Atlantic has the capacity to sue who had contracted with and been benefited by said corporation and
knew it to be without the necessary license to do business. Merrill
Held: NO. But where as in the present case, the law denies to a foreign Lynch Futures, Inc. v. Court of Appeals, 211 SCRA 824 (1992).3
corporation the right to maintain suit unless it has previously complied
with a certain requirement, then such compliance, or the fact that the Merrill Lynch Futures, Inc. v. Court of Appeals
suing corporation is exempt therefrom, becomes a necessary averment

in the complaint. These are matters peculiarly within the knowledge of 2
3
Georg Grotjahn GMBH & C. v. Isnani, 235 SCRA 216 (1994); Communications
1
This overturned the previous doctrine in Marshall-Wells (as well as in In re Material and Design, Inc. v. Court of Appeals, 260 SCRA 673 (1996); Agilent
Liquidation of the Mercantile Bank of China, etc., 65 Phil. 385 (1938), that the Technologies Singapore (PTE) Ltd. v. Integrated Silicon Technology Phil. Corp.,
lack of authority of foreign corporation to sue in Philippine courts for failure to 427 SCRA 593 (2004); Global Business Holdings, Inc. v. Surecomp Software,
obtain the license is a matter of affirmative defense. Also Commissioner of B.V., 633 SCRA 470 (2010); Steelcase, Inc. v. Design International Selections,
Customs v. K.M.K. Gani, 182 SCRA 591 (1990). Inc., 670 SCRA 64 (2012).


Proper Doctrine: Eriks Ltd. v. Court of Appeals, 267 SCRA 567
Facts: Merrill Lynch Futures, Inc., through a domestic corporation, was (1997).
found to be engaging in business (commodity futures) in the Philippines
without obtaining the proper license. It brought a suit in Philippine Eriks Ltd. v. Court of Appeals
courts to enforce a claim against local investors.
Facts: Eriks Pte., Ltd. is a non resident foreign corporation engaged in
Issue: Whether or not Merril Lynch engaged in business in the the manufacture and sale of elements used in sealing pumps. Delfin
Philippines without the requisite license. Enriquez, Jr., doing business under the name and style of Delrene EB
Controls Center and/or EB Karmine Commercial, ordered and received
Held: YES. Although the Court found the foreign corporation to have from petitioner various elements used in sealing pumps, valves, pipes
engaged in business in the Philippines without the requisite license, it and control equipment, PVC pipes and fittings within a period of 4
overturned the dismissal of the suit, on the ground that if the local months. The transfer of goods were perfected in Singapore for private
investors knew that the foreign corporation had no license to do respondents account with a 90-day credit term. Subsequently,
business in the Philippines, then they are estopped from using the lack demands were made by petitioner upon private respondent to settle his
of license to avoid their obligations. account, but the latter failed/refused to do so. Eriks Pte., Ltd. filed with
the RTC a complaint for the recovery of US$41,939.63. Private
Doctrine: The rule is that a party is estopped to challenge the respondent responded with a Motion to Dismiss, contending that
personality of a corporation after having acknowledged the same by petitioner corporation had no legal capacity to sue. The trial court
entering into a contract with it. And the "doctrine of estoppel to deny dismissed the action on the ground that Eriks Pte., Ltd. is a foreign
corporate existence applies to foreign as well as to domestic corporation doing business in the Philippines without a license.
corporations;" one who has dealt with a corporation of foreign origin
as corporate entity is estopped to deny its corporate existence and Issue: Whether or not Eriks Pte., Ltd is deemed to be a foreign
capacity." The principle "will be applied to prevent a person contracting corporation doing business in the Philippines without a license
with a foreign corporation from later taking advantage of its
noncompliance with the statutes, chiefly in cases where such person has Held: YES. The series of transactions in question could not have been
received the benefits of the contract.1 isolated or casual transactions. What is determinative of doing
business is not really the number or the quantity of the transactions,
but more importantly, the intention of an entity to continue the body of
1
The "estoppel" doctrine was also reiterated in Georg Grotjahn GMBH & Co. v. its business in the country. Accordingly, petitioner must be held to be
Isnani, 235 SCRA 216, 54 SCAD 289 (1994).


incapacitated to maintain the action a quo against private respondent. to first go to the process of obtaining a license to do business
By this judgment, we are not foreclosing petitioners right to collect from the SEC, and then file the proper suits before the local
payment. Res judicata does not set in a case dismissed for lack of courts; otherwise, they run the risk, as it should be, that the suit
capacity to sue, because there has been no determination on the would be dismissed, but not on the merits, but as a
merits. Moreover, this Court has ruled that subsequent acquisition of consequence of its failure to obtain a license, without prejudice
the license will cure the lack of capacity at the time of the execution of to obtaining such license and re-filing the suit.1
the contract. By securing a license, a foreign entity would be giving
assurance that it will abide by the decisions of our courts, even if C. On Isolated Transactions: A foreign corporation not licensed to do
adverse to it. business in the Philippines is not absolutely incapacitated from filing a
suit in local court. Aboitiz Shipping Corp. v. Insurance Company of
Doctrine: The test to determine whether a foreign company is doing North America, 561 SCRA 262 (2008).
business in the Philippines, thus: x x x The true test, however, seems
to be whether the foreign corporation is continuing the body or V. Suits Against Foreign Corporations:
substance of the business or enterprise for which it was organized or A fundamental rule of international law on state jurisdiction is
whether it has substantially retired from it and turned it over to that no state can by its laws, and no court which is only a
another. The term implies a continuity of commercial dealings and creature of the state, can by its judgments and decrees, directly
arrangements, and contemplates, to that extent, the performance of bind or affect property or persons beyond the limits of that
acts or works or the exercise of some of the functions normally incident state. Times, Inc. v. Reyes, 39 SCRA 303 (1971).
to, and in progressive prosecution of, the purpose and object of its
organization (Mentholaturn Co., Inc. v. Mangaliman). The purpose of A. Jurisdiction Over Foreign Corporations (Section 14, Rule 14, Rules of
the law is to subject the foreign corporation doing business in the Court; General Corp. of the Phil. v. Union Insurance Society of Canton,
Philippines to the jurisdiction of our courts. It is not to prevent the Ltd., 87 Phil. 313 (1950).2
foreign corporation from performing single or isolated acts, but to bar it
from acquiring a domicile for the purpose of business without first
taking the steps necessary to render it amenable to suits in the local
1
courts. Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.
2
Johnlo Trading Co., v Flores, 88 Phil. 741 (1951); Johnlo Trading Co. v. Zulueta,
Under the Eriks doctrine, it would compel every foreign 88 Phil. 750 (1951); Pacific Micronisian Line, Inc. v. Del rosario, 96 Phil. 23
corporation doing business in the Philippines without a license (1954); Far East Intl Import and Export Corp. v. Nankai Kogyo Co., Ltd., 6 SCRA
725 (1962).


RULES OF COURT RULE 14 shipment of merchandise from the United States to the Philippines. All
Section 14. Service upon defendant whose identity or whereabouts claims were forwarded to the courts in Seattle except for one, wherein
are unknown. on appeal Fireman claims that the trial court did not acquire jurisdiction
In any action where the defendant is designated as an unknown over it. The summons to Fireman was served on Union which was then
owner, or the like, or whenever his whereabouts are unknown and the formers settling agent in PH because Fireman had not yet been
cannot be ascertained by diligent inquiry, service may, by leave of registered in the PH. Said registration came two months later. Union
court, be effected upon him by publication in a newspaper of general claimed that Fireman was not doing business in the Philippines, and that
circulation and in such places and for such time as the court may it had no authority from its co-defendant to receive summons on its
order. behalf.

Atty. Hofilea The Rules of Court dont make a distinction Issue: Whether or not summons was validly served upon Fireman as
about the service of summons. As long as the foreign would confer jurisdiction over said corporation.
corporation is doing business in the Philippines, whether it is
licensed or not, service of summons is sufficient to acquire Held: YES. Service of summons for appellant Fireman on its settling
jurisdiction over the corporate entity. agent Union was legal and gave the court jurisdiction over Fireman.
"Doing business in the Philippines" makes no distinction as to whether
General Corp. of the Phil. v. Union Insurance Society of Canton, Ltd. said business was being done legally or without authority from the
Government. As long as a foreign private corporation does or engages in
Facts: General Corporation and Mayon Investment are domestic business in this jurisdiction, it should and will be amenable to process
corporations. Union Insurance is a foreign insurance corporation, duly and the jurisdiction of the local courts. Hence service upon any agent of
authorized to do business in the PH, with head office in Hong Kong, and said foreign corporation constitutes personal service upon the
a branch office in Manila. Fireman's Fund Insurance is a foreign corporation and accordingly judgment may be rendered against said.
insurance corporation organized under the laws of California, and duly
registered with the Insurance Commissioner of the Bureau of Even then, Fireman was adjudged of doing business in the Philippines.
Commerce. Union has been acting as a settling agent for claims against The subject transactions were not casual or isolated business
Fireman's Fund Insurance. transactions. According to the evidence, since before the war, the
Fireman's Fund Insurance Co. would appear to have engaged in this kind
General Corp and Mayon Investment Co. sued Union (HK) and Fireman of business and had employed its co-defendant Union as its settling
(USA) for the payment of 12 marine insurance policies arising from a agent.


functions or the place where its business is done. State
Doctrine: That service of summons on a foreign corporation may be Investment House v. Citibank, 203 SCRA 9 (1991); Northwest
made only upon an agent of said corporation residing in the Philippines Orient Airlines v. Court of Apppeals, 241 SCRA 192 (1995).
refers to those doing business in the Philippines which has complied 2. Nexus of "Doing Business in the Philippines"
with the law and obtained the corresponding license and not to those In construing the proper service of summons for a foreign
actually doing business here but without the corresponding license or corporation under the old Section 14, Rule 14 of the Rules of
authority. Court, the Court held that "in order that services may be
effected in the manner above stated, said section also requires
1. Service of Summons under the Rules of Court Hinged Upon that the foreign corporation be one which is doing business in
Doing Business in the Philippines the Philippines. This is a sine qua non requirement. This fact
For purpose serving summons a foreign corporation in must first be established in order that summons can be made
accordance with Rule 14, Section 14, it is sufficient that it be and jurisdiction acquired. This is not only clear in the rule but is
alleged in the complaint that it is doing business in the reflected in a recent decision of this Court. We there said that
Philippines. Hahn v. Court of Appeals, 266 SCRA 537 (1997). `as long as a foreign private corporation does or engages in
When it is shown that a foreign corporation is doing business in business in this jurisdiction, it should and will be amenable to
the Philippines, summons may be served on (a) its resident process and the jurisdiction of local courts.'"1
agent designated in accordance with law; (b) if there is no
resident agent, the government official designated by law to B. Objection to Jurisdiction: Appearance of a foreign corporation to a
that effect; or (c) any of its officers or agent within the suit precisely to question the tribunals jurisdiction over its person is not
Philippines. The mere allegation in the complaint that a local equivalent to service of summons, nor does it constitute an
company is the agent of the foreign corporation is not sufficient acquiescence to the courts jurisdiction. Avon Insurance PLC v. Court of
to allow proper service to such alleged agent; it is necessary Appeals, 278 SCRA 312 (1997).
that there must be specific allegations that establishes the
connection between the principal foreign corporation and its C. Discredited Pari Delicto Doctrine: The local party to a contract with a
alleged agent with respect to the transaction in question. foreign corporation that does business in the Philippines without license
French Oil Mills Machinery Co.v. Court of Appeals, 295 SCRA cannot maintain suit against the foreign corporation just as the foreign
462 (1998).
1
For purposes of venue involving a foreign corporation, its Pacific Micronisian Line, Inc. v. Del Rosario, 96 Phil. 23 (1954). quoting also
General Corporation of the Philippines v. Union Insurance Society of Canton,
residence includes the country where it exercises corporate
Ltd.,49 Off. Gaz., 73, September 14, 1950.


corporation cannot maintain suit, under the principle of pari delicto.
Top-Weld Mfg. v. ECED, 119 SCRA 118 (1985). Held: YES. From the evidence, it is apparent that the 2 foreign
corporations are doing business in the Philippines. They were carrying
Top-Weld Mfg. v. ECED out here the purposes for their creation (manufacture and marketing of
welding products) and even negotiated with other groups for the
Facts: Top-weld entered into separate contracts with 2 different foreign transfer of franchising rights. HOWEVER, Top-Weld is not entitled to
entities: (1) A license and technical assistance agreement with IRTI and relief. It does not come to court with clean hands. It is chargeable with
(2) distributor agreement with ECED. Upon learning that the 2 foreign knowledge of the law, which by the way it in fact invokes before the
entities were negotiating with another group to replace the Top-weld as court. It was incumbent upon Top-Weld to know whether IRTI or ECED
their licensee and distributor, Top-weld instituted a civil case against are authorized to transact business. Since all are parties to an illegal
IRTI, ECED, EUTECTIC, and Gaerlan, a Filipino citizen alleged to be the agreement, the court will leave them where it finds them.
representative and employee of these 3 corporations. IRTI and ECED
later on terminated the agreement for breaches committed by Top- Doctrine: No remedy could be afforded to the parties because of their
Weld like failure to pay interest, use of substandard or wrong materials, presumptive knowledge that the transaction was tainted with illegality.
and re-labelling. Subsequently, Top-Weld asked for a preliminary Equity cannot lend its aid to the enforcement of an alleged right claimed
mandatory injunction to compel ECED to ship and deliver various items by virtue of an agreement entered into in contravention of law.
covered by the distributorship contract, and to prohibit the corporations
from importing into the Philippines directly or indirectly any EUTECTIC Atty. Hofilea the party in Top-Weld Mfg. v. ECED cannot
materials, supplies or equipment except to and through Top-Weld. complain on the ground of pari delicto. Also, such contract was
void for being against public policy.
Top-Weld now invokes R.A. No. 5455 (Aliens doing business in the o It seems a little strange for the Court to go that length.
Philippines) prohibiting foreign corporations from transacting business Despite the situation, the contracts were still valid. The
and engaging in economic activity in the Philippines without permit and only limitation is that they cannot avail of remedies
from terminating any franchise or agreement with a resident unless for through Philippine Courts.
just cause and upon compensation. BUT SEE: Communication Materials v. Court of Appeals, 260
SCRA 673 (1996).
Issue: Whether or not respondent corporations can be considered as
"doing business" in the Philippines and, therefore, subject to the Communication Materials v. Court of Appeals
provisions of R.A. No. 5455.


Facts: CMDI and ASPAC are domestic corporations, while Francisco S. raising this fact to bar ITEC from instituting this injunction case against
Aguirre is their President and majority stockholder. Respondent ITEC it.
International is a foreign corporations from Alabama. There is no
dispute that ITEC is a foreign corporation not licensed to do business in Doctrine: A party is estopped to challenge the personality of a
the Philippines. corporation after having acknowledged the same by entering into a
contract with it.
ITEC entered into a Representative Agreement with ASPAC whereby it
would be the exclusive representative in the Philippines for the sale of Atty. Hofilea the foreign company was found doing business
ITECs products. Through a License Agreement entered into by the without a license with a Philippine party who was aware of
same parties, ASPAC became legally and publicly known as ASPAC-ITEC such. But the Court did not declare the contract void and pari
(Philippines). By virtue of said contracts, ASPAC sold electronic products, delicto. The suit was allowed.
exported by ITEC, to their sole customer, PLDT. ITEC decided to
terminate the same, because petitioner ASPAC allegedly violated its D. Odd But Prevailing Doctrine:
contractual commitment as stipulated in their agreements. ITEC charges Indeed, if a foreign corporation, not engaged in business in the
the ASPAC and another Philippine Corporation, DIGITAL, the President Philippines, is not barred from seeking redress from the courts
of which is also Aguirre, of using knowledge and information of ITECs in the Philippines, a fortiori, that same corporation cannot claim
products specifications to develop their own line of equipment and exemption from being sued in Philippine courts for acts done
product support, which are similar, if not identical to ITECs. against a person or persons in the Philippines. Facilities
Management Corp. v. De la Osa, 89 SCRA 131 (1979).1
Issue: Whether or not ITEC is doing business in the Philippines
Facilities Management Corp. v. De la Osa
Held: YES. The Court held that private respondent had been engaged
in or doing business in the Philippines for some time now. A perusal Facts: Facilities Management Corporation and J. S. Dreyer are domiciled
of the agreements between petitioner ASPAC and the respondents in Wake Island while J. V. Catuira is an employee of FMC stationed in
shows that there are provisions which are highly restrictive in nature, Manila. Leonardo dela Osa was employed by FMC in Manila, but
such as to reduce petitioner ASPAC to a mere extension or instrument rendered work in Wake Island, with the approval of the Department of
of the private respondent. The No Competing Product provision of the
Representative Agreement. Notwithstanding such finding that ITEC is
1
doing business in the country, ASPAC is nonetheless estopped from FBA Aircraft v. Zosa, 110 SCRA 1 (1981); Royal Crown Intl v. NLRC, 178 SCRA
569 (1989); Wang Laboratories, Inc. v. Mendoza, 156 SCRA 44 (1987).


Labor of the Philippines. Dela Osa later filed for reinstatement with back contracts are actually reduced to writing, shall constitute doing business
wages and recovery of his overtime compensation, swing shift and even if the enterprise has no office or fixed place of business in the
graveyard shift differentials. FMC, et al. filed a motion to dismiss the Philippines; (2) appointing a representative or distributor who is
subject petition on the ground that the Court has no jurisdiction. domiciled in the Philippines, unless said representative or distributor
has an independent status, i.e., it transacts business in its name and for
Issue: Whether the mere act by a non-resident foreign corporation of its own account, and not in the name or for the account of the principal;
recruiting Filipino workers for its own use abroad, in law doing business xxx (4) Opening offices, whether called 'liaison' offices, agencies or
in the Philippines. branches, unless proved otherwise. xxx (10) Any other act or acts that
imply a continuity of commercial dealings or arrangements, and
Held: YES. FMC may be considered as "doing business in the Philippines" contemplate to that extent the performance of acts or works, or the
within the scope of Section 14 (Service upon private foreign exercise of some of the functions normally incident to, or in the
corporations), Rule 14 of the Rules of Court. Indeed, FMC, in compliance progressive prosecution of, commercial gain or of the purpose and
with Act 2486 as implemented by Department of Labor Order IV dated objective of the business organization."
20 May 1968 had to appoint Jaime V. Catuira, 1322 A. Mabini, Ermita,
Manila "as agent for FMC with authority to execute Employment CONTRA: The sine qua non requirement for service of summons
Contracts and receive, in behalf of that corporation, legal services from and other legal processes or any such agent or representative is
and be bound by processes of the Philippine Courts of Justice, for as that the foreign corporation is doing business in the Philippines.
long as he remains an employee of FMC." It is a fact that when the Hyopsung Maritime Co., Ltd. v. Court of Appeals, 165 SCRA 258
summons for FMC was served on Catuira he was still in the employ of 1988); Signetics Corp. v. Court of Appeals, 225 SCRA 737
the FMC. (1993).

Doctrine: Under the rules and regulations promulgated by the Board of Signetics Corp. v. Court of Appeals
Investments which took effect 3 February 1969, implementing RA 5455,
which took effect 30 September 1968, the phrase "doing business" has Facts: Signetics was organized under the laws of the United States of
been exemplified with illustrations, among them being as follows: ""(1) America. Through Signetics Filipinas Corporation (SigFil), a wholly-
Soliciting orders, purchases (sales) or service contracts. Concrete and owned subsidiary, Signetics entered into lease contract over a piece of
specific solicitations by a foreign firm, not acting independently of the land with Fruehauf Electronics Phils., Inc. (Freuhauf). Freuhauf sued
foreign firm, amounting to negotiation or fixing of the terms and Signetics for damages, accounting or return of certain machinery,
conditions of sales or service contracts, regardless of whether the equipment and accessories, as well as the transfer of title and surrender


of possession of the buildings, installations and improvements on the Facts: Yupangco Cotton Mills engaged to secure with Worldwide
leased land. Service of summons was made on Signetics through Security and Insurance Co. Inc., several of its properties totaling P200
Technology Electronics Assembly & Management Pacific Corp. on the Million. These contracts were covered by reinsurance treaties between
basis of the allegation that Signetics is a subsidiary of US Philips Corp., Worldwide Surety and Insurance, and several foreign reinsurance
and may be served summons at Philips Electrical Lamps, Inc. companies including the petitioners through CJ Boatrwright acting as
agent of Worldwide Surety and Insurance. A Fire then razed the
Issue: Whether or not the lower court, had correctly assumed properties insured. A Deed of Assignment made by Worldwide Surety
jurisdiction over the petitioner, a foreign corporation, on its claim in a and Insurance acknowledged a remaining balance still due and assigned
motion to dismiss, that it had since ceased to do business in the to Yupangco all reinsurance proceeds still collectible from all the foreign
Philippines. reinsurance companies. Yupangco then filed a collection suit on the
above petitioners. The service of summons were made through the
Held: YES. The term "agent", in the context it is used in Section 14, office of the Insurance Commissioner but since the international
refers to its general meaning, i.e., one who acts on behalf of a principal. reinsurers question the jurisdiction the trial court the case has not
The allegations in the complaint have thus been able to amply convey proceeded to trial on the merits. The reinsurer is questioning also the
that not only is TEAM Pacific the business conduit of the petitioner in service of summons through extraterritorial service under Sect 17 Rule
the Philippines but that, also, by the charge of fraud, is none other than 14 of the Rules of Court nor through the Insurance Commissioner under
the petitioner itself. Sec 14. Yupangco also contends that since the reinsurers question the
jurisdiction of the court they are deemed to have submitted to the
Doctrine: The rule is that, a foreign corporation, although not engaged jurisdiction of the court.
in business in the Philippines, may still look up to our courts for relief;
reciprocally, such corporation may likewise be "sued in Philippine courts Issue: Whether or not the international reinsurers are doing business in
for acts done against a person or persons in the Philippines" (Facilities the Philippines.
Management Corporation v. De la Osa).
Held: NO. International reinsurers are not doing business in the
BUT NOW SEE: Avon Insurance PLC v. Court of Appeals, 278 Philippines and the Philippine court has not acquired jurisdiction over
SCRA 312 (1997). them. The reinsurance treaties between the petitioners and Worldwide
Surety and Insurance were made through an international insurance
Avon Insurance PLC v. Court of Appeals broker and NOT through any entity or means remotely connected with
the Philippines. Reinsurance company is not doing business in a certain


state even if the property or lives which are insured by the original of the main merits of the case, which should not thus be within
insurer company are located in that state. Reinsurance Contract is the province of a mere motion to dismiss.1
generally separate and distinct arrangement from the original contract
of insurance. There was no allegation or demonstration of the existence E. Stipulation on Venue: When the contract sued upon has a venue
of petitioners domestic agent but avers simply that they are doing clause within the Philippines, it is deemed a confirmation by the foreign
business not only abroad but in the Philippines. Petitioners had not corporation, even though not doing business in the Philippines, to be
performed any act which would give the general public the impression sued in local courts. Linger & Fisher GMBH v. IAC, 125 SCRA 522 (1983).
that it had been engaging or intends to engage in its ordinary and usual
business undertaking in the country. VI. Laws Applicable to Foreign Corps. (Section 129)

Doctrine: Reinsurance company is not doing business in a certain state Section 129. Law applicable.
even if the property or lives which are insured by the original insurer Any foreign corporation lawfully doing business in the Philippines shall
company are located in that state. Reinsurance Contract is generally be bound by all laws, rules and regulations applicable to domestic
separate and distinct arrangement from the original contract of corporations of the same class, except such only as provide for the
insurance. creation, formation, organization or dissolution of corporations or
those which fix the relations, liabilities, responsibilities, or duties of
Atty. Hofilea Signetics Corp. v. Court of Appeals and Avon stockholders, members, or officers of corporations to each other or to
Insurance PLC v. Court of Appeals established what is a the corporation. (73a)
sufficient complaint in order for the Court to acquire
jurisdiction? The fact of doing business must be established by The provision in the New York law which allowed only
appropriate allegations in the complaint, and thereafter, stockholders with a minimum number of shareholdings (3%) to
extraterritorial service of summons may be done pursuant to be entitled to exercise the right of inspection is valid in the case
the provisions of Section 17, Rule 14, of the Rules of Court. The of a foreign corporation licensed to do business in the
propriety of such service however may be contravened by the Philippines which in its internal relationship was bound by the
defense that the foreign corporation is not doing business in the New York law. Grey v. Insular Lumber Co., 67 Phil. 139 (1938)
Philippines. It is a defense that requires the contravention of the
allegations of the complaint, as well as full ventilation, in effect, VII. Amendment of Articles of Incorporation (Section 130)

1


foreign corporation shall, within sixty (60) days after such merger or
Section 130. Amendments to articles of incorporation or by-laws of consolidation becomes effective, file with the Securities and Exchange
foreign corporations. Commission, and in proper cases with the appropriate government
Whenever the articles of incorporation or by-laws of a foreign agency, a copy of the articles of merger or consolidation duly
corporation authorized to transact business in the Philippines are authenticated by the proper official or officials of the country or state
amended, such foreign corporation shall, within sixty (60) days after under the laws of which merger or consolidation was effected:
the amendment becomes effective, file with the Securities and Provided, however, That if the absorbed corporation is the foreign
Exchange Commission, and in the proper cases with the appropriate corporation doing business in the Philippines, the latter shall at the
government agency, a duly authenticated copy of the articles of same time file a petition for withdrawal of it license in accordance
incorporation or by-laws, as amended, indicating clearly in capital with this Title. (n)
letters or by underscoring the change or changes made, duly certified
by the authorized official or officials of the country or state of Atty. Hofilea where two corporations, one of which is a
incorporation. The filing thereof shall not of itself enlarge or alter the branch, the SEC has authority to ensure requirements are met.
purpose or purposes for which such corporation is authorized to However, the law does not provide allowance of a merger
transact business in the Philippines. (n) whereby the surviving corporation is that of the foreign
corporation without a branch in the Philippines.
VIII. Merger and Consolidation (Section 132; Art. 51, Omnibus Code)
IX. Revocation of License (Sections 134 and 135; Art. 50, Omnibus
Section 132. Merger or consolidation involving a foreign corporation Investment Code)
licensed in the Philippines.
One or more foreign corporations authorized to transact business in Section 134. Revocation of license.
the Philippines may merge or consolidate with any domestic Without prejudice to other grounds provided by special laws, the
corporation or corporations if such is permitted under Philippine laws license of a foreign corporation to transact business in the Philippines
and by the law of its incorporation: Provided, That the requirements may be revoked or suspended by the Securities and Exchange
on merger or consolidation as provided in this Code are followed. Commission upon any of the following grounds:

Whenever a foreign corporation authorized to transact business in the 1. Failure to file its annual report or pay any fees as required by this
Philippines shall be a party to a merger or consolidation in its home Code;
country or state as permitted by the law of its incorporation, such


2. Failure to appoint and maintain a resident agent in the Philippines
as required by this Title; Section 135. Issuance of certificate of revocation.
Upon the revocation of any such license to transact business in the
3. Failure, after change of its resident agent or of his address, to Philippines, the Securities and Exchange Commission shall issue a
submit to the Securities and Exchange Commission a statement of corresponding certificate of revocation, furnishing a copy thereof to
such change as required by this Title; the appropriate government agency in the proper cases.

4. Failure to submit to the Securities and Exchange Commission an The Securities and Exchange Commission shall also mail to the
authenticated copy of any amendment to its articles of incorporation corporation at its registered office in the Philippines a notice of such
or by- laws or of any articles of merger or consolidation within the revocation accompanied by a copy of the certificate of revocation. (n)
time prescribed by this Title;
X. Withdrawal of Foreign Corporation (Section 136)
5. A misrepresentation of any material matter in any application,
report, affidavit or other document submitted by such corporation Section 136. Withdrawal of foreign corporations.
pursuant to this Title; Subject to existing laws and regulations, a foreign corporation licensed
to transact business in the Philippines may be allowed to withdraw
6. Failure to pay any and all taxes, imposts, assessments or penalties, if from the Philippines by filing a petition for withdrawal of license. No
any, lawfully due to the Philippine Government or any of its agencies certificate of withdrawal shall be issued by the Securities and
or political subdivisions; Exchange Commission unless all the following requirements are met;

7. Transacting business in the Philippines outside of the purpose or 1. All claims which have accrued in the Philippines have been paid,
purposes for which such corporation is authorized under its license; compromised or settled;

8. Transacting business in the Philippines as agent of or acting for and 2. All taxes, imposts, assessments, and penalties, if any, lawfully due
in behalf of any foreign corporation or entity not duly licensed to do to the Philippine Government or any of its agencies or political
business in the Philippines; or subdivisions have been paid; and

9. Any other ground as would render it unfit to transact business in the 3. The petition for withdrawal of license has been published once a
Philippines. (n) week for three (3) consecutive weeks in a newspaper of general


circulation in the Philippines.

Atty. Hofilea foreign companies are allowed to withdraw,
but they must settle all credits, taxes and other obligations to
the satisfaction of the SEC.


PENALTY PROVISIONS OF THE CODE Section 27. Disqualification of directors, trustees or officers.
No person convicted by final judgment of an offense punishable by
I. Penalty Clause for Violations of the Provisions of the Code (Section imprisonment for a period exceeding six (6) years, or a violation of this
Code committed within five (5) years prior to the date of his election
144)
or appointment, shall qualify as a director, trustee or officer of any

corporation.
Section 144. Violations of the Code.
Violations of any of the provisions of this Code or its amendments not
otherwise specifically penalized therein shall be punished by a fine of III. Specific application (Section 74).
not less than one thousand (P1,000.00) pesos but not more than ten
thousand (P10,000.00) pesos or by imprisonment for not less than Section 74. Books to be kept; stock transfer agent.
thirty (30) days but not more than five (5) years, or both, in the Every corporation shall keep and carefully preserve at its principal
discretion of the court. If the violation is committed by a corporation, office a record of all business transactions and minutes of all meetings
the same may, after notice and hearing, be dissolved in appropriate of stockholders or members, or of the board of directors or trustees, in
proceedings before the Securities and Exchange Commission: which shall be set forth in detail the time and place of holding the
Provided, That such dissolution shall not preclude the institution of meeting, how authorized, the notice given, whether the meeting was
appropriate action against the director, trustee or officer of the regular or special, if special its object, those present and absent, and
corporation responsible for said violation: Provided, further, That every act done or ordered done at the meeting. Upon the demand of
nothing in this section shall be construed to repeal the other causes any director, trustee, stockholder or member, the time when any
for dissolution of a corporation provided in this Code. (190 1/2 a) director, trustee, stockholder or member entered or left the meeting
must be noted in the minutes; and on a similar demand, the yeas and
nays must be taken on any motion or proposition, and a record
Atty. Hofilea Theres a school of thought that says that
thereof carefully made. The protest of any director, trustee,
unless the Code states that youre subject to penal provisions,
stockholder or member on any action or proposed action must be
then Section 144 applies. If there is a provision providing for a
recorded in full on his demand.
particular penalty, then you will be punished in accordance with

that.
The records of all business transactions of the corporation and the

minutes of any meetings shall be open to inspection by any director,
II. Cross-reference (Section 27).
trustee, stockholder or member of the corporation at reasonable

hours on business days and he may demand, writing, for a copy of


excerpts from said records or minutes, at his expense. at reasonable hours on business days.

Any officer or agent of the corporation who shall refuse to allow any No stock transfer agent or one engaged principally in the business of
director, trustees, stockholder or member of the corporation to registering transfers of stocks in behalf of a stock corporation shall be
examine and copy excerpts from its records or minutes, in accordance allowed to operate in the Philippines unless he secures a license from
with the provisions of this Code, shall be liable to such director, the Securities and Exchange Commission and pays a fee as may be
trustee, stockholder or member for damages, and in addition, shall be fixed by the Commission, which shall be renewable annually: Provided,
guilty of an offense which shall be punishable under Section 144 of this That a stock corporation is not precluded from performing or making
Code: Provided, That if such refusal is made pursuant to a resolution transfer of its own stocks, in which case all the rules and regulations
or order of the board of directors or trustees, the liability under this imposed on stock transfer agents, except the payment of a license fee
section for such action shall be imposed upon the directors or trustees herein provided, shall be applicable. (51a and 32a; B. P. No. 268.)
who voted for such refusal: and Provided, further, That it shall be a
defense to any action under this section that the person demanding to IV. Strict Principles in Criminal Law; the issue of malice.
examine and copy excerpts from the corporation's records and
minutes has improperly used any information secured through any V. Historical Background of Section 144 (Section 190 1/7 of the
prior examination of the records or minutes of such corporation or of Corporation Law)
any other corporation, or was not acting in good faith or for a Section 190 was not intended to make every casual violation of
legitimate purpose in making his demand. one of the Corporation Law provisions ground for involuntary
dissolution of the corporation and that the court was entitled to
Stock corporations must also keep a book to be known as the "stock exercise discretion in such matters. Government of P.I. v. El
and transfer book", in which must be kept a record of all stocks in the Hogar Filipino, 50 Phil. 399 (1927).
names of the stockholders alphabetically arranged; the installments Penalties imposed in Section 190(A) for the violation of the
paid and unpaid on all stock for which subscription has been made, prohibition in question are of such nature that they can be
and the date of payment of any installment; a statement of every enforced only by a criminal prosecution or by an action of quo
alienation, sale or transfer of stock made, the date thereof, and by and warranto. But these proceedings can be maintained only by the
to whom made; and such other entries as the by-laws may prescribe. Attorney-General in representation of the Government. Harden
The stock and transfer book shall be kept in the principal office of the v. Benguet Consolidated Mining Co., 58 Phil. 141 (1933).
corporation or in the office of its stock transfer agent and shall be
open for inspection by any director or stockholder of the corporation VI. Violation of Section 133 by Foreign Corporations


Section 133, which unlike its counterpart Section 69 of
Corporation Law provided specifically for penal sanctions for
foreign corporations engaging in business in the Philippines
without obtaining the requisite license, should be deemed to
have a penal sanction by virtue of Section 144 of the
Corporation Code. Home Insurance Co. v. Eastern Shipping
Lines, 123 SCRA 424 (1983).


MISCELLANEOUS The Securities and Exchange Commission shall have the power and
authority to implement the provisions of this Code, and to promulgate
I. SEC Power and Supervision (Sections 108 and 143; PD 902-A) rules and regulations reasonably necessary to enable it to perform its
duties hereunder, particularly in the prevention of fraud and abuses
on the part of the controlling stockholders, members, directors,
Section 108. Board of trustees.
trustees or officers. (n)
Trustees of educational institutions organized as non-stock
corporations shall not be less than five (5) nor more than fifteen (15):
Provided, however, That the number of trustees shall be in multiples II. Special Corporations (Section 4)
of five (5).
Section 4. Corporations created by special laws or charters.
Unless otherwise provided in the articles of incorporation on the by- Corporations created by special laws or charters shall be governed
laws, the board of trustees of incorporated schools, colleges, or other primarily by the provisions of the special law or charter creating them
institutions of learning shall, as soon as organized, so classify or applicable to them, supplemented by the provisions of this Code,
themselves that the term of office of one-fifth (1/5) of their number insofar as they are applicable.
shall expire every year. Trustees thereafter elected to fill vacancies,
occurring before the expiration of a particular term, shall hold office III. New Requirements on Existing Corporations (Section 148).
only for the unexpired period. Trustees elected thereafter to fill
vacancies caused by expiration of term shall hold office for five (5) Section 148. Applicability to existing corporations.
years. A majority of the trustees shall constitute a quorum for the All corporations lawfully existing and doing business in the Philippines
transaction of business. The powers and authority of trustees shall be on the date of the effectivity of this Code and heretofore authorized,
defined in the by-laws. licensed or registered by the Securities and Exchange Commission,
shall be deemed to have been authorized, licensed or registered under
For institutions organized as stock corporations, the number and term the provisions of this Code, subject to the terms and conditions of its
of directors shall be governed by the provisions on stock corporations. license, and shall be governed by the provisions hereof: Provided, That
(169a) if any such corporation is affected by the new requirements of this
Code, said corporation shall, unless otherwise herein provided, be
Section 143. Rule-making power of the Securities and Exchange given a period of not more than two (2) years from the effectivity of
Commission. this Code within which to comply with the same. (n)


IV. Applicability of Other Provision of old Corporation Law (Sections
145 and 146).

Section 145. Amendment or repeal.
No right or remedy in favor of or against any corporation, its
stockholders, members, directors, trustees, or officers, nor any liability
incurred by any such corporation, stockholders, members, directors,
trustees, or officers, shall be removed or impaired either by the
subsequent dissolution of said corporation or by any subsequent
amendment or repeal of this Code or of any part thereof. (n)

Section 146. Repealing clause.
Except as expressly provided by this Code, all laws or parts thereof
inconsistent with any provision of this Code shall be deemed repealed.
(n)


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CORPORATION

LAW REVIEWER (2013-2014) ATTY. JOSE MARIA G. HOFILEA

The Corporation Code definition and treatment of non-stock

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