Corpo Law - Summarized

PHILIPPINE CORPORATE LAW by CESAR VILLANUEVA- SUMMARIZED
CHAPTER 1: INTRODUCTION
CORPORATE LAW: body of laws, principles, and doctrines covering private corporations
 Proper Treatment of the Corporation Code
- Comes from the common law system of USA
- Product of commercial developments
 Interpretation of the CC
- It should be given a reasonable or literal interpretation that will best execute its purpose,
even though such construction should not be permitted to defeat the policy and purpose
of the Code
 Corporation Code
- It has for its subject matter the corporation, which is a medium or tool of doing business,
then the Code may be viewed as the manual of instructions by which to properly operate
the medium or tool, that is the corporation
CHAPTER 2: BRIEF HISTORY OF PHILIPPINE CORPORATE LAW
HISTORICAL BACKGROUND
1. Sociedades Anonimas
 a commercial partnership, a sort of corporation, “where upon the execution of the public
instrument in which its Articles of agreement appear, and the contribution of funds and
personal property, becomes a juridical person
 Prior to the arrival of the American occupying forces in the Philippines, the main business
vehicles under the Spanish colonial administration that were similar to the Anglo-Saxon
corporations were SA
 Introduced on December 1, 1988
 the inscribing of its articles of agreement in the commercial register was not necessary to
make it a juridical person – a corporation.
 Such inscription only operated to show that it partook the form of a commercial
corporation
 Similarities with Corporations
a. Limited Liability
b. Centralized Management
 Section 75 of the Corporation Law
o A sociedad anonima existing at the time of the passage of the law was authorized at
its option to either continue doing business as such entity or to transform and be
organized under and by virtue of the provisions of the Corporation Code
 In the event that it elected to transform and re-organize under
the provision of the law, it was provided that the entity shall transfer
all corporate interests to the new corporation
 The election to transform or to retain status quo was to be made within a
reasonable time from the effectivity of the Code
 Section 191 of the Corporation Law
o Sociedad anonimas which did not opt to reform and organize under the Corporate
Law, continued to be governed by the laws that were in force prior to the passage
of said law, particularly the provisions of the Code of Commerce on sociedad
anonimas, in relation to their organization and method of transacting business and
to the rights of members thereof as between themselves
2. The Corporate Law
 Act No. 1459: first corporate statute in the PH jurisdiction
 Became effective on April 1, 1906
 It provides that:
a. No corporation shall be authorized to conduct business of buying and selling public
lands
b. No corporation is permitted to hold or own real estate, except as such as may be
reasonably necessary to enable it to carry out the purposes for which it was created
c. No agricultural corporation shall in anywise be interested in any other agricultural
corporation
d. No non-agricultural corporation shall own in excess of 15% of the outstanding capital
stock of any agricultural corporation, which holding shall be for the purpose of
investment only
e. A mining corporation may acquire and hold not more than 40% of the voting capital
of another mining corporation, or not more than 30% of the voting capital of each
of not more than 3 mining corporations, and subject restrictions of equity ownership
3. Corporation Code of the Philippines
 Batas Pambansa Blg. 68: adopted various corporate doctrines previously enunciated
by the Supreme Court under the supplanted Corporation Law
 Became effective on May 1, 1980
 It did not maintain the various particular penal clauses under the old
Corporation Law, but instead merely provides for a general penal clause
 It maintains the concept of corporation as a “creature of limited powers”
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CHAPTER 3: NATURE, ATTRIBUTES, AND CLASSIFICATIONS OF CORPORATIONS
Section 2:
“A corporation is an artificial being created by operation of law, having the right of succession,
and the powers, attributes, and properties expressly authorized by law or incident to its
existence.”
o Juridical entity with a personality separate and distinct from the members or
stockholders that compose it, as well from any other legal entity to which it may be
related
o A corporation is but a fiction extended by law to investors, managers, and
businessmen by which to conduct their commercial affairs
THEORIES ON THE FORMATION OF LAW

1. Theory of Concession
 Under this theory, a corporation is a creature of State, and of limited powers and
capabilities, completely within the control of the State
 Tayag vs Benguet Consolidated, Inc
 Characterized a corporation as an artificial being, created by operation of law,
which owes its life to the State, its birth being purely dependent on its will
 Corporations are not immune from judicial control
 Expressly denied the Genossenschaft Theory
 Treated corporation as the reality of the group as
a social and legal entity, independent of State
recognition and concession
2. Theory of Enterprise Entity
 Under this theory, the corporate entity is viewed as taking its significance primarily from
the reality of the underlying enterprise, formed or in formation
 The state’s approval of the corporate form sets up a prima facie case that the assets,
liabilities, and operations of the corporation are those of the enterprise. But that where
the corporate entity is defective, or otherwise challenged, its existence, extent and
consequences may be determined by the actual existence and operations of the
underlying enterprise, which by these very qualities and operations acquires a”being” of
its own recognized by law
 The corporation is emerging as an enterprise bounded by economics, rather than as an
artificial juridical personality bounded by forms of words in a charter, minute, books, and
books of accounts.
 It hinges itself on the fact that there can be no corporate existence without persons to
compose it
 It meant to cover the situations where courts have either:
a. Erected corporate personality which the State had not granted; or
b. Disregard corporate personality where the State had granted it
Both for the purpose of giving legal effect to factual relationships set up between an
economic entity and an outside
TRI-LEVEL RELATIONSHIPS IN THE CORPORATE SETTING

1. The corporation is a juridical entity or a juridical fiction, which views the relationship between
the State and the Corporation
2. The corporate setting provides for contractual relationships on 4 sub-levels namely:
a. Between the Corporation and its agents or representatives to act in the real world, such
as its directors and its officers, governed suppletorily by the Law on Agency
b. Between the Corporation and its SH or members
c. Between and among the SH in common value
d. Between the corporation and third parties or outsiders, which is essentially governed by
the Contract Law, and Labor Law when it comes to relationship with officers and
employees
3. A corporation becomes in its operation a business economic unit, a business enterprise, or
what is called in Accounting as “going concern”
CORPORATION AS A CREATURE OF LAW

1. Constitutional Provisions
 The power to create corporations is one of the attributes of the sovereignty, the exercise
of which is legislative in character
 “Congress cannot, except by general law, provide for the formation, organization or
regulation of private corporations”
 Corporation Code: general law under which private corporations are organized pursuant
to the mandates of the Constitution
2. Civil Code Provisions, the
 Article 44: “x x x the law recognizes corporations, partnerships and associations for
private interests or purpose to which are granted a juridical personality, separate and
distinct from that of each shareholder, partner of member.”
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 Article 45: “The juridical persons organized as public corporations are governed by the
laws creating or recognizing them, while private corporations are regulated by laws of
general application on the subject.”
3. Franchises of Corporations
 J.R.S Business Corp vs Imperial Insurance: recognized the differences between the
primary and secondary franchises of corporations:
1. Corporate or General Franchises
 Is the franchise to exist as a corporation
 The primary franchise of a corporation, that is, the right to exist as such,
is vested in the individuals who compose the corporation and not in the
corporation itself and cannot be conveyed in the absence of a legislative
authority to do so.
2. Special or Secondary Franchises
 Certain rights and privileges conferred upon existing corporations, such as
the right to use the streets of a municipality to lay pipes or tracts, erect
poles or string wires
 These are vested in the corporation and may ordinarily be conveyed or
mortgaged under a general power granted to a corporation to dispose of
its property, except such special or secondary franchises as are charged
with a public use
ATTRIBUTES OF A CORPORATION
1. Artificial Being
- It is the fiction of law which creates the person of the corporation, with the same attributes
of an individual having full capacity to enter into a contractual relations
2. Creature of Law
- The juridical existence of a corporation is dependent on the consent or grant of the State
- Apply Theory of Concession
3. Right of Succession
- A 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 than those
who compose it
4. Creature of Limited Powers, Attributes and Properties
ADVANTAGEOUS FEATURES OF THE CORPORATE MEDIUM

1. Strong Juridical Personality
 SEC, under P.D 902-A
 The administrative agency granted with both administrative and quasi-judicial
powers over controversies and issues governing corporations and corporate
matters, had allowed a more efficient system focused on the special field and
consistent stream of decisions in corporate law coming from a special agency
 Securities Regulation Code
 Transferred all corporate assets and issues to the jurisdiction of the courts of
law, the tradition of allowing a specialized tribunal to handle corporate matters
and issues has been retained
 Supreme Court’s A.M No. 00-11-03-SC
 Only specially designated RTC branches in each regional district, formally
referred to as Special Commercial Courts, whose presiding judges are well-
versed in corporate and commercial development are granted exclusive
jurisdiction to hear and decide corporate assets arising under Sec. 5 of PD 902-
A involving:
 Corporate fraudulent schemes
 Inta-corporate disputes
 Election and termination of directors, trustees
and officers
 Corporate suspension of payments
 Rehabilitation proceedings
2. Centralized Management
 Imbues the corporate medium with stable and efficient system of governance and
dealings with third parties, since management prerogatives are centralized in its BoD
3. Limited Liability to Investors
 The liability of investors in a corporation us limited to their shares as distinguished from
partnerships
 SH: has an assured limited liability
4. Free Transferability of Units of Investment

 General Rule: The shares of stocks can be transferred without the consent of the other
SHs
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DISADVANTAGEOUS FEATURES OF A CORPORATE MEDIUM

1. Complicated and Costly Formation and Maintenance
2. Lack of Personal Element and Abuse of Corporate Management
3. Limited Liability Hits Innocent Victims
4. Double Taxation
COMPARING THE CORPORATION WITH OTHER BUSINESS MEDIA

Sole Prop. Joint accounts/ Business Trust Partnerships Joint Ventures Cooperatives
Cuentas en
Participation
No JP No JP Has JP
Less saddle with Less reqs
the many reqs
Owner is in Trustee Partner is an Members shall
command of his manages the agent of the have equal
whole business affairs partnership voting rights
Owner is Limited Liability
personally liable
Created under
the terms of a
business trust
Proprietor For the benefit Self-help
Exercises both of 3rd persons or principle
the prerogatives the beneficiaries
of control and
management
and the main
beneficiary of
the income and
the fruits
A sort of Trust is created It is a form of It is an
accidental when ownership partnership, and autonomous and
partnership over the is governed by duly registered
constituted in property subject the law on association of
such a manner thereof is split partnerships. persons, with
that its existence between the common bon of
was only known trustee who It is defined as interest, who
to those who assumes legal or an association of have voluntarily
had an interest naked title, and persons or joined together
in it, there being the beneficiary companies to achieve their
no mutual who has jointly social, economic
agreement beneficial title undertaking and cultural
between the some needs and
partners, and commercial aspirations by
without a enterprise, making
corporate name generally all equitable
indicating to the contribute contributions to
public in some assets and share the capital
way that there risks. required,
were other patronizing their
people besides products and
the one who services and by
ostensibly accepting a fair
manage the share of the risks
business
Does a defective incorporation process result into a partnership? NO

 Grounds:
1. Both corporate and partnership relationships are fundamentally contractual
relationships created by co-venturers who consent to come together under said
relationships
2. The important differences between the corporation and the partnership cannot lead
one to the conclusion that in the absence of the first, the contracting parties would
have gone along with the latter
- Delectus personae
ENTITLEMENT OF THE CORPORATION TO THE CONSTITUTIONAL RIGHTS

1. Due process and equal protection clause
2. Unreasonable searches and seizures
3. No right against self-incrimination
LIABILITY OF CORPORATION FOR TORTS

 The liabilities of corporation for torts committed by its agents must generally follow the rules
provided by law on agency:
a. A corporation must be held liable for all the contracts and default that arise from those
entered into by its agent within the scope of his authority, or even those outside the scope
of its authority, by which has been ratified by the corporation, through its BoD
b. The acting office is solidarily liable with the corporation for the damages resulting from
his negligence as a joint-tortfeasor
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CRIMINAL LIABILITY IN CORPORATE SETTING

General Rule: not liable
Exceptions:
1. Trust Receipt Law
2. AMLA
NON-ENTITLEMENT TO MORAL DAMAGES

General Rule: A corporation is an artificial being, and cannot experience physical sufferings, mental
anguish, fright, serious anxiety, wounded feelings, moral shock or social humiliation, there being, there
is no basis for its recovery of moral damages
Exception:
- A corporation has a good reputation, and was besmirched
NATIONALITY OF CORPORATIONS
1. Place of Incorporation Test
- A corporation is a national of the country under which the laws of which it has been
organized and registered
2. Control Test
- The nationality of a corporation is determined by the nationality of the majority of
stockholders on whom equity control is vested, on the theory that they would be able to
elect the majority of the BoD
- Cannot overcome the Place of Incorporation Test
Exception: Foreign Investment Act of 1991
- Also applies to:
a. Exploitation of Natural Resources – 60-40
b. Ownership of Private Lands –
c. Public Utilities – 60-40
d. Mass Media – 100
e. Advertising – 70-30
3. War-Time Test
- In times of war, the nationality of a private corporation is determined by the citizenship
of its controlling stockholders
4. Investment Test and the Grandfather Rule
 GR Rule, as a sub-application under the Control Test
 Where the various nationality tests shall first be applied on the SH of the holding
companies, to determine the nationality of the equity in the target corporation,
and thereby arrive at the nationality of such target corporation
 Grandson: target company
 Father: holding company
 Grandfather: person or entity holding shares in the holding
company
- In essence, it is the method by which the percentage of Filipino equity is computed, in
a corporation engaged in fully or partly nationalized areas of activities provided under the
Constitution and other nationalized laws, in cases where the corporate shareholders are
present in the situation by attributing the nationality of the second or even subsequent
tiers of ownership to determine the nationality of the corporate shareholder.
CORPORATIONS DISQUALIFIED FROM OWNING ALIENABLE LANDS OF PUBLIC DOMAIN

 Sec. 3, Art. XII of the 1987 Consti
“Alienable lands of the public domain shall be limited to agricultural lands. Private corporations
or associations may not hold such alienable lands of the public domain, except by for lease,
for a period not exceeding twenty-five (25) years, renewable for not more than 25 years, and
not to exceed 1000 hectares in area. Citizens of the Philippines may lease not more than 500
hectares or acquire not more than 12 hectares thereof by purchase, homestead, or grant
CLASSIFICATION OF CORPORATIONS
1. Public – those created for political purposes connected with the public good in the
administration of the civil government
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2. Private –
a. Stock: those which have a capital stock divided into shares and are authorized to
distribute the holders of such shares dividends or allotments of the surplus profit on the
basis of the shares held
b. Non-Stock: all other private corporations; further classified as to their purpose
I. Profit-seeking
II. Religious
III. Eleemosynary or those
organized for charitable,
scientific or vocational purposes
 Types of Private Corporations:
A. Those organized under the Corporation Code for private ends
B. Those organized under the Corporation Code as GOCCs to achieve certain
purposes of the government
C. Those GOCCs organized with their own charter
3. Quasi-Public Corporation – it is a cross between private corporations and public
corporationsl; it usually cover school districts, water districts and the like
4. Domestic – one incorporated under the laws of the Philippines
5. Foreign – a foreign corporation may be licensed by SEC to do business in the Philippines only
under the principle of reciprocity, after securing a certificate of authority from the Board of
Investment or the Omnibus Investments Code, and after complying with the conditions for
issuance of the license on application forms, structural organizations and capitalization
 It has no legal existence beyond the bounds of the state or sovereignty by which it
is created. It exists only in contemplation of law and by the force of law, and where
the law ceases to operate, the corporation can have no existence
 Objectives of the statutory provisions prescribing conditions under which
foreign corporations are permitted to do business in a state other than
that of their creation:
a. To place them equally with DC
b. To subject them to inspection so that their condition may be known
c. To protect the residents of the state doing business with them by subjecting
them to the courts of the state
6. De Jure – a corporation has de jure existence if there is a full or substantial compliance with
the requirements of an existing law permitting organization of such corporation as by proper
articles of incorporation duly executed and filed
 Its juridical personality is not subject to attack in courts from any source
 Its due incorporation cannot be successfully attacked even in a quo warranto
proceeding by the State
7. De Facto – a corporation has de facto existence where there is a bona fide attempt to
incorporate, colourable compliance with the stature and user of corporate powers
 Its due incorporation may not be inquired collaterally in any private suit of which a
corporation may be a party. Such inquiry may only be made in a quo warranto
proceeding
8. Corporation by Estoppel – although an entity may not be a corporation de jure or de facto,
a particular person may, by estoppel, be precluded from denying its corporate existence. A
group of persons may assume to do business as a corporation without having gone far enough
to achieve a de facto corporate existence
9. Corporation by Prescription – Roman Catholic is corporation, with an acknowledged
juridical personality inasmuch as it is an institution which antedated by almost a thousand years
any other personality in Europe, and which existed when Grecian eloquence still flourished in
Antioch and when idols were still worshipped in the temple of Mecca
10. Stock Corporations – those which hava a capital stock divided into shares and are authorized
to distribute to the holders dividends
 Requisites for its existence:
a. A capital stock is divided into shares
b. Authority to distribute dividends
11. Non-Stock Corporations – is one where no part of its income is distributable as dividends
to its members, trustees or officers, subject to the provisions 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 that which the
corporation was organized
12. Parent Company – is one that controls another as a subsidiary or affiliate by the power to
elect its management
13. Holding Company – one which holds stocks in other companies for purposes of control rather
than mere investment
14. Affiliate – a person that directly or indirectly, through one or more intermediaries, controls,
or is controlled by, or is under common control with, the person specified, through the
ownership of voting shares, by contract or otherwise
 AMLA: Affiliate means an entity at least 20%, but not exceeding 50% of the voting
stock of which is owned by another company
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 FRIA: Affiliate is a corporation that directly or indirectly, through one or more

intermediaries, is controlled by, or is under the common control of another
corporation
15. Parent & Subsidiary Company – where a corporation has controlling financial interest in
one or more corporations, the one having control is known as the parent company, and the
others are known as the subsidiary company
 FRIA: a subsidiary of a specified person is an affiliate controlled by such person,
directly or indirectly, through one or more intermediaries
 AMLA: subsidiary means an entity more than 50% of the outstanding voting stock
of which is owned by the parent company
CHAPTER 4: CORPORATE JURIDICAL PERSONALITY
DOCTRINE OF CORPORATE JURIDICAL PERSONALITY

 A corporation has a juridical personality separate and distinct from the stockholders or
members who compose it, or the other corporations to which it is associated, and the
supplementary doctrine of piercing the veil of corporate fiction
MAIN DOCTINE OF SEPARATE JURIDICAL PERSONALITY

 A corporation is an artificial being invested by law with a personality separate and distinct from
its officers and stockholders and from other corporations to which it may be connected, the
following have been held to be the legal consequences of the application of such main doctrine,
thus:
a. The property of a corporation is not the property of its SH; nor can the property of even
the controlling SH or the officers be treated as part of the corporate estate
b. A parent or holding corporation has no propriety interest in the property, rights and
interests of its subsidiaries or affiliates; consequently, any suit against the parent company
does not bind the subsidiaries and vice-versa
c. A corporation may not be held liable for the obligations of the SH or members composing
it, or those of its officers, and neither can its SH be held liable for the obligations of such
corporation
d. Corporate officers are not personally liable for their official acts in pursuing the affairs and
businesses of the corporation; unless, it is shown that they have exceeded their authority
e. Substantial ownership in the capital stock entitling the shareholder a significant vote in
corporate affairs allows them no standing or claims pertaining to corporate affairs
f. Since the juridical personality of a corporation is a fiction created by law for convenience
and to prevent injustice, it may be disregarded if it is used as a means to perpetuate fraud
or an illegal act or as vehicle for the evasion of an existing obligation, the circumvention
of statutes, or to confuse legitimate issues
 Exceptions:
1. Doctrine of piercing the veil of corporate entity
2. Contract
DOCTINE OF PIERCING THE VEIL OF CORPORATE FICTION

General Rule: a corporation will be looked upon as a legal entity until sufficient reason to the contrary
appears
Exceptions: when the notion of legal entity is used to –
1. Defeat public convenience
2. Justify wrong
3. Protect fraud
4. Defend crime
 Instances the Doctrine of Piercing the Veil of Corporate Fiction is warranted:

1. To ward off a judgment credit
2. To avoid inclusion of corporate assets as part of the estate of the decedent
3. To escape liability arising for a debt
4. To perpertuate fraud
5. To confuse legitimate issues either to promote or to shield unfair objectives to cover up
an otherwise blatant violation of the prohibition against forum shopping
 Nature and Consequences of the Nature of the Piercing Doctrine as Being
Essentially an Equitable Remedy
1. Applies only to prevent a wrong or injustice, or to achieve equitable means
2. It is a remedy of last resort; cannot be applied to establish a right or a cause of action
3. Party invoking the doctrine must have a victim standing
4. Applies only when the corporate personality was the efficient cause or means; it must be
shown to be necessary and with factual bases
 Some probative factors of identity that will justify the application of
the doctrine of piercing the veil
a. Stock ownership by one or common ownership of both corporations
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b. Identity of directors and officers

c. The manner of keeping corporate books and records
d. Methods of conducting business
 Tests in determining the applicability of the doctrine of piercing the
veil of corporate fiction
a. Control, not mere majority of complete stock control, but complete
dominion, not only of finances but of policy and business practice in
respect to the transaction attacked so that the corporate entity as to this
transaction had at the time to separate mind, will or existence of its own
b. Such control must have been used by the defendant to commit fraud or
wrong, to perpertuate the violation of statutory or other positive legal
duty, or dishonest and unjust act in contravention of plaintiff’s legal rights
c. The control and breach of duty must proximately cause the injury or unjust
loss complained of.
5. Piercing application is essentially a judicial prerogative
 Consequences of the Application of the Piercing Doctrine
1. It treats the corporation, its controlling or accountable officers as a mere association
 Two Formulation on the Application of the Piercing Doctrine
a. The courts will often look at the corporation as a mere collection of
individuals or an aggregation of persons undertaking business as a group,
disregarding the separate juridical personality of the corporation unifying
the group
b. When 2 business enterprises are owned, conducted and controlled by the
same parties, both law and equity will, when necessary to protect the
rights of third parties, disregard the legal fiction
2. Piercing may apply to benefit those within and those outside the intra-corporate relations
3. Piercing application only has res judicata effect
CLASSIFICATIONS OF THE PIERCING APPLICATION CASES
1. When the corporation is used to commit fraud or to justify a wrong, to defend a crime (Fraud
Piercing Cases)
- There is always an element of motive, malice or a wrong done
2. When the corporate entity is used as a mere alter ego, business conduit, or instrumentality of
a person or another entity (Alter Ego Piercing Cases)
3. When respect for the corporate entity would defeat public convenience, or would result in
injustice (defeat public convenience or equity piercing cases)
- Even in the absence of an evil motive, piercing would be allowed
FRAUD PIERCING CASES

General Rule: When the legal fiction of the separate corporate personality is abused, such as wen the
same is used for fraudulent or wrongful ends, the courts would not hesitate to pierce the corporate veil
Exception: It must be shown by clear and convincing proof that the separate juridical personality was
purposely employed to evade a legitimate and binding commitment and perpetuate a fraud or similar
wrongdoing
 Elements:
a. There must have been fraud or an evil motive in the affected transaction, and the
mere proof of control of the corporation would not authorize piercing
b. Corporate entity has been used in the perpetuation of fraud or in the justification of
wrong, or to escape personal liability
c. The main action should seek for the enforcement of pecuniary claims pertaining to
the corporation against corporate officers or SH, or vice-versa
 Fraud Piercing need not necessarily be accompanied by alter ego elements to make
fraud case stick, because fraud is a matter of proof, and often it is a state of the mind
being founded on malice
 Applicable to:
a. Tax Evasion Cases
b. Evasion of Lawful Obligations
c. Parent-Subsidiary Scenarios in Fraud Piercing Cases
d. Impose liability on corporate officers
ALTER EGO PIERCING CASES

General Rule: It is available only if it is sought to hold the officers and stockholders directly liable for a
corporate debt or obligation (Umali Doctrine)
- Arnold vs Willets
 Where the stock of a corporation is owned by one person whereby the
corporation functions only for the benefit of such individual owner, the
corporation and the individual should be deemed the same
 Some probative factors of identity that will justify the application of the
doctrine of piercing the veil (Concept Builders Case)
a. Stock ownership by one or common ownership of both corporations
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b. Identity of directors and officers

c. The manner of keeping corporate books and records
d. Methods of conducting business
 Applicable to:
a. Tax Avoidance Cases (ex: dummy corporations)
b. Under-capitalization of Corporation – species of alter ego or defeat or public
convenience piercing cases, especially so when it is never considered prudent
business practice for ventures to shoulder all the capital needed for the venture when
credit therefore is available
o The operation of the corporation was so merged with those of the
stockholders as to be practically indistinguishable from them.
c. Forum Shopping
d. Transfer of Business Enterprise
e. Parent-Subsidiary Cases
o Where it appears that 3 business enterprises are owned, conducted and
controlled by the same parties, both law and equity will, when necessary
to protect the rights of 3rd persons, disregard the legal fiction that the
corporations are distinct entities and treat them as identical.
o Factors that will justify the application of the treatment of the
doctrine of the piercing of corporate veil
1. Parent corporation owns all or almost all of the capital stock of the
subsidiary
2. Parent and subsidiary corporations have common directors or officers
3. Parent corporation finances the subsidiary
4. Parent corporation subscribes to all the capital stock of the subsidiary
or otherwise causes its incorporation
5. Subsidiary has grossly inadequate capital
6. Parent corporation pays the salaries and other expenses or losses of
the subsidiary
7. Subsidiary has substantially no business except with the parent
corporation or no assets except those conveyed to or by the parent
corporation
8. In the papers of the parent corporation or in the statements of its
officers, the subsidiary is described as a department of division of the
parent corporation, or its business or financial responsibility is
referred to as the parent corporation’s own
9. Parent corporation uses subsidiary’s property as its own
10. Directors or executives of the subsidiary do not act independently but
take their orders from parent corporation
11. Formal legal requirements of the subsidiary are not observed
 Four Policy Bases on the Application of Alter Ego Piercing Cases
1. Even when the controlling SH or managing officer intends consciously to do no evil,
the use of the corporation as an alter ego or as a mere instrumentality for personal
agenda, and in some cases as the private checkbook of the controlling stockholder,
is in direct violation of the central principle in Corporate Law of treating the
corporation as a separate juridical entity from its members and SH
2. By not respecting the separate juridical personality of the corporation, others who
deal with the corporation are not also expected to be bound by the separate juridical
personality of the corporation, and may treat the interests of both controlling SH or
officer and the corporation as the same
3. Alter ego piercing cases may prevail even when no monetary claims are sought to
be enforced against the SH or officers of the corporation
4. When the underlying business enterprise does not really change and only the
medium by which that business enterprise is changed, then there would be occasion
to pierce the veil of corporate fiction to allow the business creditors to recover from
whoever has actual control of the business enterprise
DEFEAT PUBLIC CONVENIENCE OR EQUITY PIERCING CASES

 Equity cases applying the piercing doctrine are what are termed the “dumping ground”
where no fraud or alter ego circumstances can be culled by the courts to warrant piercing
 Main Features: is the need to render justice in the situation at hand or to brush aside
merely technical defenses. Often, it appears in combination with other types of piercing,
especially the defeat of public convenience cases
 When the veil of corporate fiction is used to confuse legitimate issues, the same should
be pierced.
PIERCING DOCTRINE AND THE DUE PROCESS CLAUSE

 Jurisprudence provides that a person cannot be bound by the decision therein, since no
individual or entity shall be affected by a proceeding to which he is a stranger, and to do
otherwise would be a denial of due process
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 The requirements of due process may well be complied with even when the individuals
sought to be made liable are not initially and formally made parties to the litigation, so
long as when the basis for the application of the piercing doctrine, they are given an
opportunity to contest its application and meet the evidence adduced for its enforcement
 Requisites:
1. The court must first acquire jurisdiction over the corporation involved before its or
their separate personalities are disregarded
2. The doctrine of piercing the veil of corporate entity can only be raised during a full-
blown trial over a cause of action duly commenced involving parties duly brought
under the authority of the court by way of service of summons or what passes as
such service
 Labor Cases
- The doctrine shall not be applicable to all types of officers, such as
the general manager, even if he is the highest ranking officer, when
such officer is neither a SH or a member of the Board of Directors
ALTER EGO PIERCING CASE FRAUD PIERCING CASE DEFEAT PUBLIC

CONVENIENCE OR EQUITY
PIERCING CASE
- Has a wider leeway - Most restricted ones - Most unwidely used
- its application and even - Requires that the allegation of - Where the courts may just
without intending to do fraud must clearly be proven tend to pierce and not
malice or just by being to make a SH or officer liable carefully go through the
practical in taking for corporate debts and that facts of the case to rely on
shortcuts. piercing is available only other doctrines to do
when there is a claim of justice
recovery against such SH or
officers
CHAPTER 5: CORPORATE CONTRACT LAW
MERGING PRINCIPLES OF CORPORATE LAW AND CONTRACT LAW

1. Juridical Entity Level of Corporate Relationship
- The primary corporate doctrine that operates is that a corporation is a creature of limited
power
2. Doctrine of Centralized Management
- All corporate powers and capacities are vested directly with the Board of Directors
3. Intra-Corporate Level of Corporate Relationship
- The articles of incorporation and the by-laws embody the contractual terms and conditions
between and among the members of the intra-corporate family
- It is the corporation code that contains provisions regulating the adoption, amendment,
or revision of the AoI and by-laws, but the corporate principles contained therein are
primarily derived not only from Contract Law, but also from the Law of Agency, Law on
Business Trust and the common law doctrine of business enterprise
4. Extra-Level of Corporate Relationship
- Governs primarily the relationship between the corporations and the public it deals with
- Principles permeating the extra-corporate level would be contract law, in general and the
special laws governing the particular contracts that the corporation enters into, such as
contracts of sale, lease, or contracts of service
5. Primordial Public Policy is derived from Contract Law principles of:
a. Consensuality
b. Mutuality
c. Obligatory Force
THE UNENFORCEABLE CONTRACT PREMISE

 Essential Requisites of Contract Law
1. Consent
 Art. 1305: Consent is the meeting of minds between two persons whereby
one binds himself, with respect to the other, to give something, or to render
some service
 Art. 1319: Consent is manifested by the meeting of the offer and the
acceptance upon the thing and the cause which are to constitute the contract
 Essential requisites of consent:
a. Two contracting parties must be legally capacitated by law to bind and be
bound by obligations, and also should not represent the same interests
 Under Contract Law, lack of consent makes a contract void; whereas vice in
consent renders the contract voidable
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2. Subject Matter of the Contract

3. Cause of Consideration
PRE-INCORPORATION STAGES: PROMOTER’S CONTRACT

 Promoter – a person who, acting alone, or with others, takes initiative in founding and
organizing the business or enterprise of the issuer and receives consideration therefor
 Promoter’s Contract – those types of contracts entered into in behalf of a corporation which
is in the process of organization and incorporation, and such fact is acknowledged as an
essential ingredient in the process of perfection
- Otherwise known as Pre-Incorporation Contracts
o Where the agent or representative of the would-be corporation expressly
engages the other party, both of them fully aware that the corporation is yet
to be registered, or is still in the process of registration
- Promoter’s contracts, where essentially an agent enters into a contract in the name of the
principal who does not yet exist, are governed by the Law on Agency
APPLICATION OF PRINCIPLES IN THE LAW ON AGENCY

 Art. 1897: The agent who acts as such is not personally liable to the party with whom he
contracts, unless he expressly binds himself, or exceeds the limits of his authority without
giving such party sufficient notice of powers
 Art. 1898: If the agent contracts in the name of the principal, exceeding the scope of his
authority, and the principal does not ratify the contract, it shall be void if the party with whom
the agent contracted is aware of the limits of the powers granted by the principal
 Art. 1901: A third person cannot set up the fact that the agent has exceeded powers, if the
principal has ratified, or has signified his willingness to ratify the agent’s acts
 Applying such principles in promoter’s contracts, it is clear that every

promoter or representative of a corporation in the process of incorporation
binds himself to ensure that the corporation once formed will ratify the contract
entered into in its name; otherwise, he becomes personally liable for such
contract in the event that the corporation does not so ratify it once it comes
into existence
 Principle of Ratification: essential in making every promoter’s contract valid
and binding against the corporation once it has come into legal existence, since
the third party, knowingly entering into the contract at the time the corporate
party did not yet exist to so authorize the promoter, is bound by the provisions
of Art. 1898, classifying the contract void if the party with whom the agent
contracted is aware of the limits of the powers granted by the principal
PRE-INCORPORATION SUBSCRIPTION AGREEMENTS

 Sec. 60 of CC: Any contract for the acquisition of unissued stock in an existing corporation,
or a corporation still to be formed, shall be deemed a “subscription agreement” within the
meaning of the CC, notwithstanding the fact that the parties refer to is as a sale, purchase, or
some other contract
 Sec. 61: A subscription for shares of a stock corporation still to be formed shall be irrevocable
for a period of at least 6 months from the date of subscription, UNLESS:
1. All of the other subscribers consent to its revocation
2. The incorporation of said corporation fails to materialize within the stipulated
period or within a longer period as may be stipulated in the contract of
subscription
HOWEVER, no pre-incorporation subscription may be revoked after the submission of the
articles of incorporation with the SEC
 Secs. 60 & 61 have effectively adopted into our jurisdiction a fused version of:
a. Offer Theory
 Contrues subscription agreement as only a continuing offer to a proposed
corporation, which offer does not ripen into a contract until accepted by the
corporation when organized
 It allows subscribers to withdraw before the corporations comes into existence
and accepts the offer
b. Contract Theory
o A subscription agreement among several persons to take shares in a proposed
corporation becomes a binding contract and is irrevocable from the time of
subscription, unless cancelled by all the parties before acceptance by the
corporation
 Subscription Contract: a contract between the corporation and the subscribing person
- Special contracts, in the sense that they go beyond the terms of ordinary contracts
- At the same time, they are also deemed to be contracts among the stockholders of the
corporation
 In case of pre-incorporation subscription agreement, Contract Law would consider the
subscription contract void, because of the parties to corporation, does not exist
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- Secs. 60 & 61 as special provisions of the CC, override the general provisions of Contract
law and mandate that the pre-incorporation contracts are valid and enforceable
 Pre-Incorporation Agreement
- A type of promoter’s contract, and it is consistent with the fact that a promoter’s contract
is not necessarily binding on the corporation once it is formed or organized and may be
refused by the corporation once formed
- The only time when the corporation is bound by the promoter’s contract is when it has at
the time of its constitution received benefits from the contract
OTHER PROMOTER’S CONTRACTS

 These are contracts entered into the name if the intended corporation by the promoters or
organizers of the corporation, such as contracting services to draw-up feasibility studies, the
leasing of the corporate business premises, the hiring of key employees, etc
POST-RATIFICATION AS THE BASIS TO HOLD THE CORPORATION LIABLE

 Ratification is the key element in upholding the validity and enforceability of a promoter’s
contract. Without ratification by a corporation after its due incorporation, a contract entered
into in behalf of the corporation yet to be organized or still in the process of incorporation is
void as against the corporation
 Promoter personally liable if the corporation is not duly incorporated
DEFECTIVELY-FORMED AND NON-EXISTENT CORPORATIONS

De Facto Corporation Doctrine
 It is meant to protect the enforceability of corporate dealings and contracts, to allow the public
to take at reasonable face value the authority of the corporation and its officers to enter into
valid and binding contracts, thereby providing a healthy system by which to encourage the
public to deal with corporate entities
 Requisites:
1. The existence of a valid law under which the corporation may be incorporated
2. An attempt in good faith to incorporate, or existence of a colourable compliance with
provisions on incorporation
 Minimum Requirement of GF: issuance of the Certificate of Incorporation
3. The assumption by the enterprise of corporate powers
 Examples:
a. Taking subscriptions and issuing shares of stocks
b. Electing officers
c. Adopting by-laws
 Organization: is the election of officers, providing for the subscription and
payment of the capital stock, the adoption of by-laws and such other steps as
are necessary to endow the legal entity with the capacity to transact the
legitimate business for which it was created
 Can there be de facto corporation organized under an enabling statute that is
unconstitutional?
1. Orthodox View: an unconstitutional act, whether legislative or executive, is not a law,
confers no rights, imposes no dues and affords no protection
2. Qualified View: the actual existence of a statue prior to such determination of
unconstitutionality is an operative fact and may have consequences which cannot always
be erased by a new judicial declaration
 Under that theory, a corporation defectively organized under the law before it
was declared unconstitutional can claim to be a de facto corporation
 After the declaration of the invalidity or unconstitutionality of the enabling
statue, any corporation organized under it can no longer claim the status of
being a de facto corporation, since at that point the element of good faith would
no longer exist
 Defects that would preclude the creation of a de facto corporation
1. Absence of AoI
2. Failure of filing the AoI with SEC
3. Lack of Certificate of Incorporation
 Defects that do not preclude the creation of a de facto corporation
1. Defects in the corporation papers
2. Corporate name
3. Ineligibility of incorporators
4. Defects in the execution of incorporation papers, the acknowledgment in the corporation,
or certificate of incorporation is insufficient or defective in form, or it was acknowledged
before the wrong office
CORPORATION BY ESTOPPEL
 It represents an exemption to the principle embodied under Sec. 2 of the CC
 It is meant to hold the contractual parties to their representations or expectations at the time
the contract was perfected
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 Jurisprudence provides that the general rule is that in the absence of fraud, a person whi
has contracted or otherwise dealt with an association in such as way as to recognize and in
effect admit its legal existence as a corporate body is thereby estopped to deny its corporate
existence in any action leading out or involving such contract or dealing, unless its existence is
attacked for causes which have arisen, since making the contract or other dealing relied on as
an estoppel and this applies to foreign as well as to DC
 Sec. 21: All persons who assume to act as a corporation knowing it to be without authority to
do so shall be liable as general partners for all debts, liabilities and damages incurred arising
as a result thereof, provided, however, that when such any ostensible corporation is sued on
any transaction entered by it as a corporation or on any tort committed by it as such, it shall
not be allowed to use as a defense for its lack of corporate personality
 Corporation by estoppel applies only when one party to a contract was under the
impression that the other corporate party was a duly incorporated entity. It applies when a
certificate is issued
 When fraud or misrepresentation occurs, the actor is personally liable on the contract as
a general partner
 By using general partners, the implication is that the one who knows a
corporation not to exist would be liable not only with what he purported to
invest in the venture, but also he could be held liable to all his properties, even
those not actually invested or promised to be invested in the corporate venture
 When no fraud or misrepresentation occurs, it would prevent both sides from raising the
non-existence of the corporation as a means to avoid the enforcement of the contract
 The persons acting in good faith for the purported corporation would still
be personally liable, but only to the extent of their actual or promised
investment in the corporate venture
ULTRA VIRES DOCTRINE

 It deals with the corporate capacity to validly enter into contracts and transactions, and involves
either of the 2 principles in PH Corporate Law: 1) creature of state and 2) centralized
management
 Atrium Management Corp vs CA
 UV is one committed outside the object for which a corporation is defined by the law
of its organization and therefore beyond the powers conferred upon it by law
 UV is an act outside or beyond the corporate powers, including those that may
ostensibly be within such powers but are, by general or special laws, prohibited or
declared illegal
 Exception to UV
a. When the acts are necessary and incidental to carry out a corporation’s purposes, and to
the exercise of powers conferred by the CC and under a corporation’s AoI
TYPES OF ULTRA VIRES DOCTRINE

1. Those entered into or done beyond the powers of the corporation as provided for
in the law or its AoI
 UNENFORCEABLE CONTRACTS
 Basis:
a. UV doctrine stems in part from the principle that a corporation is a creature
of law, and has only such powers and privileges as are granted by the
State
b. UV doctrine upholds the duty of trust and obedience owned by the
corporation’s directors and officers to the SH or members
2. Those entered into or done on behalf of the corporation by persons who have no
corporate authority
 Cover acts, contracts and transactions made on behalf of the corporation by
agents and representative who have not been authorized by the BoD
 UNENFORCEABLE CONTRACTS, under the principles in corporate contract law,
as being species of contracts entered into by an agent or representative without
authority from the principal in whose name the contracts are entered into.
3. Acts or contracts which are per se illegal as being contrary to law
o VOID CONTRACTS, for corporations, even when acting through the BoD, has
the authority to enter into contracts which are prohibited or declared void by
law or public policy
JUDICIAL ATTITUDE TOWARDS UV DOCTRINE

 Courts are hesitant to accept UV as a defense. To rule otherwise would eventually undermine
the public’s faith on the corporation as a means of doing business
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CHAPTER 6: ARTICLES OF INCORPORATION
ARTICLES OF INCORPORATION
 Represents the highest form of Corporate Law, defining the charter of the corporation
 When it has been approved by SEC, constitutes every duly registered corporation’s charter, the
basis by which to adjudge whether it exists for legal purposes, as well as the extent of its
powers and capacities, or what is termed in Civil Law as its juridical capacity to act
 Contract between the ff parties:
a. State and Corporation
b. SH and the State
c. Corporation and SH
REGISTRATION OF THE AOI

 AoI does not become binding as the charter of the corporation unless they have been filed and
registered with SEC
 In cases of special types of corporations, such as bank, public utilities, insurance
companies, etc. they will not be certified by the SEC unless:
 Said Articles are accompanied by a favorable
recommendation from the appropriate agencies
supervising such special types of corporations, to the effect
that the articles are in accordance with the specific laws
applicable
EXAMINATION AND APPROVAL BY SEC

 Upon filing, the SEC will determine whether the provisions thereof are in
accordance with law. If it is not, SEC shall give the incorporators
reasonable time within which to correct or modify the objectionable
portions
 PD 902-A
- Gives the SEC, after consultation with the BOI, NEDA or other
appropriate agencies, the power to refuse or deny application for
registration of any corporation, if its establishment, organization or
operation will not be consistent with the declared national economic
policies
SPECIAL RULES FOR BANKS

 Sec. 14 of the General Banking Law of 2000
- SEC shall not register the AoI of nay bank, or any amendment
thereto, unless accompanied by a certificate of authority issued by
the Monetary Board under its seal
 Such certificate shall not be issued unless:
a. All requirements of existing laws and regulations to
engage in the business for which the applicant is
proposed to be incorporated have been complied with
b. The public interests and economic conditions, both
general and local, justify the authorization
c. The amount of capital, the financing, organization,
direction and administration, as well as the integrity
and responsibility of the organizers and
administrators, reasonably assure the safety of
deposits and the public interests
 Sec. 81 of GBL
 Provides expressly that the SEC shall not register the
articles unless accompanied by a certificate of authority
issued by BSP
GROUNDS FOR DISAPPROVAL OF AOI

1. AoI or its amendment is not substantially in accordance with the form
prescribed by law
2. The purposes of the corporation are patently unconstitutional, illegal, immoral,
or contrary to government rules and regulations
3. TA concerning the amount of capital stock subscribed and/or paid is false
4. The percentage of ownership of the CS to be owned by the citizens of the PH
has not been complied with as required by existing laws or the Constitution
CONTENTS OF THE AOI

 Sec. 14: provides that all corporations organized thereunder shall file with
the SEC their AoI in any of the official languages, duly signed and
acknowledged by all the incorporators, containing substantially the ff
matters:
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a. Name of the Corporation

b. Purpose clause, and should distinguish the primary purpose from the
secondary purpose, should the corporation have more than one
purpose; a non-stock corporation shall not include a purpose which
would change or contradict its nature
c. Place of principal office within the PH
d. Term of existence
e. Names, nationalities and residences of the incorporators
f. Number of directors or trustees
g. Names, nationalities and residence of the persons who shall act as
directors or trustees until the first regular directors or trustees are
duly elected and qualified
h. If stock corporation, amount of authorized capital stock, number of
shares, par value or no par value shares, original subscribers,
amounts subscribed and paid by each
REQUIREMENTS:
1. Treasurer’s Affidavit
- 25% of the total capital stock authorized is subscribed and at least
25% of such has been fully paid in case or in property
2. Certificate of Deposit
- SEC Guidelines require that a bank certificate covering the deposit
of the paid-up capital, in accordance with a prescribed form
subscribed under oath by a responsible bank officer, must
accompany the incorporation papers
3. Letter of Authority to Examine Bank Deposit
- Authorizing the SEC to examine not only the bank deposit account
but also the corporation’s book of accounts and supporting records
to determine the existence and utilization of the paid-up capital
capital stock must also be determined
4. Written Undertaking to Change Corporate Name
CORPORATE NAME
 The incorporators constitute a body politic and corporate under the name stated in the
certificate
 Essential to corporate’s existence, and it cannot change its name except in the manner provided
by statute
 Since it is the main practical means of identifying a corporation from its members or SH, and
other entities, the CC does not allow a corporation to adopt a name identical, deceptively or
confusingly similar, to any other name already protected by law or which is patently deceptive,
confusing or contrary to existing laws
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CHANGE OF CORPORATE NAME

 Does not result in dissolution, nor does not make a new corporation
 It has no effect to the identity of the corporation, or on its property rights, or liabilities
USE OF CORPORATE NAMES OF DISSOLVED PERSONS

 SEC Memorandum Circular
-The name of a dissolved firm shall not be used by other firms within 3 years
after the approval of the dissolution of the corporation by the SEC, unless
allowed by the last SH representing at least majority of the OCS of the dissolved
firm
SEC JURISDICTION OVER ISSUES INVOLVING CORPORATE NAME
 Industrial Refractories vs CA: SEC still has quasi-judicial powers to hear and
decide controversy between 2 corporations as to who has a better right to the
use of a particular corporate name
- SEC has absolute jurisdiction, supervision and control over all
corporations
- It also exercises regulatory and administrative powers to implement
and enforce the Corporation Code
- It has the duty to prevent confusion as to the use of corporate nam
- It has the authority to de-register at all times and under all
circumstances corporate names which in its estimation are likely to
generate confusion
PURPOSE CLAUSE
 Significance: It confers, as well as limits, the powers which a corporation may exercise.
 It must specify which is the corporation’s primary purpose and those which are the secondary
purpose
 Other reasons for indicating purpose in the charter of the corporation:
1. Prospective investors shall know the kind of business the corporation deals
2. Management shall know the limits of its actions
3. A third party can know whether his dealings with the corporation are within the corporate
powers and functions
 Indication of Primary Purpose: necessary for the administrative supervision and monitoring
of the State, as it can determine which particular agency shall have jurisdiction over the
operations of the corporation
 If the purpose stated is lawful, SEC cannot ask for other purpose other than those stated,
hence, mandamus will lie to compel SEC to issue certificate of incorporation, UNLESS, under
declared policies, the SEC may need to regulate certain lawful purposes or activities in
consonance with the declared national economic policies
INVESTMENT IN NON-PRIMARY PURPOSES

 Sec. 42: A private corporation may invest its funds in any other corporation or
business or for any purposes other than the primary purpose for which it was
organized when:
1. Approved by the majority of the BOD or BOT
2. Ratified by the SH represented at least 2/3 of the members in case of non-
stock corporations, at a SHs meeting duly called for the purpose
 Written notice of the proposed investment and the time and the place
- Shall be addressed to each SH or member at his place of residence
as shown in the books of corporation and deposited to the addressee
in the post office with postage prepaid, or served personally;
however, any dissenting SH shall have an appraisal right
 Where the investment is reasonably necessary to accomplish the
corporation’s primary purpose, the approval of the SH or members is not
necessary
RULE OF INTERPRETATION OF THE PURPOSE CLAUSE
o When the charter of the corporation confers certain powers, it is to be
construed as including incidental powers reasonably necessary to the proper
exercise of the enumerated powers and as excluding all other non-enumerated
powers; and that if powers are expressly enumerated in details, such
specification by implication excludes all other powers or rights, except such
incidental or subordinate rights and powers as may be reasonably necessary to
an exercise of the powers and rights expressly given
PRINCIPAL PLACE OF BUSINESS
o M.C No. 3, s. 2006: all corporations and partnerships applying for registration
should state in their AoI or AoP the:
a. Specific address of their principal office
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- Served as the residence of the corporation

b. Specific residence address of each incorporator, SH, director, trustee or
partner
o Sec. 51: allows Metro Manila to be shown as the principal place of business =
this is no longer allowed under the MC No. 3
CORPORATE TERM
 Corporation commences its existence from the moment the SEC issues a Certificate of
Incorporation
EXTENSION OF CORPORATE TERM

o Sec. 11: A corporation shall exist for a period not exceeding 50 years from the
date of the incorporation unless sooner dissolved or unless the said period is
extended
PROVIDED, that no such extension shall be made earlier than 5
years prior to the original or subsequent expiry date unless there are
justifiable reasons for an earlier extension
INCORPORATING SH OR MEMBERS
 Sec. 10: Any number of natural persons not less than 5 but not more than 15 all of legal age
and a majority of whom are residents of the PH, may form a private corporation for any lawful
purpose
CAPITAL STRUCTURE AT REGISTRATION

 AoI must state the amount of its authorized CS and the number of shares into which it is
divided
 Sec. 12: Stock Corporation incorporated shall not be required to have any minimum authorized
CS except as otherwise specifically provided for by special law, and provided that the paid up
capital cannot be lower than 5,000
 Maximum Capitalization is required to be indicated to:
1. protect the SH
2. Limit the issuance of the CS and extent of voting power or capacity of a SH
SUBSCRIPTION AND PAID UP CAPITAL

o Sec. 13: provides that at least 25% of the ACS as stated in AoI must be
subscribed at the time of incorporation, and at least 25% of the total
subscription must be paid
- the balance to be payable on a date fixed in the contact of
subscription without need of call, or in the absence of a fixed date,
upon call by the BoD, provided that in no case shall the paid up
capital be less than 5,000
o Capital Stock: the amount fixed in the AOI procured to be subscribed and
paid in. It is settled that the shares issued in excess of the CS are void
o OCS: total shares of stocks issued to subscribers of SH, whether or not full paid
or partially paid, except treasury shares
o Subscribed Capital Stock: portion of the CS subscribed, whether or not fully
paid
o Subscription: mutual agreement of the corporation and the subscriber to take
and pay for the stock of the corporation
ISSUANCE OF PAR VALUE SHARES OF STOCK

o Par Value: one in the certificate of stock of which appears an amount in pesos
as the nominal value of shares. Such par value must be stated in the AOI and
par share cannot be issued at less than par value, which can be changed only
by an amendment of the AOI
o If no par value shares will be issued, such fact must be stated in the
articles, and the consideration of their issuance cannot be less than the issued
value, which in turn, cannot be less than 5 pesos for each
o The consideration for which no par value may be
issued is referred to as its “issued value”, may be
fixed in any of the 3 ways
1. AoI
2. BoD
3. SH representing at least a majority of the OCS
o Some corporations cannot issue par value shares:
1. Banks
2. Public utilities
3. Insurance companies
4. Building and loan associations
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AMENDMENTS TO OR REVISIONS OF THE AOI

• Sec. 16: unless otherwise prescribed therein or by special laws and for legitimate purposes,
ay provision or matter stated in the AOI may be amended by a majority vote of the BOD or
BOT and the vote or written consent of SH representing at least 2/3 of the OCS, without
prejudice to the appraisal right of dissenting SH, or the vote or written assent of at least 2/3
of the members, if it be a stock corporation
• Original Amended Articles
o Shall contain:
1. All provisions required by law to be set out in the AOI, with
2. The amended articles be indicating by underscoring the changes made,
and
3. A copy thereof duly certified under oath by the corporate secretary and a
majority of the directors or trustees stating the fact that said amendments
have been duly approved by the required vote of SH or members
• Amendments shall take effect upon the approval of SEC, or in case the SEC fails to act on
the application within 6 months from the date of filing for a cause not attributable to the
corporation
MATTERS WHICH ARE BEYOND AMENDMENT

1. Names of the incorporators
2. Names of the incorporating directors or trustees
3. Names of the original subscribers to the capital stock of the corporation and
their subscribed and paid up capital
4. Treasurer in trust elected by the original subscribers
5. Members who contributed to the initial capital of non-stock corporation
6. Witnesses and acknowledgement thereof
CHAPTER 7: BY LAWS
BY LAWS
• Meant to be an intramural document, to govern the relationship between and among members
of a corporate family
• Traditionally defined as regulations, ordinances, rules or laws, adopted by an association or
corporation or the like, for its internal governance, including rules for routine matters such as
calling meeting and the like
NON-BINDING EFFECTS OF BY-LAWS TO OUTSIDERS

o General Rule: Third persons are not bound by by-laws
o Exceptions:
1. Third parties must have acquired knowledge of the pertinent by laws at that time
the transaction or agreement between said third party and the shareholders was
entered into
PRINCIPLE OF WAIVER APPLICABLE TO BY-LAWS
o General Rule: It may be waived by a SH or member when it is he whose individual
rights are advanced or protected by its provisions
o Exceptions: If a corporation acts or contracts in disregard of a by-laws with the
consent or acquiescence of the SH or members, there is a waiver of by-laws, at least
pro hac vice, whether it is afterwards sought to set up the by-laws against strangers
or as against it SH or members
LEGAL BASIS OF POWER TO ADOPT BY-LAWS
1. BL cannot contravene the provisions of law
2. BL cannot contravene the charter
3. BL must be reasonable and non-discriminatory
PROCEDURE FOR THE ADOPTION OF BY-LAWS

• Sec. 46: Every corporation must, within one month after receipt of official notice of the
issuance of its certificate of incorporation by SEC, adopt a code of by-laws for its government
not inconsistent with the Code
• Loyola Grand Villas vs CA
- Failure to file the by-laws does not imply the demise of the corporation, but merely
constitutes a ground by which the SEC may seek forfeiture of the franchise of the
corporation as provided by P.D 902-A
• By-Laws may be adopted and filed prior to incorporation:
1. It must be approved and signed by all the incorporators
2. Submitted to SEC, together with the AOI
• For the adoption of by-laws
1. Affirmative vote of SH representing at least a majority of the OCS, or at least a majority
of the members in the case of non-stock corporations, is necessary
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• BY LAWS shall:
1. Be signed by the SH or members voting for them
2. Shall be kept in the principal office of the corporation, subject to the inspection of the SH
or members during office hours
3. A copy thereof must be duly certified by a majority of the directors or trustees, and it
must be countersigned by the secretary of the corporation
4. It shall be filed with the SEC, which shall be attached to the original AOI
BASIC CONTENTS OF BY-LAWS

1) The time, place and manner of calling and conducting regular or special meetings of the
directors or trustees;
2) The time and manner of calling and conducting regular or special meetings of the stockholders
or members;
3) The required quorum in meetings of stockholders or members and the manner of voting
therein;
4) The form for proxies of stockholders and members and the manner of voting them;
5) The qualifications, duties and compensation of directors or trustees, officers and employees;
6) The time for holding the annual election of directors of trustees and the mode or manner of
giving notice thereof;
7) The manner of election or appointment and the term of office of all officers other than directors
or trustees;
8) The penalties for violation of the by-laws;
9) In the case of stock corporations, the manner of issuing stock certificates; and
10) Such other matters as may be necessary for the proper or convenient transaction of its
corporate business and affairs.
OTHER MATTERS THAT MAY BE INCLUDED IN BL

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
MATTERS THAT MAY BE BOTH FOUND IN AOI AND BL

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
MATTERS THAT CANNOT BE PROVIDED IN BL

1.
2.
3.
4.
5.
6.
7.
8.
AMENDMENTS TO AND REVISIONS OF BL

• Sec. 48: The BoD or BoT, by a majority vote thereof, and the owners of at least a majority of
the OCS, or at least a majority of the members if a non-stock corporation at a regular or special
meeting duly called for a purpose, may amend or repeal any by-laws or adopt new by-laws
• Owner of the 2/3 OCS: may delegate to the BOD the power to amend or repeal any by-laws or
adopt new by-laws; provided, that any power delegated to the Board of Directors to amend or
repeal any BL or adopt new BL, shall be considered revoked whenever SH owning or representing
a majority of the OCS or a majority of the members in the non-stock corporation, shall so vote at a
regular or special meeting.
25
CHAPTER 8: CORPORATE POWERS AND AUTHORITY
UNDERLYING THEORY OF CORPORATE POWERS

• A corporation has no power except those expressly conferred on it by the CC, and its charter,
and those that are implied or incidental to its existence; in turn, a corporation exercises its
powers through BoD and its duly authorized officers
DOCTRINE OF CENTRALIZED MANAGEMENT

• Theory of Concession

• Specified instances where consent or ratification of SH/Members are required
1. To give effect to a corporate power, contract or transaction
2. Underlying contractual relationship is being amended
CORPORATE POWERS AND CAPACITY

1. Express Powers
- Art. 46: Juridical persons may acquire and possess property of all kinds, as well as incur
obligations and bring civil or criminal actions, in conformity with the laws and regulations
of their organization
- Sec. 36: Express Powers of Corporations under the CC
1) To sue and be sued in its corporate name;
2) Of succession by its corporate name for the period of time stated in the articles
of incorporation and the certificate of incorporation;
3) To adopt and use a corporate seal;
4) To amend its articles of incorporation in accordance with the provisions of this
Code;
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;
6) In case of stock corporations, to issue or sell stocks to subscribers and to sell
stocks to subscribers and to sell treasury stocks in accordance with the
provisions of this Code; and to admit members to the corporation if it be a non-
stock corporation;
7) To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage
and otherwise deal with such real and personal property, including securities
and bonds of other corporations, as the transaction of the lawful business of
the corporation may reasonably and necessarily require, subject to the
limitations prescribed by law and the Constitution;
8) To enter into merger or consolidation with other corporations as provided in
this Code;
9) To make reasonable donations, including those for the public welfare or for
hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, That
no corporation, domestic or foreign, shall give donations in aid of any political
party or candidate or for purposes of partisan political activity;
10) To establish pension, retirement, and other plans for the benefit of its directors,
trustees, officers and employees; and
11) To exercise such other powers as may be essential or necessary to carry out its
purpose or purposes as stated in the articles of incorporation.
POWERS BASIC PRINCIPLES REQUIREMENTS APPRAISAL

RIGHTS
POWER TO SUE GR: Lodged with BOD
AND BE SUED EXC: Derivative Suit
Board Resolution
- authorizing a corporate officer to execute a certification against FS
Rules on Summons
-Service may be made upon:
President
Managing Partner
General Manager
Corporate Secretary
Treasurer
In-House Counsel
POWER TO GR: BOD
SELL, LEASE,
DISPOSE, OR If done through an agent, BODs approval is still needed
ENCUMBER
ASSETS
26
POWER TO GR: BOD

BORROW OR EXC: When the corporation
ENTERE INTO shall incur or increase a bonded
LOANS indebtedness (Sec. 38)
POWER TO Purposes:
MAKE a. Public welfare
DONATIONS b. Hospital
c. Charitable
d. Cultural
e. Scientific
f. Civic
g. Similar purposes
EXC:
1. In aid of a political party or candidate
2. Partisan political activity
CSR: posits that corporations, being creatures of the law and receiving the
protection of the State as well as profiting from society, must bear certain non-
profit and social responsibility toward the society
Test of Reasonable Donation

Corporation donations must be of such nature and of such amount that they
promote the best interest of the corporation and its SH, in the sense that the
main purpose is to build the name and goodwill of the company as a good
corporate citizen, thereby enhancing patronage for its business on a long term
basis
POWER TO 1. Exercise of the power to favor officers and employees
GRANT 2. Exercise of the power to favor directors or trustees
PENSION,
RETIREMENT
AND OTHER
GRATUITIES
POWER TO Power to Extend: not 1. Approval by Sec. 37
EXTEND OR inherent right, since the majority vote of - It is only in
SHORTEN corporate term is not only a the BOD the case of
CORPORATE matter that constitutes an 2. Ratified at a extension of
TERM integral clause of the AOI, but meeting by SH corporate that
also the State in granting JP to representing at he may
a corporation is presumed to least 2/3 of the exercise his
have granted it only for the OCS or at least 2/3 AR to have his
period of time provided in the of the members in shares
corporation’s charter a NSC bought back
at fair value
Power to Shorten: inherent Written Notice of the by the
right, since the decision to proposed action and corporation.
shorten the business life of a of the time and place - Extension
business endeavour should be of the meeting shall: usually
addressed to the business 1. Addressed to each novates the
decision of the co-venturers SH or member at corporate
his
o place of contract with
residence as each SH
shown on the
books of the Sec. 81
corporation, - available also to
2. And deposited to DSH even when it
the addressee in covers the
the post office with shortening of the
postage prepaid, term of corporate
or served existence
personally - Should not be
triggered when 
its comers to
shortening
corporate
existence
because there is
really no violation
of the contractual
intent
27
- cannot prevail
over Sec. 37
POWER TO Temporary Stoppage
TEMPORARY (SEC Rules)
CEASE 1. 2/3 vote of the
CORPORATE OCS is required
OPERATIONS prior to the voting
of the BOD or by
subsequent
ratification in a
meeting called for
the purpose
If the temporary
cessation of operations
of the corporate powers
requires the ratificatory
vote of the SH, more so
would a permanent
ceasure of operations
which is not
accompanied by formal
dissolution of the
corporate entity
o
POWER TO Any increase or decrease in 2. Approved by a NO AR IN
INCREASE OR the CS requires prior approval majority vote of INCREASE OF
DECREASE of SEC BOD, and CS
CAPITAL 3. Ratified by SH - Increase in
STOCK SEC shall not accept for owning or CS does not
filing any certificate representing at prevent a
UNLESS: least 2/3 of the DSH from
1. Accompanied by the SS of OCS at a SH’s opting out of
the Treasurer showing at meeting duly the
least 25% of such called for the contractual
increased capital stock has purpose relationship
been subscribed and at by simply
least 25% of the amount WRITTEN NOTICE of selling his
subscribed has been paid, the proposed increase shares in the
either in actual cash to the or decrease of the corporation
corporation or that there capital stick must be to any
has been transferred to the addressed to each SH at interested
corporation property the his place of residence as buyer
valuation of which is equal shown on the books of - Grant of AR
to 25% of the subscription corporation and in case of
deposited to the increase in
addressee in the post CS would
NOT AN INHERENT POWER office with postage defeat the
receipt or served very purpose
The increase in capital stock personally for which the
does not constitute part of power is
the CS, until approved by the CERTIFICATE IN exercised
SEC. Prior approval, it is treated DUPLICATE must also
as deposits on future be signed by a majority NO AR IN
subscriptions of BOD and DECREASE OF
countersigned by the CS
SPECIAL RULES ON LISTED Chairman and Secretary - The
SHARES of the said meeting decrease
In case of corporations whose setting forth THAT: would result
securities are listed in the stock 1. Requirements of in returning
exchange or registered under the law have been part of the
the SEC Code, no complied with investment
announcement of the offer of 2. Amount of the of the SH,
rights to acquire share or to increase or including
issue stock dividends to SH shall diminution of CS those SH
be made after an increase of CS 3. Names, who
without a definite fixed date for nationalities of the dissented
the exercise of such right or persons
issuance of stock dividends. subscribing, the
amount of capital
stock etc.,
28
4. Actual
indebtedness of
the corporation on
the day of the
meeting
5. Amount of stock
represented at the
meeting
6. Vote authorizing
increase or
diminution of
capital stock
POWER TO Falls within the business 4. Majority vote of
INCUR, judgment of the BOD under the BOD, and
CREATE, OR Doctrine of Centralized 5. SH Meeting duly
INCREASE Management, and would not called for purpose
BONDED require a ratificatory vote 6. 2/3 of the OCS
INDEBTEDNESS shall favor the
Any incurring, creating of incurring, creating
bonded indebtedness sall or increasing any
require prior approval from SEC bonded
indebtedness
SEC shall not accept for
filing any certificate RULES ON WRITTEN
UNLESS: NOTICE
4. Accompanied by the SS of
the Treasurer showing at
least 25% of such
increased capital stock has
been subscribed and at
least 25% of the amount
subscribed has been paid,
either in actual cash to the
corporation or that there
has been transferred to the
corporation property the
valuation of which is equal
to 25% of the subscription
PARTICULAR
REQUIREMENTS OF SEC
Issuance of bonds may be filed
by the issuing corporation which
has:
1. Minimum net worth of 25M
at the time of the filing of
the application
2. It must have been in
operation for 3 years
3. It must fulfill the financial
ratios mandated by SEC
SUPPORTING DOCUMENTS
1. Issuing corporation must
submit a Trust Indenture
with a trustee bank
2. Underwriting Agreement,
together with the printed
prospectus and title
covering the securities for
bonded indebtedness
POWER TO Exceptions: 2. Majority vote of DSH

SELL, DISPOSE, 1. Subject to the existing laws BOD -may exercise AR
LEASE OR on illegal combinations and 3. When authorized in case of sale of
ENCUMBER monopolies by the vote of at all or substantially
ASSETS least 2/3 of the all of the
Transactions not covered by OCS corporate assets
the Ratificatory Vote or property
Requirements RULES ON WRITTEN
NOTICE
29
1. usual and regular course of

business of such corporations
2. proceeds of the sale or other
dispositions of such property be
appropriated for the conduct of
its remaining business
A sale or disposition shall be

deemed to cover
substantially all the
corporate property and
assets if thereby the
corporation would be
rendered incapable of:
1. continuing business, or
2. accomplishing the purpose
for which it was incorporated
- Qualitative,
rather than
Quantitative
BULK SALES LAW

-When the transaction falls
within the classification of the
Law on sale in bulk, and would
require the seller to execute a
SS listing the corporate creditors
and the amount and nature of
their claims, giving notice of the
sale, and applying the proceeds
of the sale proportionately to
the payment of the listed
obligations
* Compliance with the BSL is

required for the sale of all or
substantially all of the corporate
assets or property; otherwise,
the transaction would be
rendered fraudulent or void
Legal Effects when entered

into without the requisite
SH approval
-Sec. 40 does not provide for
legal consequences
-UV of the 2nd type
Legal Effects on Assignee

even with Requisite SH or
Members Approval
-business enterprise transferss
POWER TO Sec. 42: A corporation may 3. Approved by
INVEST invest its fund in any majority of BOD
CORPORATE corporation or business or for 4. Ratified by the SH,
FUNDS IN any purpose other than the representing at
ANOTHER primary purpose when: least 2/3 of the
CORPORATION 1. Approved by majority OCS
OR BUSINESS of BOD
2. Ratified by the SH, RULES ON WRITTEN
representing at least NOTICE
2/3 of the OCS
Exception to the
requirement of approval
-Investment is reasonably
necessary to accomplish the
corporation’s primary purpose
as stated in the AOI
(Business Judgment na ng BOD)
30
Funds: includes any corporate

property to be used in the
furtherance of the business, and
that what property is devoted in
any business other that pursuit
of the primary purpose for
which the corporation was
incorporated, it would need
ratificatory vote of 2/3 of the
OCS of the corporation
Investments should be
considered within primary
purpose
1. Investment as a means to
obtain best returns of their
investible funds
2. Place the corporation’s
funds in an investible fund
Investments outside of
Secondary Purpose
-requires ratificatory vote
WAYS TO EXPAND
BUSINESS
1. Public company with more
than 19 SH, but not
publicly listed
2. PC with more than 20SH,
with the option to become
publicly listed
3. PC with more than 20SH,
but with the option not to
become publicly listed, but
you can market your
shares through individual
public offer, registered at
SEC
POWER TO Exception: 2. Approved by the
ENTER INTO 1. Not be longer than 5 years BOD, and
MANAGEMENT for any term 3. SH owning at least
CONTRACT the majority of the
Coverage of Management OCS of both the
Contract managed and
1. Contracts whereby a managing
corporation undertakes to corporation
manage or operate all or 4. Meeting duly called
substantially all of the for purpose
business of another
corporation, whether such Ratification
contracts is called service Requirements when
contracts, operating there is common
contracts or otherwise control of involved
corporations
1. SH of both
managing and the
managed
corporations own
or control more
than 1/3 of the
total OCS entitled
to vote of the
managing
corporation
2. A majority of
members of the
BOD of the
managing
corporation also
31
constitute a
majority of the
members of the
BOD of the
managed
corporations
3. Management
contract must be
approved by the
SH of the managed
corporations
owning at least 2/3
of the total OCS
entitled to vote, or
by at least 2/3 of
the members in
the case of NSC
POWER TO YES, through a JV, when the

ENTER INTO A latter is in line with the business
PARTNERSHIP authorized by the Charter
JV: partnership agreement,

although of a special type, since
it pertains to a particular project
or undertaking
GR: A corporation cannot enter

into a contract of partnership
with an individual or another
corporation on the premise that
it would be bound by the acts of
the persons who are not its duly
appointed and authorized
agents or officers, which is
inconsistent with the policy of
the law that the corporation
shall manage is own affairs
separately and exclusively
EXC:
1. Expressly conferred by the
charter or the AOI, and the
nature of the business
undertaken by the
partnership is in line with
the business authorized by
the charter or AOI
REPORTORIAL REQUREMENTS WHEN EXERCISING SPECIFIC CORPORATE POWERS

1. Increases or decreases its capital stock
2. Changes its line of business
3. Creates bond indebtedness
4. Merges or consolidated with other corporations
5. Extends or shortens its term of existence
6. Increases or decreases the number of its directors
7. Ceases business operations
8. Dissolves
Must state the causes or reasons for said action in the resolution
of SH or BOD, approving the same, which resolution must be signed
and attested by the President and Secretary of the Corporation
Corporation invests funds in any other corporation or
business or for any purpose other than the main purpose:
 It shall file with SEC a copy of the RESOLUTION adopted
by the affirmative vote of the SH holding at least 2/3 of the
voting power authorizing the Board of Directors to invest
in another corporation or business.
32
CHAPTER 9: BOARD OF DIRECTORS/TRUSTEES AND OFFICERS
THEORIES ON THE SOURCE OF THE POWER AND AUTHORITY

OF THE BOARD OF DIRECTORS/TRUSTEES
1. Theory of Original Power

- The source of the power of the Board comes directly from the law, and that the Board is
originally and directly granted corporate powers as the embodiment of the corporation
- It has no democratic notions, but actually is more akin to the principles of autocracy
- It recognizes that one of the attractive features of the corporate vehicle for the efficient
and economical management of corporate affairs is promoted by centralization of control
in a small group of decision makers, which is the BOD
- Under this theory, the BOD is vested with the legal title to the properties and business
enterprise of the corporation, being viewed as a medium or the corpus, with the SH being
considered as the beneficiaries, and thereby a fiduciary relationship is established
between the BOD/BOT as the trustee, and SH, as the beneficiaries
 Theory of Corporation
- SH may have all the profits, but shall turn over the compete
management of the enterprise to their representatives and agents
called the Directors
2. Theory of Delegated Power

- The authority exercised by the Board is viewed as the derived or delegated authority,
delegated to the, by SH or members of the corporation
- The source of the primary power can override the decision of its delegates. Such theory
promotes the notion of “agency” in the corporate set-up, where the real sources of power
are the SH or members, and the representatives would be the Board
- General Rule: The owners exercise ultimate power and disposition over the subject matter
to which he holds
- Under this view, a corporate has a personality separate and distinct from the individuals
that compose it, but the fact remains that it cannot act the without the medium of human
beings. The corporate powers should belong to the SH or members who from the
corporation, and who contribute the corporate assets
- Angeles vs Santos: the source of common law rights of SH and members to bring a
derivative suit on behalf of the corporation is based on the recognition that the powers of
the Board is delegated to them by the SH or members
Peculiar Agency Role of the Board

 Sec. 23: The Board is the main agency by which all corporate powers and authority are
exercised, and strictly speaking any other officer appointed to represent the corporation, is a
mere appointee or sub-agent of the Board
 ABS-CBN Broadcasting Corp vs CA characterized the power of the Board as follows:
“Under the Corporation Code, unless otherwise provided by said Code, corporate powers,
such as the power to enter into contracts, are exercised by the BOD. However, the Board
may delegate such powers to either an executive committee or officials or contracted
managers. The delegation, except for the executive committee, must be for specific
purpose. The delegation to officers makes the latter agents of the corporation;
accordingly, the general rules of agency as to the binding effects of their acts would apply.
For such officers to be deemed fully clothed by the corporation to exercise a power of the
Board, the latter must specially authorize them to do so”
 Premium Marble vs CA:
“In the absence of an authority from the BOD, no person, not even the officers of the
corporation, can validly bind the corporation. It held that in the absence of any Board
Resolution authorizing the filing of a suit for the corporation, then any suit filed on behalf
of the corporation should be dismissed, since the power of the corporation to sue and be
sued in any court is lodge with the BOD that exercises its corporate powers.
 In corporate setting, although the Board is an agent of the corporation, since the principal
is a mere juridical concept, it realistically is not in the position to countermand the decision of
its agent, the Board
 Since the principal does not have real existence or a mind of its own to make
decision, the Board is by the exercise of its judgment, the very principal
speaking and acting in the commercial world
 The Board acts both as an agent of the corporation, and the very personification
of the corporation in the commercial and legal world, and practically stands as
the principal of corporate powers and affairs, and that the officers and
representatives that it appoints are its own agents
Board Power and Fiduciary Obligations Spring from a Trust Arrangement

 The better way to unify the doctrines and the jurisprudential rulings that define and
characterize the power of the BOD, the responsibilities and the fiduciary roles it plays, as well
33
as the standing of, and relationship to, the SH, would be to consider the corporate set-up as
that based on the medium of business trust.
 The essence of a business trust is having at nexus of such relationship a property whereby the
“trustor” conveys naked or legal title thereto to the trustee, for the benefit of another called
the “beneficiary” who thereby is deemed to hold beneficial or equitable ownership of the
property covered by the trust arrangement
 In a corporate set-up, one must consider the corporation more as the trust medium set-up
by the State, whereby the corporate assets and business enterprise constitute the corpus, with
the BOD being designated by law as the collective trustee which exercise powers of control,
ownership, and management over the corpus, with the SH being the beneficiary thereof
 Under such trust relationship, inherently the BOD owes fiduciary duty to
the beneficiaries-SH, and must run the affairs of the corporation for the
complete benefit of the beneficiaries-SH
- But, it does not mean that the BOD are mere agents of the SH, for
they hold title to the corporate assets and business enterprise in their
own right as naked title holders, and whose business discretion on
how to run the affairs of the corporation is essentially what will
prevail
- BOD
o Chosen based on their qualification, and are expected to
run the affairs of the corporation in the exercise of their
business judgment, and not as mere stooges of the SH
who do not possess as a group the managerial competence
to run the affairs of the corporation

 Sec. 23: Unless otherwise provided in this Code, the corporate powers of all corporations shall
be exercised, all business conducted and all property of such corporations controlled and held
by the BOD or BOT, to be elected from among the holders of stocks, or where there are no
stocks, from among the members of the corporation, who shall hold office for one (1) year
until their successors are elected and qualified
 Hornilla vs Salunat: A corporation’s BOD is understood to be that body which:
1. Exercises all powers provided for under the CC
2. Conducts all business of the corporation
3. Controls and holds all property of the corporatiom
 AF Realty Dev vs Dieselman Freight Services
“Just as a natural person may authorize another to do certain acts in his behalf, so may the
board of directors of a corporation validly delegate some of its functions to individual officers
or agents appointed by it. Thus, contracts or acts of a corporation must be made either by the
BOD or by corporate agent duly authorized by the Board. Absent such valid delegation relating
to the affairs of the corporation, but not in the course of, or connected with, the performance
of authorized duties of such director, are held not binding on the corporation.
 RATIONALE:
- It promotes efficiency and prevents confusion arising from diffused
corporate powers. Investors and creditors of a corporation, as well
as those who deal with it, can rely upon the law-directed fact that
the corporation shall be bound only through its BOD, or
representatives duly authorized by the Board. In any organizational
set-up, the congruence of authority and responsibility in the same
person, committee, or board always promotes efficiency
- Board: sole authority to determine policy and conduct the ordinary
business of the corporation within the scope of its charter
 STOCKHOLDERS’ AGREEMENT CANNOT WITHHOLD CORPORATE
POWERS FROM THE BOD
 PRIMARY OBJECTIVE OF THE BOARD

a. Stockholders Theory: Maximization of Profits
- The primary obligation of SH is to seek the maximum amount of
profits for the corporation, and characterized the director’s position
as a position of trust and that in case a director’s interests conflict
with those of the corporation, he cannot sacrifice the latter for that
of his own advantage and benefit
- The fiduciary or trust relationship is not a matter of statutory or
technical law. It springs from the fact that directors have the control
and guidance of corporate affairs and property and hence of the
property interests of SH. Therefore, it is the grant of legal title of
corporate properties to the BOD under Sec. 23 of CC that necessarily
brings about its fiduciary obligations to the SH who thereby have
beneficial title or interests in the corporate enterprise
b. Stakeholders Theory: Enhancing the Value of the Corporation
34
- SEC Code of Corporate Governance

 When it comes to listed and publicly-held companies, it is
the obligation of BOD to promote good corporate
governance
 Corporate Governance: a system whereby
SH, creditors and other stakeholders of a
corporation ensure that the management
enhances the value of the corporation as it
competes in an increasingly global market place
 Definition was changed when the
2009 Revised Code of Corporate
Governance was enacted:
 Framework of rules,
systems and processes in
the corporation that
governs the performance
by BOD and Management
of their respective duties
and responsibilities to SH
- Principles embodied in the SEC Code create the following legal
consequences on the duties and responsibilities of the BOD of public
companies, thus:
1. Apart from SH, the SEC Code grants legal stakeholders
standing to creditors, employees, managers and the
community who are affected by the corporate enterprise,
and thereby expands considerably the constituencies to
whom the BOD owe certain fiduciary obligations
2. It also expands the objective of the BOD from one of
maximization of profits, itself an objective that can be
gauged from corporation’s financial statements, to
enhancing the value of the corporation, to make it more
competitive in the long run, and the best suited to protect
the varied interests of all stakeholders
ULTRA VIRES ACTS OF THE SECOND TYPE

 Policy Basis
- General Rule: Only the acts of corporate officers within the scope of their authority
are binding on the corporation
- Exception: When they exceed their authority, their actions can no longer bind the
corporation, unless, it has ratified such acts or is estopped from disclaiming them
 Doctrines countervailing the UV Doctrine
1. Doctrine of Estoppel or Ratification
 This principle of estoppel precludes a corporation and its BOD from denying the
validity of the transaction entered into by its officer with a third party who in
good faith, relied on the authority of the former as manager to act on or behalf
of the corporation
 Premised on a reliance in good faith by a third party that the representative of
the corporation has proper authority as “generally derived from law, corporate
by laws, or authorization from the Board, either expressly or implied by habit,
custom, or acquiescence in the general course of the business”
 Corporate policies need not be in writing. Contracts entered into by a
corporate officers or obligations or prestations assumed by such officer for and
in behalf of such corporation are binding on the said corporation only if such
officer acted within the scope of his authority or if such officer exceeded the
limits of his authority, the corporation has ratified such contract or obligation
2. Doctrine of Apparent Authority
o If a corporation knowingly permits one of its officers, or any other agent, to act
within the scope of apparent authority, it holds him out to the public as
possessing the power to do those acts; and thus, the corporation will, as against
anyone who has in good faith dealt with it through such agent, be estopped
from denying the agent’s authority
o Requisites:
a. The acts of the purported corporate officer or agent justifying belief in the
agency by the principal corporation
b. Knowledge thereof by the principal corporation
c. Reliance thereon by the principal corporation
o AU is not derived from mere practice, its existence may be ascertained through:
a. The general manner in which the corporation holds out an officer or agent
as having the power to act or in, other words, the apparent authority to
act in general, with which it clothes him
35
b. The acquiescence in his acts of a particular nature, with actual or

constructive knowledge thereof, whether within or beyond the scope of
his ordinary powers
 AU requires evidence of similar acts executed in its favor

or in favor of other parties. It is not the quantity of similar
acts which establishes AU, but the vesting of a corporate
officer with the power to bind the corporation
 Instances when AU does not apply
- Principal did not commit any act or conduct which a party knew or relied upon
in good faith as a result of the exercise of reasonable prudence, and the
agent’s act or conduct must have produced a change to the third party’s
detrinment
 Instances when AU apply
1. Where the BOD have previously allowed the President to represent himself as
duly authorized to open savings and current accounts in the name of the
corporation, where a notarized SecCert was submitted
2. Where a corporation seeks to disown its President’s act of applying to the bank
for credit accommodation, simply on the ground that it never authorized the
President by the lack of any formal Board Resolution, but it was proven that
the Board never objected to the previous acts of the President
3. Where in a banking corporation, an officer arranges a credit line agreement and
forwards the same to the legal department as its head office, and the bank did
not disaffirm the contract, then it is bound by it
4. Where in a banking corporation, the corporate secretary has entered into an
option contract on the sale of a foreclosed property which was allowed prior
board resolution, the subsequent granting of an extension of the payment of
the balance of the purchase price by the same officer is binding on the bank
 Timely and Proper Repudiation of Lack of Officer’s Authority
 “A corporation can not avail itself of the defenses that it had no power to enter
into the obligation to enforce which the suit is brought, unless it pleads that
defense. This principle applies equally where the defendant intends to challenge
the power of its officer or agent to execute it its behalf the contract upon which
the action is brought and where it intends to defend on the ground of a total
want of power in the corporation to make such contract (Ramirez vs Orientalist)
 The application of the doctrine is the burden of the outsider dealing with a
corporation to show.
 Exceptions to the Doctrine of Apparent Authority
1. Self-Dealings of Directors and Officers
“A director of the corporation holds a position of trust and as such, he owes a
duty of loyalty to his corporation. In case his interest conflict with those of the
corporation, he cannot sacrifice the latter to his own advantage and benefit. As
corporate managers, directors are committed to seek the maximum amount of
profits for the corporation. This trust relationship is not a matter of statutory or
technical law. It springs from the fact that directors have control and guidance
of corporate affairs and property and hence of the property interest of the SH”
2. It cannot apply to benefit a party who deals with the corporation
aware of the corporate representative’s lack of authority
 De Facto Officers
- A corporate officer is a de facto officer, where he acts as such, under
color of an election of appointment but fails being a de jure officer
by some irregularity or failure to qualify as required by law
- The official dealings of directors de facto with third persons are
sustained as rightful and valid on ground of continuous acquiescence
by the corporation, and suffering them to hold themselves out having
such authority; thereby inducing others to deal with them in such
capacity
THE BUSINESS JUDGMENT RULE

• A resolution or transaction pursued within the corporate powers and business operations of
the corporation, and passed in good faith by the BOD, is valid and binding; and generally the
courts have no authority to review the same or substitute their own judgment, even when it
can be proven that the exercise of such power may cause losses to the corporation or decrease
its profit
• Gamboa vs Victoriano: Courts cannot supplant the discretion of the Board on administrative
and management matters as to which they have legitimate power of action, and the contracts
which are intra vires entered into by the Board are binding upon the corporation and courts
will not interfere unless such contracts are so unconscionable and oppressive as to amount to
a wanton destruction of right of the minority
• Laissez Faire
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- A business corporation exists solely for the benefit of those who had invested their capital
in it
- A business corporation is organized and carried on primarily for the benefit of the SH, and
that the directors cannot conduct the affairs of a corporation for the merely incidental
benefit of SH and for the primary purpose of benefiting others.
- Also known as the free enterprise system, which dictates that it is better for the State and
its organs to leave business to the businessmen; especially so, when courts are ill-
equipped to make business decisions, and more importantly, the social contract in the
corporate family to decide the course of the corporate business has been vested in the
BOD and not in courts
o Theoretical Basis
- BOD hold such office charged with the duty to act for the corporation
according to their best judgment, and in so doing they cannot be controlled
in the reasonable exercise and performance of such duty
- The Board is the business manager of the corporation, and so long as it acts
in good faith, its orders are not reviewable by the courts
- As an act of police power, the State has by statutory law vested directly all
corporate powers in the BOD of each corporation, and that SH invest in
corporations bound by the principle that all corporate powers and
management of the corporate business enterprise is with BOD, whose
decision they cannot overcome except in those specified instances embodied
in the CC where their ratificatory vite is mandated to be essential for the
validity of a corporate act
o Two Branches of the Business Judgment Rule

 Applications of the BJR
1. Resolutions approved, contracts and transactions entered into, by the BOD
within the powers of the corporation cannot be reversed by the courts, not even
on the behest of the SH of the corporation
2. Directors and officers acting within such business judgment cannot be held
personally liable for the consequences of such act
BRANCHES OF BJR
1. The business judgment rule is not only a substantial rule of law, but
also a rule on evidence. Whenever any action is brought to question
the validity of a board resolution or corporate transaction approved
by the Board, the general rule is once it has been entered into by the
Board by virtue of the exercise of its judgment, and it will be
presumed to be valid
2. Corporate officers cannot be held personally liable for corporate acts
or obligations incurred in the exercise of the business judgment.
However, when directors or trustees violate their duties, they can be
held personally liable, thus:
a. When the corporation wilfully and knowingly vote for patently
unlawful acts of the corporation
b. When he is guilty of gross negligence or bad faith in directing
the affairs of the corporation
c. When he acquires any personal or pecuniary interest in conflict
with his duty as such director
 Second Branch: consistent with the general rule under

the Law on Agency which holds that an agent cannot be
personally made liable for the contracts and transactions
he enters into in behalf of the principal, except when he
acts without or in excess of authority or acts with
negligence, in fraud or in bad, and in clear conflict of
interests
 Bad Faith: does not simply connote bad judgment or
negligence, but imports a dishonest purpose or some
moral obliquity and conscious doing of wrong. It means a
breach of a known duty through some motive or interest
of ill will, partaking the nature of fraud
 For BOD to be held accountable, the
mismanagement and the resulting losses on
account thereof are not the only matters to be
proven; it is likewise necessary to show that the
directors or trustees acted in BF and with malice
while doing the assailed acts
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REQUIREMENT THAT BOARD MUST ACT AS A BODY

• Sec. 25: A majority of the number of directors or trustees as fixed by the AOI shall constitute
a quorum for the transaction of the corporate business, and every decision of at least a majority
of the directors or trustees present at a meeting at which there is a quorum shall be valid as a
corporate act
• The grant of corporate power is to the Board as a body, and not to the individual members
thereof, and that the corporation can be bound only by the collective act of the board.
- Rationale: the public policy that makes for better management practice for the Board to
sit dowm to discuss corporate affairs, and decided on the basis of their consensus
o Directors or Trustee Cannot Act Individually to Bind the Corporation

 Contracts or acts of a corporation must be made either by the BOD or by
a corporate agent duly authorized by the Board; and that absent such valid
delegation/authorization, the rule is that the declaration of an individual
director relating to the affairs of the corporation, but in the course of, or
connected with the performance of authorized duties of such director, are
held not binding on the corporation
o Ratification by the Board Does Not Need Formal Meeting
 General Rule: A corporation, through its BOD, should act in the manner
and within the formalities, if any, prescribed by its charter or by the
general law.
 Thus, directors must act as a body in a meeting called pursuant
to the law or the corporation’s by-laws, otherwise, any action taken
therein may be questioned by any objecting director or SH.
However, it pointed out that nevertheless jurisprudence provides
that an action of BOD during a meeting, which was illegal for lack
of notice, may be ratified either expressly, by the action of the
directors in subsequent legal meeting, or impliedly, by the
corporation’s subsequent course of conduct.
 The court nonetheless held that the fact that the power to make corporate
contracts is vested in the BOD does not signify that a formal vote of the
Board must always be taken before contractual liability can be fixed upon
a corporation; for the Board can create liability, like an individual, by other
means than by a formal expression of its will.
o Directors or Trustees Cannot Bind the Board in Stockholders’ or Members’
Meeting
 The by-laws of the corporation provided expressly that specific mode of
filling-up existing vacancies in the BOD through a majority vote of the
remaining members of the BOD; nonetheless, the vacancies were filled
up by a majority vote of the members in a membership meeting called for
the purpose
o Directors or Trustees Cannot Attend Meetings by Proxy or Through an
Alternate
 The by-laws of the corporation provided expressly that specific mode of
filling-up existing vacancies in the BOD through a majority vote of the
remaining members of the Board; nonetheless, the vacancies were filled
by a majority vote of the members in a membership meeting called for the
purpose, where the majority of the members of the BOD were present.
o Directors or Trustees Cannot Attend Meetings by Proxy or Through an
Alternate
 They must attend hearings of the Board and act in such person and as a
body. Each director or trustee is required by law to exercise his personal
judgment and he cannot delegate his powers or assign his duties
 Alternate directors are not allowed, since directors are required to exercise
judgment and discretion in running the affairs of the corporation and
cannot be substituted by others because their position is one of trust and
confidence
EXECUTIVE COMMITTEE
• Sec. 35: The By-Laws of a corporation may create an Executive Committee, composed of not
less than 3 members of the Board, to be appointed by the Board.
• EC may act, by majority vote of all its members, on such specific matters within the
competence of the Board, as may be delegated to it in the by-laws or on a majority
vote of the board except with respect to:
1. Approval of any action for which shareholders’ approval is also required
2. Filling of vacancies in the Board
3. Amendment or repeal of by laws or the adoption of new by-laws
4. Amendment or repeal of any resolution of the Board which by its express terms is not so
amenable or repealable
5. Distribution of cash dividends to the shareholders
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• SEC Opinion: An executive committee can only be created by virtue of a provision in by-laws
and that in the absence of such by-law provision, the BOD cannot simply create or appoint an
executive committee to perform some of its functions.
QUALIFICATIONS AND DISQUALIFICATIONS OF DIRECTORS AND TRUSTEES
• QUALIFICATIONS
Sec. 92: “He must own at least 1 share of the capital stock of the corporation of which he is
a director, which share shall stand in his name on the books of the corporation. No person
shall be elected as trustee unless he is a member of the corporation
Any director who ceases to be the owner of at least 1 share of the stock of the
corporation of which he is a director shall thereby cease to be a director. A majority of the
directors or trustees of all corporations organized under the CC are required to be residents of
the Philippines.”
o Rule on Corporate SH
- General Rule: They are not qualified to be elected as such to the
Board. They cannot also designate an individual representative to be
voted into the Board since the representative would not be a
stockholder of record nor member himself, which is the minimum
requirement to be qualified to be voted into the Board of the
corporation
- Their representation in the Board can be achieved by making their
individual representatives trustees of the shares or membership,
which would the make them SH or members of record, and thereby
qualified to be elected to the Board, but at the same time,
maintaining legal responsibility of trustees to the corporate SH or
members
• DISQUALIFICATIONS
Sec. 27: He must not have been convicted of an offense punishable by imprisonment of
exceeding 6 years, or has not committed any violation of Corporation Code within 5 years prior
to his election
Sec. 19 of the General Banking Law of 2000
“Except for rural banks, no appointive or elective public official, whether full time or part-time
shall at the same time serve as officer of any private bank, save in cases where such service
is incident to financial assistance provided by the government or a government owned or
controlled corporation to the bank or unless otherwise provided under existing laws.
• ALIEN MEMBERSHIP IN THE BOD

 Anti-Dummy Law (Commonwealth Act No. 108)
 Penalizes the intervention of aliens in the management, operation,
administration or control of nationalized enterprise or activity
 It provides that election of aliens as members of the BOD of governing body
of corporations or associations engaging in partially nationalized activity shall
be allowed in proportion to their allowable participation or share in the capital
of such entities
 General Banking Act of 2000, Sec. 15
 Non-Filipino citizens may become members of the BOD of a bank to the extent of
the foreign participation in the equity of said bank
• RULES ON ADDITIONAL QUALIFICATIONS AND DISQUALIFICATIONS

 By Laws: can provide other qualifications and disqualifications, in addition to those
provided under the Corporation Code
INSTITUTION OF INDEPENDENT DIRECTORS

• Defining the role of independent directors
- Does not exist under the CC
- Securities Regulation Code of 2000
 Institutionalized a separate sytem of independent directors when it required
under Sec. 38 thereof for all public companies to have at least 2 independent
directors or such independent directors shall constitute at least 20% of the
members of such board, whichever is lesser
 Independent Director: a person other than an officer of employee of the
corporation, its parent or subsidiaries, or any other individual having a
relationship with the corporation, which would interfere with the exercise of
independent judgment in carrying out the responsibilities of a director
- SEC Revised Code of Governance
 Independent Contractor: a person who, apart from his fees and
shareholdings, is independent of management and free from any business or
other relationship which, or could reasonably perceived to, materially interfere
39
with the exercise of his independent judgment in carrying out his responsibilities
as a director
 Requires that publicly-held companies that it covers “shall have at least 2
independent directors or such number of independent directors that constitutes
20% of the members of the Board, whichever is lesser, but in no case less than
2
 All other companies are encouraged to have independent directors in their
board
 SEC Code mandates that an Independent Director should:
1. Attend and actively participate in Board and Committee meetings, review
meeting materials and, if called for, ask questions or seek explanation
2. Be a member and the Chairman of the Audit Committee
3. Be a member of the Nominations Committee
4. Be a member of the Compensation/Remuneration Committee
- Section 38.1 of the SRC Rules: defines an independent director by detailing the rules
on disqualification, thus:
1. ID means a person who, apart from his fees and shareholdings, is independent
of management and free from any business or other relationship which could,
or could reasonably be perceived to, materially interfere with his exercise of
independent judgment in carrying out his responsibilities as a director in any
public company, and includes among others, any person who:
a. Is not a director or officer of the corporation or of its related companies
or any of its substantial shareholders (other than as an independent
director of any of the foregoing);
b. Is not a substantial shareholder of the corporation or of its related
companies or any of its substantial shareholders;
c. Is not a relative of any director, officer or substantial shareholder of the
corporation, any of its related companies or any of its substantial
shareholders. For this purpose, relatives includes spouse, parent, child,
brother, sister, and the spouse of such child, brother or sister;
d. Is not acting as a nominee or representative of any director or substantial
shareholder of the corporation, any of its related companies or any of its
substantial shareholders;
e. Has not been employed in any executive capacity by that public company,
any of its related companies or by any of its substantial shareholders
within the last five (5) years;
f. Is not retained as professional adviser by that public company, any of its
related companies or any of its substantial shareholders within the last five
(5) years;
g. Is not retained as professional adviser, by that public company, any of its
related companies or by any of its substantial shareholders, either
personally or through his firm; or
h. Has not engaged and does not engage in any transaction with the
corporation or with any of its related companies or with any of its
substantial shareholders, whether by himself or with other persons or
through a firm of which he is a partner or a company of which he is a
director or substantial shareholder, other than transactions which are
conducted at arm’s length and are immaterial.
• Independence of an Independent Director
- Comes from the utter lack of official, professional or business connection with the public
company (except that of being an independent director and holding qualifying shares)
which would interfere with the exercise of independent judgment in carrying out the
responsibilities of a director; he is one who must be completely independent from the
management of the company
• Qualifications of Independent Contractor
1. They must own at least 1 share of the capital stock of the corporation of which he is a
director, which shares shall stand in his name on the books of the corporation.
 Such share shall remain nominal, since it is provided that he is automatically
disqualified when he holds securities in the company in excess of 10% of the
entire issue
 10% beneficial interests: is not a nominal figure, and if an independent
directorship is allowed to have that much, then it really does not make sense
why such his office is instituted separately from directors who are elected by
minority of the SH
 BOD of a Bank: shall have at least 2 independent contractors, which shall be
persons other than an officer or employee of the bank, its subsidiaries or
affiliates or related interests
• Western Institute of Technology vs Salas:
“There is no argument that directors or trustees, as the case may be, are not entitled to salary
or other compensation when they perform nothing more than the usual and ordinary duties of
their office. This rule is founded upon a presumption that the directors/trustees render service
40
gratuitously, and that the return upon their shares adequately furnishes the motives for service,
without compensation”
• Issues Relating to the System of Independent Directors
- Issues relating to the viability of such system, with passionate advocates on both sides of
the debate
a. Diluting the Sense of Responsibility to the Corporations and its Various
Stakeholders
- It dilutes the system of Board responsibility towards the corporation,
the SH and other stakeholders
- With the formal adoption of the Stakeholder Theory for publicly held
companies in the original SEC Code of Corporate Governance, then
all directors, whether independent or not, are mandated to take into
consideration the interests of all stakeholders, and not just the
stockholders
b. Quasi-Public Role of the Independent Contractor
- The position of independent director is therefore equated to a quasi-
public office, equivalent to those occupied by independent auditors
and even credit rating companies, whose work of certification is
supposed to constitute independent work which can be relied upon
by the government and the public as disinterested source of gauging
the financial standing or credit worthiness of companies or securities,
as the case may be.
- The quasi-public characterization of the office of ID is contrary to the
very essence of the nature and function of the BOD: it is the agency
constituted by the CC to directly manage the corporate business
enterprise and to exercise all the corporation’s powerw
- By the very nature of their function, the BOD are held to be partisan
for the benefit of the corporation and their constituencies for whose
benefits directors have been imposed with fiduciary duties and
obligations
- Stockholder’s Theory: Directors are supposed to be die-hard
fiduciaries for the corporation and its SH to the exclusion of other
interests and to the extent they do not violate the law and contravene
public policy
- Stakeholder Theory: Directors owe their primary duties to all
parties who occupy the position being stakeholders to the corporate
affairs
c. Wrongly Presumes that only independent directors can exercise
independent judgment
- The system of ID presumes that only ID can exercise independent
judgment on corporate matters, and that the logical extension of
such reasoning is that all other directors are not pre-disposed to
exercise independent judgment
- If that were the case, it is rather strange that independent directors
are constituted always a minority of 20% in the boards of covered
companies, and therefore would always be out-voted by the majority
who are supposedly not capable of independent judgment, or who
would act for the benefit of, or to cover-up the shortcomings of
management
- ID is to protect the interest of the State (which created their office)
or to the greater public other than those members of the public who
already qualify as stakeholders
- Under such setting, ID are accountable only to themselves and
what they think is the greater good in the corporate world
d. Promotes culture of confrontation
- Presumption is that all other directors are unlikely to be in a
position to exercise independent judgment; that only independent
directors are above suspicion. Therefore, the ID’s primary duty is to
place other directors on the path of independent thinking and
decision making, or in essence, to be effective fiscalizers in the BOD
which acts under a supposedly constant threat of conflicts of interests
situations
e. Independent directors may come into corporate setting practically
ignorant of the industry
- ID is legally and practically excluded from their rank leading experts
and professionals in the field, business or industry engaged in by the
public company they serve; consequently, the only individuals who
would qualify to be nominated and elected into the BOD of a public
company are essentially strangers to the industry and who would
essentially be lightweights in the industry to which they are
supposed to exercise business judgment
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- ID would be a hard-put at being effective contributors in the board

dynamics, based on the 2 critical areas of importance, competence
and remuneration-dependence
- The SRC IRR on disqualifications for ID would qualify very few
competent individuals fir UD since they would most likely have
business or professional dealings in the industry where the public
company operates. The really remaining competent candidates for
independent directorship would be few and would thereby become
expensive commodities. The other individuals who would qualify may
be just starting on their careers and have not become too spread-out
in the industry network as to be disqualified, or are individuals who
come from outside of the industry
o In either case, such ID may lack the moral and
professional influence for their views to carry
much weight in Board discussions
o In fact, being placed in the Board situation
where some of the captains and leading
practitioners in the industry sit as non-ID, may
just literally place ID into very passive roles,
afraid to open their mouth and expose their
ignorance of the intricacies of the industry and
the operations of the company; and then the
only measure of how they have been
independent is the near-silent posture they have
taken during the year.
(INCOMPLETE PA ‘TO)
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CHAPTER 10: STOCKHOLDERS AND MEMBERS
Policy Approaches on Rights of SH and Members
1. Nature of Rights of SH
- 2 Complementing Policy Approaches to the treatment of SH as a group of

investors under the ff contractual relationships:
a. Default Rule: All SH have equal rights expressed in the last par of Sec. 6 that
provides “each share shall be equal in all respects to every other share”
b. When preferences or restrictions are made to apply to a valid class of SH, the same
shall exists and be valid only when expressly “provided in the AOI and stated in the
Certificate of Stock
- Section 6: Board Enabling Clause:

o When authorized by AOI, the BOD may fix the terms and conditions of preferred
SOS or any series thereof, or to classify its shares for the purpose of insuring
compliance with constitutional or legal requirements
HOWEVER, such terms and conditions shall be effective upon filing of a
Certificate with the SEC
- Cojuangco vs Roxas: IMPORTANT RIGHTS OF SH

a. Right to vote
b. Right to receive dividends
c. Right to receive distributions upon liquidation
d. Right to inspect books
- ADDITIONAL RIGHTS:
e. Right to transfer or dispose of his fully paid SOS
f. Right to file derivative suit
 Does not need for any express or enabling provisions in the AOI or BL
- Sale of Sequestered Corporations

 SOS remain privately owned, until such time that the courts declare that the subject
shares were acquired through government funds
 Then, the sale need not to go through public bidding
 It may be effected through stock exchange
- Title of Corporation vs Interests of its Members or SH

a. Ownership of the Property = corporation
b. Interests of SH = consists in a right to a proportionate part of profits
whenever dividends are declared by the corporation, and to a proportion
of the property remaining upon termination or dissolution
- SH: propriety in character

- Rule upon the death of the SH
General Rule: His heirs do not automatically become SH and acquire the rights and
privileges of the deceased SH
Exception: compliance with Sec. 23 of the CC
a. Stocks must be distributed first to the heirs in an estate proceeding
b. Transfer of stocks must be recorded in the books of the corporation
2. Nature of the Rights of the Members
- Sec. 90
Gen. Rule: Membership in a non-stock corporation and all rights arising therefrom are
personal and non-transferable
Exception: unless otherwise provided by law
- Non-Stock Corporation’s member = personal in character because of its

eleemosynary nature
- Sec. 89:
a. Rights of members of any class or classes to vote may be limited, broadened or
denied to the extent specified in the AOI or BL
b. Rights of members to vote by proxy may be denied under the AOI or BL
- Sec. 91: membership shall be terminated in the manner and for causes provided under
the AOI or BL
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o Termination of Membership: has the effect of extinguishing all rights of a

member in the corporation or in its property UNLESS, otherwise provided in the
AOI or BL
PRE-EMPTIVE RIGHTS
- Sec. 39: All SH of a stock corporation shall enjoy pre-emptive rights to subscribe to all
“issues or dispositions” of shares of any class, in proportion to their shareholdings
- Definition: a common law right of SH to be granted the first option to subscribe to any
opening of the corporation’s unissued CS, or to any increase of its ACS
- Reasons:
1. To protect both the propriety and voting rights of SH, since such proportionate
shares determines his proportionate power to vote in corporate affairs when the
law gives the SH a right to affirm or deny board actions
2. Determines his proportionate share in the dividends declared by the corporation,
as well as his proportionate share to its remaining assets upon dissolution
- Exceptions:
1. Subscription Deposits
o Deposits for additional subscriptions are payments received for future issuance
of stock which may or may not materialize
o While this may be allowed for balance sheet presentation as part of SH’s equity
account, the same cannot be considered as part of the capital of corporation
until shares are actually issued in consideration thereof
2. When such rights are denied by AOI or amendment thereto
3. SH has no PER to the issuance of shares of CS of the corporation
a. Issued in compliance with laws requiring stock offerings or minimum stock
ownership by the public
b. Issued in gf with approval of the SH, representing 2/3 of the OCS, in exchange
for property needed for corporate purposes
c. Issued in gf with the approval of the SH, representing 2/3 of OCS, in payment
of previously contracted debt
- Rule on Waiver of PER
o It should be given individually by SH to be valid or by SPA
o When it has been effectively waived:
a. It is not necessary that said shares should be again offered on a pro-rata
basis to the SH who took advantage of PER
b. Waived shares may be offered to non-SH of record on a first come serve
basis without violating the PER of SH
HOWEVER, SEC considers it a sound practice to offer always
the remaining shares to interested SH of record whenever
practical and feasible before offering them to 3rd parties
- Rule on Issue of Shares (When it is objectionable)
1. Directors acted in breach of trust and their primary purpose is to perpetuate or shift
the control of the corporation, or
2. To freeze out the minority interests
- Coverage
1. Sec. 39 provides that PER exists to all issues or dispositions of shares of any class
o Issues or Dispositions: provides that PER should now be available even
to issues from the existing unsubscribed portion of the ACS when the
Board decides to open them for subscription, and even to the re-issuance
or sale of treasury stocks in a corporation
RIGHTS OF FIRST REFUSAL AND OTHER RESTRICTIONS ON THE TRANSFER OF SHARES
o Types of Restriction on Shares

1. Rights of First Refusal
 Provides that a SH who may wish to sell or assign his shares must first offer
the shares to corporation or to other existing SH of the corporation, under terms
and considerations which are reasonable; and that only when the corporation
or SH do not fail to exercise their option, is the offering SH at liberty to dispose
of his shares to 3rd parties
2. Right of First Option
 Grants to the corporation the right to buy the shares at a fixed price, and would
be valid if the terms and considerations are reasonable
3. Right of Prior Consent
 Require that any SH who may wish to sell, assign, or dispose of his shares in
the corporation may do so only when he obtains the consent of the BOD or
other SH of the corporation
 VOID, since it restrains the exercise of SH of his propriety interests in the shares
4. Buy-Back Agreement
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 Exists in situations when shares are given or assigned to officers or employees

under the condition that should they resign or be terminated from employment,
the corporation shall be granted the right to buy-back the shares
 VALID, as long as reasonable
5. Absolute Prohibition to Transfer Shares
 VOID
 Violates Sec. 63 which treats SOS as personal property of SH
PRE-EMPTIVE RIGHTS vs RIGHT OF FIRST REFUSAL
PRE-EMPTIVE RIGHT RIGHT OF FIRST REFUSAL

Common law right Contractual stipulations
Inherent May be provided under specific statutory
provisions
Exist It does not exist, when not provided by law
Pertains to the portion of ACS that has not been Shares already issued
subscribed
Right against the corporation Right against another SH
JURISPRUDENTIAL RULES ON RIGHT OF FIRST REFUSAL
1. Contractual Stipulations = valid

- Mutual agreement not to sell, transfer or dispose any part of shareholdings until after the
date agreed upon
2. Restrictions in the BL
- VALID, insofar as not inconsistent with any existing law, or must be sourced from
legislative enactment
- Any privilege or restriction pertaining to SoS shall be found in the AOI
3. Restrictions in the Charter
- VALID, if the same is necessary and convenient to the attainment of objective of the
company for which it was incorporated
- UNLESS:
a. Palpably unreasonable under the circumstances
- TESTS TO DETERMINE ITS VALIDITY
 Whether it is sufficiently reasonable as to justify the overriding of the general
policy against restraint or alienation of PP
 1 month: reasonably sufficient for SH within which to signify their
desire to buy the SoS being offered for sale by any SH before the same
may be offered to 3rd parties
 Reasonable Period: 30-60 days, depending on the circumstances of
the case
4. Restrictions must be indicated in the Stock Certificates
- It is in recognition of the quasi-negotiable character of SOS
5. Party entitled to exercise rights on sequestered shares
- RFR: attribute of ownership and can only be effected through a contractual commitment
by the registered owner
6. RFR and Nationalization Issue
- VALID, so long as it complies with the constitutional requirements on foreign equity
UNDERLYING DOCTRINE IN RESTRICTIONS ON TRANSFER OF SHARES

o Issues involving rights of first refusal and other restriction over ownership interests in SOS
seem to be tied up with the public policy against unreasonable restraint of trade
- Jurisprudential history of PH looks at instrinsic reasonableness of any provision tending to
restrain a person from engaging in a trade or calling. Such restriction may be upheld
when not contrary to the public welfare and not greater than is necessary to afford a fair
and reasonable protection to the party in whose favor it is imposed
- Twin Tests of Reasonable Restraint
1. It has a beneficial purpose, results in the protection of the corporation as well as of
the individual parties to the contract
2. Reasonable as to the length of time of the suspension
o General Rule: A right of first refusal that grants to the corporation or other SH the first option
to purchase the shares of a disposing SH is in principle valid because it does not in effect
prevent the disposing SH from eventually being able to dispose of the shares, and it generally
should not matter to him that the eventual buyer would be the corporation or another SH
Exception: The term or period upas on which the option may be exercised by the SH or
corporation is unreasonable, then it becomes unreasonable restraint of trade
o SEC’s parameters on what constitutes reasonable restrictions
45
1. Restriction shall not be more onerous than granting the existing SH or the corporation the
option to purchase the shares of the transferring SH with such reasonable terms,
conditions or period stated therein
2. Restriction shall not be valid or enforceable if it absolutely prohibits the sale or transfer
of stock without the consent of the existing SH, as this would violate the general law on
free alienability of SoS
3. Reasonable option period may range from 30-60 days or even more, depending on the
circumstances surrounding the case
4. After the option has expired, the SH is free to sell his SoS to anyone
NON-COMPETITION CLAUSE
o It may be properly provided for as a condition for being a SH in the AOI or BL
o Valid and reasonable exercise of corporate authority since a corporation, under the principle of
self-preservation, has the inherent right to preserve and protect itself by excluding competitors
or hostile interests
RIGHT TO VOTE
o Tan vs Sycip: characterized the right to vote as “inherent and incidental to ownership of
corporate stocks, and as such is a property right and that consequently, only stock actually
issued and outstanding may be voted – neither the SH or the corporation can vote or represent
shares that have never passed to the ownership of SH, or having so passed, have again been
purchased by the corporation
o Castillo vs Balinghasay: The right of a SH to participate in the control and management of the
corporation that is exercised through his vote
VARYING THE RIGHT TO VOTE
 Sec. 6: No share may be deprived of voting rights except those classified as

preferred or redeemable shares. In addition, there shall always be a class or series
of shares which have complete voting rights
Where the articles of incorporation provide for non-voting shares in the cases
allowed by the Corporation Code, the holders of such shares shall nevertheless be
entitled to vote on the ff matters:
a. Amendment of AOI
b. Adoption and amendment of BL
c. Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property
d. Incurring, creating or increasing bonded indebtedness
e. Increase or decrease of CS
f. Merger or consolidation
g. Investment of corporate funds in another corporation or business in
accordance with the Code
h. Dissolution of corporation
EXCEPT in the above cases, the vote necessary to approve a particular corporate
act as provided in the CC shall be deemed to refer only to stocks with right to vote.
 The creation of a class of shares with multiple voting rights appears to be effective
where the purpose is to unequally distribute voting power so as to confer larger
participation in management on a SH or a class of SH
 Sec, 137: Outstanding Capital Stock

 Total shares of stock issued to subscribers or SH, whether or not fully
or partially paid (as long as there is a binding subscription
agreement), except treasury shares
 It expressly excludes treasury shares, it is not meant to cover non-
voting shares whenever it is used in relation to voting requirements
because of the qualification under Sec. 6
 Tan vs Sycip
- Unissued stocks may not be voted or considered in determining
whether a quorum is present in SH meeting or whether a requisite
proportion of the stock of the corporation is voted to adopt a certain
measure or act
VOTING RIGHTS OF MEMBERS

o Sec. 89: In a non-stock corporation, the right of a member of any class to vote may be
limited, broadened, or denied to the extent specified in AOI or BL
Unless so limited, broadened or denied, each member regardless of class shall be
entitled to vote
46
RIGHT TO A PROXY
In the case of stock corporation, the right to vote by proxy cannot be taken away
In the case of non stock corporation, the right to vote by proxy may be taken
away by provisions in the AOI or BL
o General Rule: Members of non-stock corporation may cast as many votes as there are
trustees to be elected, but not cast more than one vote for one candidate. Candidates receiving
the highest number of votes shall be declared or elected
Exception: unless otherwise provided in the AOI or BL
o Voting by mail or other similar means

- May be authorized by the BL of non-stock corporation and under such conditions which
may be prescribed by SEC
o Cumulative Voting for Trustees

- may be provided for in the BL
- Absence of provisions allowing for cumulative voting in a non-stock corporation, the
members can only vote under the straight voting system
PARTY ENTITLED TO VOTE

o A SH of record has a right to participate and vote in any meeting of the SH of the corporation,
and in the absence of fraud, it cannot be collaterally attacked on account of such corporation
o Person who has purchased stock and who desires to be recognized as a SH, for the
purpose of voting, must secure such a standing by having the transfer recorded upon the books
of the corporation; and if the transfer is not duly made upon request he has, as his remedy, to
compel it to be made
o SEC: It would be illegal for a corporation to adopt a rule that a SH who fails to attend the
meeting or appoint a proxy is deemed to have appointed the Chairman of the meeting as his
proxy, since Sec. 58 of the CC clearly provides that a proxy to be valid:
1. must be in writing and
2. signed by the SH
3. a proxy to vote stock, to be valid must have been given by the person who is
the legal owner of the stock and entitled to vote the same at the time it is voted
o Appointment of Proxy
- Purely personal
- The right to vote is inseparable from the right of ownership of stock without the owner’s
consent, and therefore a proxy to vote stock, to be valid must have been given by the
person who is the legal owner of the stock and entitled to vote the same at the time it is
voted
I. RIGHT TO VOTE ON SEQUESTERED SHARES

- Sequestration of shares does not entitle the government to
exercise act of ownership over the shares; consequently, even
sequestered shares may be voted upon by the registered SH of
record
- Consevator cannot as a rule, exercise acts of dominion by voting
these shares
- Republic vs COCOFE: PCGG has the right to exercise voting rights
on sequestered shares whenever it is able to comply with either
public character or two tiered tests
- Two Tierred Tests
1. Prima facie evidence show that the wealth and/or the shares
are indeed ill-gotten
2. There is demonstrated imminent danger of dissipation of assets,
thus necessitating their continued sequestration and voting by
the government until a decision, ruling with finality on their
ownership, is promulgated by the proper court
 It does not apply (Public Character Tests)

1. When the funds are prima facie public in
character
2. When it is affected with public interests
II. VOTING ON JOINT OWNERSHIP

- Sec. 65: In case of SoS owned jointly by 2 or more persons, in order
to vote the same, the consent of all the Cos shall be necessary unless:
1. There is a written proxy,
2. Signed by all the Cos, authorizing one or some of them or
any other person to vote such shares
47
HOWEVER, when the shares are owned in an “AND/OR”

capacity by the holders thereof, any of the joint owners
can vote said shares or appoint a proxy therefore.
- When a certificate of stock is issued with the conjunctive

“AND/OR” placed between the names of the parties who are
co-owners of said shares, it is understood that the shares covered
by the certificate may be transferred upon the endorsement of both
or either of the SH and the right to vote the shares may also be
exercised by both or any of them
III. VOTING RIGHTS OF PLEDGORS, MORTGAGORS AND

ADMINISTRATORS
- Sec. 55: In case of pledged or mortgaged shares in stock
corporations, the pledgor or mortgagor shall have the right to attend
and vote at meetings of SH, unless the pledge or mortgage is
expressly give such right in writing which is recorded on the
appropriate corporate books by the pledgor or mortgagor
- Executors, administrators, receivers and other legal
representatives
 when duly appointed by the court, may attend and vote in
behalf of the SH or members without need of any written
proxy
 Power to vote is by operation of law transferred to the
administrator of the estate of the deceased member
 Above Rule: was rejected in Tan vs Sycip
- Tan vs Sycip
 In stock corporations
1. SH may generally transfer their shares. Thus,
on the death of the SH, the executor or
administrator duly appointed by court is vested
with the legal title to the stock and entitled to
vote it
2. Until a settlement and division of the estate is
effected, the stocks of the decedent are held by
the administrator or executor
 Non-Stock Corporations
1. Membership herein are non-transferable
Unless, the AOI or BL of the corporation provide
otherwise
2. In other words, the determination of whether or
not dead members are entitled to exercise their
voting rights depends on those AOI or BL
- SEC Opinion (August 8, 1955)
General Rule: restrictions on the right of the SH to pledge or
mortgage their shares would be unlawful
Exceptions:
1. If it complies with Art. 98 of the CC
a. Restriction must appear in the AOI, BL and certificate of
stock
b. Said restriction shall not be more onerous than granting
the existing SH or the corporation the option to purchase
the shares of the transferring SH with such reasonable
terms, conditions or periods stated therein
IV. TREASURY SHARES DO NOT HAVE VOTING RIGHTS

- Sec. 57: Treasury shares shall have no voting rights as long as the
stock remains in the treasury
- Reason:
1. To give voting rights to TS could enable the directors to prolong
their stay in the office against the wishes of holders of the
majority of stock
2. The right to vote is inherent in and incidental to the ownership
of corporate stocks. Only stocks actually issued and outstanding
may be voted
- Resale or Reissue = TS regain whatever voting rights and
dividends to which they are originally entitled in the hands of third
party buyer
V. ELECTION OF DIRECTORS AND TRUSTEES
48
- Sec. 24: At all elections of directors and trustees, there must be

present either in person or by representative authorized to act by
written proxy, the owners of the majority of the OCS, or if there be
no capital stock, a majority of the members entitled to vote. The
election must be by ballot, if requested by any voting SH or member
- Stock Corporations
 Every SH entitled to vote shall have the right to
vote:
a. In person, or By proxy
b. at the time fixed by BL,
c. in his own name on the stock book of the corporation,
OR
d. where the BL are silent, at the time of the election
e. No delinguent stock shall be voted
- Any meeting of the SH or members called 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 there are not represented by
proxy, at the meeting, owners of the
majority of the OCS, if there be no capital
stock, a majority of the members entitled
to vote
VI. SUMMARY OF INSTANCE WHEN SH/MEMBERS HAVE VOTING RIGHTS

OR CORPORATE ASSETS
Amendment of AOI Sec. 16:

1. Unless otherwise prescribed by the
Code itself, or
2. by SL, and
3. for legitimate purposes
- any provision or matter

stated in the AOI may be amended
by:
a. a majority vote of the BOD or
BOT, and
b. the vote or written assent of
the SH, representing at least
2/3 of the OCS
- without prejudice
to the appraisal rights of
dissenting SH when
granted by the Code, or
the vote or written
assent of 2/3 of the
members if it be a non-
stock corporation
Investment in Non- Sec. 42: A corporation may invest its funds in
Primary Purpose of any other corporation or business or for any
the Business purpose than the primary purpose for which it
was organized when:
1. approved by a majority of the
BOD/BOT
2. ratified by the 2/3 of the OCS or
members at stockholders meeting duly
called for the purpose
HOWEVER, where the investment by

the corporation is reasonably
necessary to accomplish its primary
purpose as stated in the AOI, the
approval of the SH or members shall
not be necessary
Written Notice of the proposed

investment and the time and place of
the meeting shall be addressed to each
SH or member of their residence as
49
shown on the books and deposited to

the addressee in the post office with
postage prepaid or served personally
Mergers and Sec. 77:
Consolidations
Upon approval by majority vote of each of the
BOD or BOT of the constituent corporation of the
plan or merger or consolidation, the same shall
be submitted for approval by SH or members, of
each of such corporations at separate corporate
meetings duly called for the purpose
Notice of such meetings shall be given to all

SH or members of the respective corporations, at
least 2 weeks prior to the date of the meeting,
either personally or by registered mail
 Contents:
1. Purpose of the meeting
2. Copy or summary of the plan or
merger or consolidation, as the
case may be
o Affirmative vote of SH
representing 2/3 of the OCS,
in case of stock corporation,
or at least 2/3 of the
members in case of non-
stock corporations, shall be
necessary for the approval
of such plan
Any dissenting SH may exercise his

appraisal rights, provided that if after the
approval of the SH of such plan, the BOD should
decide to abandon the plan, the appraisal right
shall be extinguished
Any amendment to the plan of the merger

or consolidation may be made, provided:
1. Approved by majority vote of BOD or
BOT of all the constitutent
corporations, and
2. Ratified by the affirmative vote of SH,
representing 2/3 of the OCS or 2/3 of
the members of each of the
constituent corporations
- Such plan, together with the

amendment, shall be
considered as the agreement
of merger or consolidation
Increase and Sec. 38: No corporation shall increase or
decrease of Capital decrease its CS, unless
Stock 1. Approved by majority vote of the BOD
and
2. at a stockholders’ meeting duly called
for a purpose, 2/3 of the OCS shall
favor the increase or diminution of the
CS
Written notice = same rule on service

Incurring or Section 38: No stock corporation may incur or
Creating Bonded create bonded indebtedness, or increase the
Indebtedness same, with the approval by a majority vote of the
BOT and of at least 2/3 of the members in a
meeting duly called for the purpose
Adoption, Sec. 48:
Amendment and
Repeal of BL 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
least a majority of the members of a non-stock
50
corporation, at a regular or special meeting duly

called for the purpose, may amend or repeal any
by-laws or adopt new by-laws.
The owners of two-thirds (2/3) of the

outstanding capital stock or two-thirds
(2/3) of the members in a non-stock
corporation may delegate to the board of
directors or trustees:
1. the power to amend or repeal any by-
laws or
2. 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 by-laws shall be considered as
revoked:
a. whenever stockholders owning
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:
1. be attached to the original by-laws in
the office of the corporation,
2. 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
the same to be attached to the original
articles of incorporation and original
by-laws.
The amended or new by-laws shall only be

effective upon the issuance by the Securities and
Exchange Commission of a certification that the
same are not inconsistent with this Code
Declaration of Stock Sec. 43: No stock dividend shall be issued
Dividends without the:
1. approval of stockholders representing
not less than two-thirds (2/3) of the
outstanding capital stock at a regular
or special meeting duly called for the
purpose. (16a)
Management Sec. 44:
Contracts
No corporation shall conclude a
management contract with another
corporation unless:
1. such contract shall have been
approved by the board of directors
2. and by stockholders owning at least
the majority of the outstanding capital
stock, or by at least a majority of the
members in the case of a non-stock
corporation, of both the managing and
the managed corporation, at a meeting
duly called for the purpose:
Provided, That
(1) where a stockholder or
stockholders representing the same
interest of both the managing and the
managed corporations own or control
more than one-third (1/3) of the total
51
outstanding capital stock entitled to

vote of the managing corporation; or
(2) where a majority of the members

of the board of directors of the
managing corporation also constitute a
majority of the members of the board
of directors of the managed
corporation, then the management
contract must be approved by the
stockholders of the managed
corporation owning at least two-thirds
(2/3) of the total outstanding capital
stock entitled to vote, or by at least
two-thirds (2/3) of the members in the
case of a non-stock corporation. No
management contract shall be entered
into for a period longer than five years
for any one term.
The provisions of the next preceding paragraph

shall apply to any contract whereby a corporation
undertakes to manage or operate all or
substantially all of the business of another
corporation, whether such contracts are called
service contracts, operating agreements or
otherwise: Provided, however, That such service
contracts or operating agreements which relate
to the exploration, development, exploitation or
utilization of natural resources may be entered
into for such periods as may be provided by the
pertinent laws or regulations. (n)
Fixing of Sec. 62: The issued price of no-par value
Consideration of No- shares may be fixed in the AOI or BL, or in the
par values absence thereof, by the SH at a meeting duly
called for the purpose representing at least a
majority of the OCS
AGREEMENTS AFFECTING VOTING RIGHTS
PROXIES o Sec. 58 (Stock): SH and members may vote in person or by proxy in

all meetings of the SH or members
- The right to issue proxy is vested with public interest
when it comes to stock corporation
o Sec. 89 (Non-Stock) : AOI or BL may restrict the right of members
to vote by proxy
- SEC Opinion states that such right may be entirely
denied by appropriate provisions of the AOI or BL
Nature
o Special form of agency and governed by the Law on Agency
o Being strictly a fiduciary relation, it is revocable in nature,
generally
o General Rule: Proxies, even those wit irrevocable terms, have
always been considered as revocable
o Exception: couple with an interest
 Revocation may be made by:
1. Formal Notice
2. Orally
3. Conduct as by the appearance of the SH or member giving
the proxy
4. Issuance of a subsequent proxy
5. Sale of shares
 Proxy Couple with an interest may be rended non-
revocable where:
1. Proxy has parted with value or incurred liability at the
SH’s request
Requisites
1. It must be in writing
2. Signed by SH or member of record, and
3. Filed before the meeting with CorSec
52
a. Forms of Proxies
o SEC prescribes no particular form, as long as it
complies with Sec. 58
o If BL or AOI prescribes a form, follow such
b. For purposes of determining quorum and entitlement

to vote or to participate in SH’s meeting:
o Proxy must be filed or registered with CorSec
prior to the SH meeting, and unless filed in
accordance with the provisions ofteh CC or BL, the
proxy is not entitled to any right
o When BL or AOI is silent to the submission
of proxies, the corporation cannot fix a deadline,
hence, it can be filed anytime before the meeting
c. Period of Effectivity
o General rule: It shall be valid only for the
meeting for which it is intended
Exception: unless otherwise provided in the
proxy
o If there is a stipulation for a longer period of
effectivity, no proxy shall be valid and effective
for a period longer than 5 years at any one time
d. Who May Be appointed

o No limitation as to who may be appointed
e. Proxy Rules for publicly listed companies

o SEC M.C No. 5, s. 1991 applies, only in the
absence of rules, guidelines, or provisions in the
BL of the corporation; thus, if the BL have specific
provision on proxies, then said BL are controlling
f. Procedural matters relating to proxies

o Proxy solicitation: involves the securing and
submission of proxies
o Proxy Validation: concerns the validation of
such secured and submitted proxies
o SEC’s power to pass upon the validity of
proxies, in relation to election controversies has
effectively been withdrawn, as it was abrogated
with its quasi-judicial powers, and has been
transferred to the RTC special commercial
courts pursuant to the SRC
o SEC, however, is not deprived of its investigatory
and regulatory powers, especially so since such
powers are exercisable on motu propio basis
JURISDICTION OF RTC SPECIAL

COMMERCIAL COURTS
1. Voting election of officers, and not all matter
which may be voted upon by SH
Voting Trust NATURE

Agreements o Voting Trust Device involving the complete surrender by
the SH of his voting rights to a trustee, appears to have been
effective in the rehabilitation of insolvent corporations, as well as
in irrevocable committing groups of SH to the continuation of fixed
business policies
o Voting Trust Agreement
- A stockholder of a stock corporation parts with the naked
or legal title, including the power to vote, of the shares
and only retains the beneficial ownership of the stock
- By its very nature, it results in the separation of the voting
rights of a SH from his other rights such as:
1. Right to dividends
2. Right to inspect the books
3. Right to sell certain interests in the assets of the
corporation
53
4. Other rights to which a SH may be entitled until the

liquidation of the corporation
o Voting Trustee
- A shareowner vested with colourable and naked title of the
shares covered for the primary purpose of voting upon
such stocks that he does not own
Sec. 59:
One or more stockholders of a stock corporation may create
a voting trust for the purpose of conferring upon a trustee or trustees the
right to vote and other rights pertaining to the shares for a period not
exceeding five (5) years at any time:
PROVIDED, That in the case of a voting trust specifically required
as a condition in a loan agreement, said voting trust may be for a
period exceeding five (5) years but shall automatically expire upon
full payment of the loan.
A voting trust agreement must be:

1. in writing
2. and notarized,
3. and shall specify the terms and conditions thereof.
A certified copy of such agreement shall be filed with the

corporation and with the Securities and Exchange Commission;
otherwise, said agreement is ineffective and unenforceable.
The certificate or certificates of stock covered by the

voting trust agreement shall be canceled and new ones shall
be issued in the name of the trustee or trustees stating that they
are issued pursuant to said agreement.
In the books of the corporation, it shall be noted that the

transfer in the name of the trustee or trustees is made pursuant
to said voting trust agreement.
The trustee or trustees shall execute and deliver to the transferors

voting trust certificates, which shall be transferable in the same
manner and with the same effect as certificates of stock.
The voting trust agreement filed with the corporation shall be

subject to examination by any stockholder of the corporation in
the same manner as any other corporate book or record:
Provided, That both the transferor and the trustee or trustees may
exercise the right of inspection of all corporate books and records
in accordance with the provisions of this Code.
Any other stockholder may transfer his shares to the same trustee
or trustees upon the terms and conditions stated in the voting
trust agreement, and thereupon shall be bound by all the
provisions of said agreement.
No voting trust agreement shall be entered into for the purpose

of circumventing the law against monopolies and illegal
combinations in restraint of trade or used for purposes of fraud.
Unless expressly renewed, all rights granted in a voting trust

agreement shall automatically expire at the end of the agreed
period, and the voting trust certificates as well as the certificates
of stock in the name of the trustee or trustees shall thereby be
deemed canceled and new certificates of stock shall be reissued
in the name of the transferors.
The voting trustee or trustees may vote by proxy unless the

agreement provides otherwise. (36a)
REQUISITES:
1. It must be in writing and notarized
2. It must specify the terms and conditions thereof
3. A certified copy of such agreement shall be filed with the
corporation and with the SEC
54
PRE-TERMINATION OF A VOTING TRUST AGREEMENT

o No voting trust shall be used for the purposes of fraud
o SH who are defrauded by their trustees have the right to revoke
the trust and recover damages from the trustee
VOTING TRUST AGREEMENT AS PART OF THE LOAN AGREEMENT

o Sec. 59 envisions a situation where a corporation obtains a loan
from a bank, with the condition that the majority SH would be
required to execute voting trust agreements over their shares to
ensure that the lending institution would have controlling intrests
in corporate votes to be taken that may affect the ability of the
borrowing corporation to pay the loan
o VTA constitutes security to the lending institution, although it is
not the corporation which executes the same since it is not the
owner of the shares, but rather its SH
Pooling Agreement SEC. 100 (2) : An agreement between two or more stockholders, if in
and Other SH’s writing and signed by the parties thereto, may provide that in exercising any
Agreement voting rights, the shares held by them shall be voted as therein provided, or
as they may agree, or as determined in accordance with a procedure agreed
upon by them.
o Pooling or Voting Agreements

- Contractual arrangements by which 2 or more SHs agree that
their shares shall be voted as a unit
- The parties thereto remain the legal owners of their stocks
with the right to vote them, although contractually they each
have found themselves to vote in accordance with the
decision of the defined in the pool
- Covers personal obligations “to do”, then although the terms
thereof are valid and binding as contractual commitments,
they cannot be enforced by an action for specific
performance based on the public policy against involuntary
servitudes. Therefore, enforcement measures on pooling
agreements are made by imposing hefty liquidated damages
provisions for non-compliance thereof.
DIFFERENCES BETWEEN A PROXY AND VOTING TRUST AGREEMENT

Proxy Voting Trust Agreement
1. Agency relationship based on personal 1. Contractual relationship based on the
qualification and essentially revocable law on trust, and is not revocable
although it may lawfully terminated
breach of trust
2. It must be in writing and signed by the 2. In addition to the written and signature
SH agreement, it must be notarized and
that a copy of such shall be submitted
to the SEC
3. Fiduciary 3. Fiduciary
4. Proxy can only act in the specified SH’s 4. Trustee is not limited to any particular
or member’s meeting meeting
5. He has no right to receive dividencs, 5. He will receive dividends declared on
unless specifically given such power the shares held in trust, but with
obligation to dispose them for the
benefit of the beneficial owner
6. Proxy does not have the right to 6. Trustee is the person entitle to exercise
inspect the books the right to inspect
7. Proxy does not have an appraisal right, 7. Trustee, as the naked owner, exercises
unless such power is expressly granted the appraisal right, but subject to his
trust obligations with the beneficial
owner
HIERARCHY OF ENFORCEABILITY
1. Voting Trust Agreement
2. Proxy
3. Pooling Agreement
STOCKHOLDERS’ OR MEMBERS’ MEETING

o Sec. 49. Kinds of meetings. - Meetings of directors, trustees, stockholders, or members
may be regular or special
55
o Sec. 50. Regular and special meetings of stockholders or members. - Regular

meetings of stockholders or members shall be held annually on a date fixed in the by-laws, or
if not so fixed, on any date in April of every year as determined by the board of directors or
trustees:
Provided, That written notice of regular meetings shall be sent to all stockholders or
members of record at least two (2) weeks prior to the meeting, unless a different
period is required by the by-laws.
Special meetings of stockholders or members shall be held at any time deemed necessary
or as provided in the by-laws:
Provided, however, That at least one (1) week written notice shall be sent to all
stockholders or members, unless otherwise provided in the bylaws.
Notice of any meeting may be waived, expressly or impliedly, by any stockholder or

member.
Whenever, for any cause, there is no person authorized to call a meeting, the Secretaries and
Exchange Commission, upon petition of a stockholder or member on a showing of good cause
therefor, may issue an order to the petitioning stockholder or member directing him to call a
meeting of the corporation by giving proper notice required 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 members present have been chosen one of their number as presiding officer
o Sec. 51: Place and time of meetings of stockholders or members. - Stockholders' or

members' meetings, whether regular or special, shall be held in the city or municipality where
the principal office of the corporation is located, and if practicable in the principal office of the
corporation: Provided, That Metro Manila shall, for purposes of this section, be considered a
city or municipality.
Notice of meetings shall be in writing, and the time and place thereof stated therein.
All proceedings had and any business transacted at any meeting of the stockholders or
members, if within the powers or authority of the corporation, shall be valid even if the meeting
be improperly held or called, provided all the stockholders or members of the corporation are
present or duly represented at the meeting
 Failure to comply = would render the meeting illegal

 Postponement of Annual SH’s Meeting
General Rule: may be allowed for justifiable and meritorious reasons
Exception:
1. The same shall be held within a reasonable time from the
date it has been postponed and
2. Proper notice of the change of the date is given to all SHs
of record
o Sec. 93: Place of meetings. - The by-laws may provide that the members of a non-stock
corporation may hold their regular or special meetings at any place even outside the place
where the principal office of the corporation is located: Provided, That proper notice is sent to
all members indicating the date, time and place of the meeting: and Provided, further, That
the place of meeting shall be within the Philippines
WHO CAN CALL A MEETING?

 General Rule: Any person/s designated in the BL to have authority to call
stockholder’s or member’s meeting may validly do so
 In the absence of such provisions, the meeting may be called by:
1. Director or Trustee, or
2. Officer entrusted with the management of the corporation unless
otherwise provided by law
 Whenever for any purpose, there is no person authorized to call
a meeting, the SEC, under a Petition of the SH or member, and on the
showing of good cause therefore, may issue an order to the petitioning
SH or member directing him to call a meeting of the corporation by giving
proper notice required by the CC or by BL
 Petitioning SH: may preside until at least a majority of
the SH or members present have chosen one of their
number as presiding officer
QUORUM
 Sec. 52.Quorum in meetings. - Unless otherwise provided for in this Code or in
the bylaws, a quorum shall consist of the stockholders representing a majority of the
outstanding capital stock or a majority of the members in the case of non-stock
corporation
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 For non-stock corporations, only those who are actual, living members with
voting rights shall be counted in determining the existence of quorum during
members’ meeting. Dead members shall not be counted
 By Laws: may provide for the holding of meetings with the presence of any number
of SH or members, even less than a majority, provided that there are at least two
 SEC Opinion, July 10, 1998: Where a corporation encounters several unsuccessful
attempts or if it would be impossible for the corporation to get the required number
of quorum of the SH necessary to transact business, it may, pursuant to the
provisions of P.D 902-A, petition the SEC for the appointment of a management
committee to undertake the management thereof
MINUTES OF THE MEETING

 Sec. 74 . Books to be kept; stock transfer agent. - Every corporation shall keep
and carefully preserve at its principal office a record of all business transactions and
minutes of all meetings of stockholders or members, or of the board of directors or
trustees,
 in which shall be set forth in detail:
1. the time and place of holding the meeting,
2. how authorized,
3. the notice given,
4. whether the meeting was regular or special, if special its object,
5. those present and absent,
6. and every act done or ordered done at the meeting.
7. Upon the demand of any director, trustee, stockholder or member,
the time when any director, trustee, stockholder or member entered
or left the meeting must be noted in the minutes;
8. and on a similar demand, the yeas and nays must be taken on any
motion or proposition, and
9. a record thereof carefully made
10. . The protest of any director, trustee, stockholder or member on any
action or proposed action must be recorded in full on his demand.
The records of all business transactions of the corporation and the minutes of any
meetings shall be open to inspection by any director, trustee, stockholder or member
of the corporation at reasonable hours on business days and he may demand,
writing, for a copy of excerpts from said records or minutes, at his expense.
Any officer or agent of the corporation who shall refuse to allow any director,
trustees, stockholder or member of the corporation to examine and copy excerpts
from its records or minutes, in accordance with the provisions of this Code,
1. shall be liable to such director, trustee, stockholder or member for damages,
and
2. in addition, shall be 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 or order

of the board of directors or trustees, the liability under this section for
such action shall be imposed upon the directors or trustees who voted for
such refusal: and
Provided, further, That it shall be a defense to any action under this

section that the person demanding to examine and copy excerpts from
the corporation's records and minutes has improperly used any
information secured through any prior examination of the records or
minutes of such corporation or of any other corporation, or was not acting
in good faith or for a legitimate purpose in making his demand.
 Without the signature of the Secretary of the meeting, an alleged minutes

taken at that meeting has no probative value nor credibility
RIGHT TO INSPECT/EXAMINE CORPORATE BOOKS

o Basis
1. The rights of SH/M would be of little value if he did not have access to information on
corporate affairs
2. The right to information is founded on his beneficial interest through ownership of shares
or members, and granted by common law for the purpose of protecting his individual
interests
3. It is based upon their ownership of the assets and property of the corporation. It is an
incident of ownership or interest be termed an equitable ownership
4. Chua vs People: SH’s right to inspect remains valid and enforceable duing the 3 year
period of liquidation mandated under Sec. 122 and 145 of the CC on stock corporation
57
o Who may exercise right to inspect

1. Only SH, Members, Directors of record
- May availed of such right personally or by representative
- May be aided by experts and counsel
o Specified Records Subject of Inspection

 Sec. 74: (see above provision)
 “record of all business transactions”: covers practically all matters of
import in profit-seeking corporation
 Things which the corporation can keep secret:
 Formula or process not generally known
1. RIGHT TO FINANCIAL STATEMENTS

- Sec. 75:
Right to financial statements. - Within ten (10) days from receipt
of a written request of any stockholder or member:
1. the corporation shall furnish to him its most recent financial
statement, which shall include
 a balance sheet as of the end of the last taxable year
and
 a profit or loss statement for said taxable year,
showing in reasonable detail its assets and liabilities
and the result of its operations.
At the regular meeting of stockholders or members, the board

of directors or trustees shall present to such stockholders or
members,
1. a financial report of the operations of the corporation for the
preceding year,
 which shall include financial statements, duly signed
and certified by an independent certified public
accountant.
However, if the paid-up capital of the corporation is less than

P50,000.00, the financial statements may be certified under
oath by the treasurer or any responsible officer of the
corporation
2. ANNUAL REPORT OF CORPORATIONS

- Sec. 141
Annual report or corporations. - Every corporation, domestic or
foreign, lawfully doing business in the Philippines shall submit to the
Securities and Exchange Commission:
a. an annual report of its operations,
b. together with a financial statement of its assets and
liabilities,
 certified by any independent certified public
accountant in appropriate cases, covering the
preceding fiscal year and such other requirements as
the Securities and Exchange Commission may
require.
Such report shall be submitted within such period as may be

prescribed by the Securities and Exchange Commission
3. SUMMARY OF CORPORATE OBLIGATIONS TO REPORT

a. Books that records all business transactions of the corporation which shall
include contracts, memoranda, journals, ledgers, etc
b. Minutes book for meetings of SH or members
c. Minutes book for meetings of the board
d. Stock and transfer book
e. Annual financial statements
f. Annual report to the SEC
g. Report of election of directors, trustees and officers within 30 days after
such election
4. RIGHT TO INSPECT COVERS CONTROLLED SUBSIDIARIES
o Manner of Availing Right to Inspect

- See Sec. 74 as quoted above
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- Reasonable Hours: business days through the year, and not merely during an arbitrary
period of few days chosen by the director
 Nature and Scope of Right to Inspect

- Inspection has to be germane to the Petitioner’s Interests as SH, and
has to proper and lawful in character and not inimical to the interest
of the corporation
 Limitations on the right of inspection
1. It should be exercised on reasonable business hours
2. The person demanding the right to examine and copy excerpts from
the corporate records and minutes has not improperly used any
information secured through any previous examination of the records
of such corporation
3. The demand is made in good faith or for a legitimate purpose
4. If the corporation or its officers contest such purpose or contend that
there is evil motive behind the inspection, the burden of proof is with
the corporation or such officer to show the same
 Purposes of the Inspection
1. To ascertain whether the corporation is being mismanaged
2. To ascertain the financial condition of the corporation
3. To ascertain the value of shares of stocks for sale or investment
4. To obtain a mailing list of SH to solicit proxies or influence voting, in
anticipation of SH meeting
 Purposes which may warrant denial because the purpose is
improper
1. to obtain information as to business secrets or to assist veal business
secrets
2. to secure business prospects or investment of advertising list, as
where the SH seeks the list of SH for the purpose of selling it to an
advertising agency
3. to find technical defect in corporate transaction in order to bring
nuisance or strike suits for purpose of blackmail or extortion
4. to obtain information intended to be published so as to embarrass
the company business, depress the value of its assets, and cause loss
to SH; or where the purpose is to create demoralization and
dissension among the SH and by depressing the value of the shares,
be able to deal with them profitably, at their expense
o Remedies if inspection is denied

1. Mandamus
Rule 7 of the Interim Rules, which under Sec. 2 hereof requires that
the Complaint filed must state:
a. The case is for the enforcement of Plaintiff’s right of inspection of corporate
orders or records and/or to be furnished with financial statements under
Secs. 74 and 75 of the CC
b. A demand for inspection and copying of books and records and/or to be
furnished with financial statements made by the plaintiff upon the
defendant
c. The refusal of the defendant to grant the demands of the Plaintiff and the
reasons given for such refusal, if any; and
d. The reasons why the refusal of the defendant to grant the demands of the
plaintiff is unjustified and illegal, stating the law and jurisprudence in
support thereof
 Mandamus Proceeding
a. Mandates that within 2 days from the filing of
the complaint, the court, upon a consideration
of the allegations of the complaint to either
dismiss it outright if it is not sufficient in form
and substances, or otherwise order the issuance
of summons, which shall be served on the
defendant within 2 days from its issuance, and
who has 10 days to file an answer
b. If no answer is filed within due date, the court
may motu propio or upon motion, shall render
judgment as warranted by the allegations of the
complaint, as well as the affidavits, document
and other evidence on record
c. If the answer is filed, the court is mandated to
render a decision based on the pleadings,
affidavits and documentary evidence and other
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evidence attached thereto within 15 days from

receipt of the last pleading
2. Damages
3. Criminal Suit
Sec. 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 not less than one thousand (P1,000.00) pesos but not more than ten
thousand (P10,000.00) pesos or by imprisonment for not less than thirty (30) days
but not more than five (5) years, or both, in the discretion of the court.
If the violation is committed by a corporation, the same may, after notice
and hearing, be dissolved in appropriate proceedings before the Securities and
Exchange Commission: Provided, That such dissolution shall not preclude the
institution of appropriate action against the director, trustee or officer of the
corporation responsible for said violation: Provided, further, That nothing in this
section shall be construed to repeal the other causes for dissolution of a
corporation provided in this Code
For Sec. 144 to apply, the ff elements must be present:
a. A director, trustee or member has made a prior demand in writing for a copy
of excerpts from the corporation’s records or minutes
b. Any officer or agent of the concerned corporation shall refuse to allow the
said director, or trustee, SH, or member of the corporation to examine and
copy said excerpts
c. If such refusal is made pursuant to a resolution or order of the BOD/BOT,
the liability under this section for such action shall be imposed upon the
directors or trustees who voted for such refusal
d. Where the officer or agent of the corporation sets up the defense that the
person demanding to examine and copy excerpts from the corporation’s
records and minutes has improperly used any information secured through
any prior examination of the records or minutes of such corporation or of
any other corporation, or was not acting in good faith or for a legitimate
purpose in making his demand, the contrary must be shown or proved
o Defenses available to Director, Trustee or Officer Held Liable

1. The person demanding to examine has improperly used any information secured through
any prior examination of the records or minutes of such corporation or for any other
corporation, or
2. The one requesting to inspect was not taking in good fauith or for a legitinmate purpose
in making his demand
APPRAISAL RIGHTS
o Nature/ Who is Entitled/ Instances when it may be exerices
Sec. 81
Instances of appraisal right. - Any stockholder of a corporation shall have the right
to dissent and demand payment of the fair value of his shares in the following
instances:
1. In case any amendment to the articles of incorporation has the effect
of changing or restricting the rights of any stockholder or class of
shares, or of authorizing preferences in any respect superior to those
of outstanding shares of any class, or
2. of extending or shortening the term of corporate existence;
3. In case of sale, lease, exchange, transfer, mortgage, pledge or other
disposition of all or substantially all of the corporate property and assets
as provided in the Code; and
4. In case of merger or consolidation
5. In case the corporation decides to invest its funds in another
corporation or business outside of its primary purpose
o How is it exercised
Sec. 82
The appraisal right may be exercised by any stockholder who shall have voted
against the proposed corporate action, by making:
1. a 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 shares:
Provided, That failure to make the demand within such period

shall be deemed a waiver of the appraisal right.
Sec. 83
Effect of demand and termination of right. - From the time of demand for
payment of the fair value of a stockholder's shares until either the abandonment
of the corporate action involved or the purchase of the said shares by the
60
corporation, all rights accruing to such shares, including voting and dividend
rights, shall be suspended in accordance with the provisions of this Code,
except the right of such stockholder to receive payment of the fair value
thereof:
Provided, That if the dissenting stockholder is not paid the value of his
shares within 30 days after the award, his voting and dividend rights shall
immediately be restored
EFFECT OF DEMAND FOR PAYMENT (See Section 83)
NOTATION ON CERTIFICATES; RIGHTS OF TRANSFEREE

Sec. 86
Within ten (10) days after demanding payment for his shares,
1. a dissenting stockholder shall submit the certificates of stock representing
his shares to the corporation for notation thereon that such shares are
dissenting shares.
His failure to do so shall, at the option of the corporation,

terminate his rights under this Title.
If shares represented by the certificates bearing such notation

are transferred, and the certificates consequently canceled, the
rights of the transferor as a dissenting stockholder under this
Title shall cease and the transferee shall have all the rights of a
regular stockholder; and all dividend distributions which would
have accrued on such shares shall be paid to the transferee
HOW PAYMENT OF FAIR VALUE IS EFFECTED

Sec. 82
If the proposed corporate action is implemented or affected,
1. the corporation shall pay to such stockholder, upon surrender of the certificate
or certificates of stock representing his shares, the fair value thereof as of the
day prior to the date on which the vote was taken, excluding any appreciation
or depreciation in anticipation of such corporate action.
If within a period of sixty (60) days from the date the corporate action
was approved by the stockholders, the withdrawing stockholder and the
corporation cannot agree on the fair value of the shares,
- it shall be determined and appraised by three (3) disinterested
persons, one of whom shall be named by the stockholder, another
by the corporation, and the third by the two thus chosen.
The findings of the majority of the appraisers shall be final, and their
award shall be paid by the corporation within thirty (30) days after such
award is made:
Provided, That no payment shall be made to any dissenting

stockholder unless the corporation has unrestricted retained
earnings in its books to cover such payment: and
Provided, further, That upon payment by the corporation of the

agreed or awarded price, the stockholder shall forthwith transfer
his shares to the corporation
EXISTENCE OF UNRESTICTED RETAINED EARNINGS

No payment shall be made to any dissenting stockholder unless the corporation
has unrestricted retained earnings in its books to cover such payment:
If there is no unrestricted retained earnings, Sec. 83 applies
Sec. 83. Effect of demand and termination of right. - From the time of
demand for payment of the fair value of a stockholder's shares until either the
abandonment of the corporate action involved or the purchase of the said shares
by the corporation,
1. all rights accruing to such shares, including voting and dividend rights, shall
be suspended in accordance with the provisions of this Code, except the
right of such stockholder to receive payment of the fair value thereof:
Provided, That if the dissenting stockholder is not paid the value of his
shares within 30 days after the award, his voting and dividend rights shall
immediately be restored
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WHEN RIGHT TO PAYMENT CEASES

Sec. 84. When right to payment ceases. - No demand for payment
under this Title may be withdrawn unless the corporation consents thereto.
1. If, however, such demand for payment is withdrawn with the consent
of the corporation,
2. or if the proposed corporate action is abandoned or rescinded by the
corporation or
3. disapproved by the Securities and Exchange Commission where such
approval is necessary,
4. or if the Securities and Exchange Commission determines that such
stockholder is not entitled to the appraisal right,
o then the right of said stockholder to be paid the fair value

of his shares shall cease, his status as a stockholder shall
thereupon be restored, and all dividend distributions which
would have accrued on his shares shall be paid to him
PARTY WHO BEARS COST OF APPRAISAL

Sec. 85. Who bears costs of appraisal. - The costs and expenses of
appraisal shall be borne by the corporation, unless:
1. the fair value ascertained by the appraisers is approximately 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 case of an action to recover such fair value, all costs and
expenses shall be assessed against the corporation, unless the
refusal of the stockholder to receive payment was unjustified
DENIAL OF APPRAISAL RIGHT

Rights granted by law = may be waived
- UNLESS:
1. The waiver contravenes public policy
SH who knowingly and intelligently waive the right = not void
STATUTORY ATTITUDES TOWARDS THE RIGHT OF APPRAISAL

CC looks disfavour in the exercise of AR
Rule 1, Sec 1 of the Interim Rules of Procedure Governing
Intracoporate Controversies
- The availability of appraisal rights for the acts complained of, shall be
considered by the courts in determining whether a suit is a nuisance
or a harassment suit
DERIVATIVE SUITS
o An individual SH is permitted to institute a derivative suit on behalf of the corporation wherein
he held stock in order to protect or vindicate corporate rights, whenever the officers of the
corporation refuse to sue, or are the ones to be sued or hold control of the corporation, in such
actions, the suing SH is regarded as a nominal party, with the corporation as the real party in
interest
o SH are liable for damages
- GROUNDS:
1. Breach of Trust
2. Redress of wrong inflicted directly upon the SH
3. Violation of fiduciary duties
o Nature
- Conditioned upon a situation where BOD are not in a position to exercise business judgment
for the benefit of the corporation
- To enable the SH to enforce a corporate cause of action
DERIVATIVE SUIT vs CLASS SUIT
DERIVATIVE SUIT SHs’ CLASS SUIT

Exception to the Business Judgment Suits by SH or members if a
Rule corporation based on wrongful or
fraudulent acts of directors or other
persons may be classified into
individual suits, class suits, an
derivative suits
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Individual when the wrong done is

done to him personally and not to
the SH or the corporation
Class or representative when the

wrong is done to a group of SH and
not to the SH of the corporation
Derivative when it is used by the

minority as remedy against abuses
of management
Common law right based on equity
American Jurisprudence allows
the formation of a committee to
investigate matters complained of
and give recommendations on
whether to sue or not
Since such committee is already in

a position to exercise business
judgment rule, the filing of
derivative suit would be improper
GR: Findings of the committee bind

the corporation. But, in the end, it
will always be the courts who shall
determine the findings are sound
and valid
The real party in interest is the
corporation, and the suing SH is a
mere nominal party
Interim Rules, Sec. 2
Discontinuance. A derivative action
shall not be discontinued,
compromised or settled without
approval of the court. During the
pendency of the action, any sale of
shares of stocks of the complaining
SH shall be approved by the court.
If the court determines that the
interest of the SH, members will be
substantially affected by
discontinuance, compromise or
settlement, the court may direct
that notice, by publication or
otherwise, be given to said SH or
members whose interests it
determines will be so affected.
o Requisites for Filing Derivative Suits

1. Plaintiff was a SH or member at the time the questioned act or transaction subject of the
action occurred, as well as at the time the action was filed, and remains as such during the
pendency of the action
2. Plaintiff exerted all reasonable efforts, and alleges with particularity in the complaint, to
exhaust all remedies available under the AOI, BL or rules governing the corporation to
obtain the relief he desires
3. Reliefs sought pertain to the corporation
4. No appraisal rights are available for the acts complained of
5. The suit is not a nuisance or harassment suit
o Exhaustion of Intra-Corporate Remedies

 GR: Derivative suit can only be filed when there has been a showing of exhaustion of
intra-corporate remedy
- it is not only a procedural rule, but also a substantive rule
- in order to be proper, this must be alleged specifically
- Interim Rules:
1. Requires a reference to or mention of all and other remedies
under AOI or BL or rules governing the corporation or
partnership to obtain the relief he desires
2. To allege such fact with particularity in the complaint that they
gave exerted all efforts to exhaust all remedies available
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 Exception:
1. Exhaustion would be futile or useless because the Board itself would not bring the
suit for the reason that they are also guilty or part of the fraud committed against
the corporation
2. Corporation itself is under the complete control of the person against whom it is
being filed
o Laches by Inaction of Director

- When the corporation is virtually immobilized from commencing suit against its
directors such as when the BOD, under the BL of the corporation, had the control of the
affairs of the corporation, laches does not begin to attach against the corporation until
the directors cease to be such.
o Grounds for Derivative Suit: Express allegation that suit filed is derivative in nature
1. Wastage and Diversion of Funds
2. Violation of the Laws
o Nature of the Reliefs Prayed For

1. It must be brought for the benefit of the corporation
o Appointment of Receiver (Chase Doctrine): In addition to the right to file DS, a SH, in
order to ensure that during the pendency of the derivative suit, the corporation is ran properly,
he can also ask for the appointment of receiver to take management away from the Board and
instead place it in the hands of the receiver
o Venue:
a. Sec. 5(b) of PD 902-A: SEC
b. Sec. 5.2 of SRC: RTC Special Commercial Courts
c. Interim Rules of Procedure: RTC which has jurisdiction over the principal office of the
corporation
o Nuisance Suits
- Failure to allege categorically that the suit was not a nuisance or harassment of suit
was fatal to the filing of the derivative suit
- Examples:
1. Collection of personal debt
o Retained Lawyer by the Corporation

- Cannot defend members of the BOD in a derivative suit filed by a minority SH
- Reason: conflict of interests
o Availability of Appraisal Rights

- To determine whether is a suit is nuisance or not
WITHDRAWAL OF SH OR DEMAND FOR DISSOLUTION IN CLOSE CORPORATIONS

o Withdrawal
- General Rule: Any SH 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 debts and liabilities exclusive of capital stock
- Provided: without prejudice to the other rights and remedies available to a SH
o Dissolution
- General Rule: Any SH of a close corporation may, by written petition to the SEC,
compel the dissolution of such corporation whenever any of the acts of the directors,
officers of those in control of the corporation is illegal, or fraudulent or dishonest or
oppressive or unfairly prejudicial to the corporation or any SH, or whenever
corporate assets are being misapplied or wasted.
RIGHT TO PROPORTIONATE SHARE OF REMAINING ASSETS UPON DISSOLUTION

o Sec. 122 of the Corporation Code
- General Rule: No corporation shall distribute any of its assets or property
- Exception:
1. Decrease of capital stock
2. Otherwise allowed in the Code
3. Lawful dissolution and after payment of all its debts and liabilities
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CHAPTER 11: SHARES OF STOCKS
NATURE OF SHARES OF STOCK

 intangible personal property of the SH, which they can transact with as in any other form of
property, like assignment by way of disposition, or pledge by way of encumbrance
 intrinsic pecuniary value to SH
 Do not represent propriety rights of SH to the assets of the properties of the corporation
 Represent the aliquot parts of a corporation’s capital, or the right to share in the proceeds when
the remaining assets of the corporation are distributed according to law and equity, the SH do not
own any part of the assets represented by the capital of the corporation; nor are the SH entitled
to the possession of any definite portion of the corporation’s assets or properties
 Whether issued or not, it do not represent assets or property to the corporation which issues,
or eventually issues them. Neither they are considered as debts or liabilities
 It falls within the special category of intangible personal property under the generic
name of “EQUITY”
- SOS represents a proportionate claim by the holder to the business enterprise pursued
through a medium of a corporation. This is the reasons why all the dealings in a
corporation are reported in the Stockholders’ Equity section of the corporation’s financial
statement
- Total Liabilities: represents all the priority claims of the corporation’s creditors to all its
Assets
- Total Assets: all of the properties of the corporation, whether real or personal
- Stockholders’s Equity: represents the primary claim of the SH to the results of the
operations of the business enterprise, which if run profitably, tend to increase the Assets
of the Corporation; and when run unprofitably at loss, tends to decrease the Assets of
the corporation
 Cannot legally own and consider as property the various organs that constitute his body, so also a
corporation as a juridical person cannot claim ownership over its corpus or any of the portions that
constitute its juridical being
o Magsaysay-Labrador vs CA: characterized a SH interest in corporate

contracts, transactions and properties, if “it exists at all, is indirect,
contingent, remote, conjectural, consequential and collateral. At the very
least, their interest is purely inchoate, or in sheer expectancy of a right in
the management of the corporation and to share in the profits thereof and
in the properties and assets thereof on dissolution, after payment of
corporate debts and obligations.”
Modes of Dealings with Shares of Stocks

 Levels
1. Level 1: Distinguishing between initial issuance of SoS, epitomized by the
Subscription Agreement; from subsequent dealings with SoS
- the initial issuance of SoS from ACS of the corporation constitutes a
commercial transaction between the issuing corporation and the
subscribing SH. Such transaction is referred to as the subscription
agreement
 Subscription Agreement is a special form of
contract governed by principles that go beyond the
norms understood in Contract Law
 Strictly speaking, the mode that constitutes in the
subscriber the owner of the shares subscribed is an
original mode of creating ownership, where there was
no ownership over them when they still constituted
unissued shares in the composition of the corporation
2. Level 2: When it comes to subsequent dealings with SOS distinguishing between
acts of sale, transfer of assignment, or generally called “contract of disposition”
from acts of attachment, levy and encumbrance, or generally called “contracts of
encumbrance”
- Contracts of Disposition involve essentially a contract of sale over
the shares disposed of, and such a contract is between the original
SH as the seller, and the substitute SH, as buyer of the shares
- Contracts of Encumbance pertaining to SoS constitute only
security arrangements where the shares are offered as collateral to
support a principal contract. Default on the principal obligation could
lead to foreclosure or a public sale of the shares given by way of
security, which could then fall into the realm of involuntary acts of
disposition.
Modes of Tradition Applicable to SoS

 SoS are not capable of actual or physical delivery. When dealing with SoS, transfer of ownership
and delivery of possession can only be effected through constructive delivery
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 3 types of constructive delivery

1. Execution of a public document, usually denominated as a Deed of Sale of SoS or more
properly, Deed of Assignment of SoS
2. The transfer or negotiation of titles, certificates or other evidence of incorporeal right, which
in this particular case means the endorsement and delivery of the stock certificates
3. The use and enjoyment by the buyer of the rights and privileges pertaining to the incorporeal
rights, with the knowledge and consent of the selling SH
Rights of Corporation with Respect to SoS

1. To call for the payment of the unpaid subscription, together with the interest accrued, if any,
on the date specified in the subscription agreement or on the date stated in the call made by
the Board
2. To impose interest on the unpaid subscriptions from the date of the subscription, if so required
by, and at the rate of interest fixed in the by-laws
3. To refuse to issue to the subscriber the certificate of stock covering shares where the
subscription has not been fully paid
4. To refuse to recognize and register the sale or assignment of any share where the subscription
has not been fully paid
5. To refuse to recognize a sale or assignment of shares which have not been duly registered in
the stock and transfer book
 ON THE OTHER HAND, Corporations do not have the power on its

own volition to:
1. Demand for the repurchase of its SoS, unless the shares are classified
as redeemable shares in the AOI
2. Refuse to pay to the SH dividends declared on shares which have not
been declared delinquent to apply them to the payment of the unpaid
subscription
3. Bid delinquent shares and thereby to obtain for itself profit, for a
value greater than the unpaid subscription, plus accrued interests,
costs of advertisement and expenses of sale
 Unpaid Subscription of SH which has not become due by call through
a formal board resolution cannot be offset against a money claim of the
employee-SH against the employer-corporation; or even when a proper
call has been made, such offsetting would still not be authorized as being
in violation of the prohibition against the unauthorized deductions under
the Labor Code
ORIGINAL DEALINGS WITH SOS
1. Subscription Agreement
- Underpins the relationship between the SH and the corporation, and therefore is a special
contract in Corporate Law
- Although governed by the Law on Contracts, it has special features that go beyond such
discipline, and delve into the heart of Corporate Law
- Sec. 72: Holders of subscribed shares not fully-paid which are not delinquent shall have
all the rights of a SH
- Therefore, it is the subscription to the SoS that creates the legal relationship between
the SH and the corporation, and it is such that grants to the SH the statutory and common
rights granted to the SH, and further, it is one which creates ownership over such shares
in the person of the subscriber
 Characteristics: There can be a subscription and issuance only with

reference to “unissued shares” in the ff cases:
a. The original issuance from ACS at the time of the
incorporation
b. The opening, during the life of the corporation, of the
portion of the original ACS previously unissued
c. The increase of ACS achieved through a formal
amendment of the AOI and registration thereof with the
SEC
 Sec. 60: Subscription Contract: Any contract for the acquisition of
unissued stock in an existing corporation or a corporation still to be formed
shall be deemed a subscription within the meaning of this Title,
notwithstanding the fact that the parties refer to it as a purchase or some
other contract.
 Law on Sales on Assignment: covers the disposition of issued SoS.
Such are essentially contracts of sale between a registered SH and a
buyer, where the subject matter is already issued and outstanding SoS
 Prior to Section 60, it was possible under the principle of freedom to
contract, for a corporation and a would-be subscriber to enter into a
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contract of sale, instead of a subscription agreement, over unissued shares

of the capital stock
 UNDER THE OLD CORPORATE LAW, the differences between a
subscription contract and a purchase agreement are:
PURCHASE CONTRACT SUBSCRIPTION AGREEMENT

The promise to issue the shares and the The subscriber becomes a SH even
promise to pay the price are considered if he has not paid his subscription
to create dependent and concurrent
duties, and payment is a condition to the
right to a Certificate for shares and the
status of SH
The purchase is not a debtor, and if he The unpaid subscription is a debt
defaults, his liability is damages for the of the subscriber
difference between the contract price
and the market value of the shares  Delinquency is the only way
by which a subscriber may be
deprived of his rights as a SH
Bankruptcy or insolvency of the Insolvency of the corporation
corporation will terminate its claim makes the unpaid subscription
against the purchaser on the theory that immediately due and demandable
it can no longer perform its side of an
executory contract by delivery of a valid
certificate and that the consideration has
failed
The provisions of the Corporation Law
regarding calls for unpaid subscription
and assessment of stock do not apply to
a purchase contract
The rule that corporation has no legal
capacity to release an original subscriber
to it capital stock from the obligation to
pay for his shares is inapplicable to a
contract of purchase of shares
- Since these distinctions led to various fraudulent acts committed

against the other SH and the creditors of a corporation, Sec. 60
removed such distinction and now provides at all agreements
pertaining to the purchase of unissued shares would be considered
as a subscription agreement
2. Pre-Incorporation Subscription Agreements

- Under the Old Corporate Law, while generally there was no issue as to the binding
effect of subscription to SoS after incorporation, there were several conflicting positions
as to the binding effect of such subscription before incorporation
- No pre-incorporation contract may be revoked after the submission of the AOI to the
SEC
- As to subscription before incorporation:
a. Offer Theory: construed subscriptions as only continuing offers to the proposed
corporation which do not ripen into contracts until accepted by the corporation
when organized
- Subscribers are allowed to withdraw their subscription at any time
before the corporations comes into existence and accepts the offer
 He can speculate, without financial risk to himself, such
that if there is oversubscription, he can take his shares and
sell them at a premium; otherwise, he withdraws from the
situation before the corporation accepts the subscription
b. Contract Theory: a subscription agreement among several persons to take shares
in a proposed corporation becomes binding and is irrevocable from the time of
subscription unless cancelled by all the parties before acceptance by the
corporation
- The difficulty of the theory is the legal standing of the corporation
formed to enforce the subscription agreements, not being the direct
party thereto
- Under this theory, the right of the corporation to enforce the
subscription agreement is sustained under the theory that the right
of the corporation to enforce the agreement is sustained under pour
autrui
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 Section 61: has now provided for a statutory basis

for the theories covering the binding effects of pre-
incorporation agreements to SoS
 it provides that a subscription for SoS
still to be formed shall be irrevocable
for a period of at least 6 months from
the date of the subscription, except:
1. when all the other subscribers
consent to the revocation
2. Unless the corporation of said
corporation fails to materialize
within said period or within a
longer period as may be
stipulated in the contract of
subscription
 It fused together the best features of
both the offer and contract theories
 Recognized that the subscription
agreement is a contract between the
subscriber and the corporation
 Pre-Incorporation agreement is
replaced by a PROMOTER’S
CONTRACT
When Shares Deemed Subscribed

 Prior to Sec. 60: Any contract for the acquisition of unissued stock shall be deemed a
subscription
 Subscription Agreement
- Not a mode of transferring ownership, but constitutes merely a title at the point of
perfection
- Sec. 72: Holders of subscribed shares not fully paid which are not delinquent shall have
all the rights of a SH
- it is perfected upon the meeting of the minds of the corporation and the subscriber as
to the number and subscription value of shares
- Secs. 60, 63,72: The entering into any contract for the acquisition of unissued stocks,
which shall be deemed as a subscription agreement, would constitute itself the tradition
by which the subscriber becomes a SH of the corporation, and through which he becomes
he owner of the shares of stock subscribed and exercise acts of ownership, subject to the
limiting provisions under the Corporation Code, such as the lien which the corporation has
over not fully-paid under the 2nd par of Sec. 63
Non-Applicability of the Statute of Frauds

 Nowhere in the CC that requires that a subscription agreement should be in writing in order to
be valid, and essentially being a consensual contract, it is binding on both the corporation and
the subscriber upon meeting of the minds
 Villanueva believes that subscription agreements are not covered by the Statute of Frauds, and
the corporation has a right to enforce and collect, and to adduce oral evidence, upon an oral
subscription agreement, on the ff grounds:
1. The special treatment accorded to subscription agreements under Corporate Law requires
that subscription agreement, even when they have entered into orally, should be allowed
to be proved and enforced by parol evidence, in order to fully protect the corporate
creditors under the trust fund doctrine
2. Even if subscription agreements are covered by Statute of Frauds, but by their nature
which upon consent would make the subscriber a SH and owner of the covered shares,
which would constitute partial execution, they are deemed to be exempted from the
prohibition against presenting of oral evidence to prove and enforce them.
Assignment of Shares under a Subscription Agreement

 Interport Resources vs Securities Specialist: The original subscriber of shares of stock under a
Subscription Agreement assigns the shares to another party, the same partakes of the nature of
a novation through the substitution of the person of the debtor, which is effective only with the
consent of the creditor, but that in the case of the corporation issuing the shares, such assignment
would be valid and binding upon notice by the transferee of the transfer of the shares coupled
with a tender of balance of the unpaid subscription pursuant to the call made by the corporation
Consideration for Issuance of Shares

 Section 62
Considering for stocks. - Stocks shall not be issued for a consideration less than the
par or issued price thereof. Consideration for the issuance of stock may be any or a
combination of any two or more of the following:
1. Actual cash paid to the corporation;
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2. Property, tangible or intangible, actually received by the corporation and necessary or

convenient for its use and lawful purposes at a fair valuation equal to the par or issued
value of the stock issued;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital; and
6. Outstanding shares exchanged for stocks in the event of reclassification or conversion.
Where the consideration is other than actual cash, or consists of intangible property
such as patents of copyrights, the valuation thereof shall initially be determined by the
incorporators or the board of directors, subject to approval by the Securities and Exchange
Commission.
Shares of stock shall not be issued in exchange for promissory notes or future service.
The same considerations provided for in this section, insofar as they may be
applicable, may be used for the issuance of bonds by the corporation.
The issued price of no-par value shares may be fixed in the articles of incorporation
or by the board of directors pursuant to authority conferred upon it by the articles of
incorporation or the by-laws, or in the absence thereof, by the stockholders representing
at least a majority of the outstanding capital stock at a meeting duly called for the
purpose. (5 and 16)
 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 consideration in any form other than cash, valued in excess of its fair value, or
who, having knowledge thereof, does not forthwith express his objection in writing and
file the same with the corporate secretary, shall be solidarily, liable with the stockholder
concerned to the corporation and its creditors for the difference between the fair value
received at the time of issuance of the stock and the par or issued value of the same
a) Cash and Promissory Notes as Consideration

o Sec. 62: SoS may be issued in consideration of cash actually paid
to the corporation, but shall not be issued in exchange for
promissory notes or future services
o “actually paid to the corporation”: it is not required that there
be actual payment of the cash consideration in order to make the
subscription agreement valid and binding
o Subscription agreement is a consensual contract, perfect, valid
and binding upon the meeting of the minds of the parties on the
subject matter
o Therefore, even though the consideration agreed upon between
the corporation and the subscriber may be cash, the non-payment
of the consideration does not render the contract invalid or void, for
indeed the unpaid subscription constitutes “subscription receivable”
in the books of corporation
o Only where there is a call by the Board, or when under the terms
of the subscription agreement payment is due, is the SH legally
obliged to pay actual cash to the corporation, and failure to do so
would subject the shares to being declared delinquent and leading
to the suspension of the rights of the SH
o “Subscription Receivable”: an obligation to pay cash in the
future
 Valid consideration under a subscription agreement, and
yet Sec. 62 expressly prohibits promissory notes (or for
that matter the creation of “accounts receivable”) to be
accepted as consideration for the subscription of SoS,
when both “notes receivable” and “accounts receivable”
may constitute essentially the same undertaking by the
same subscriber to pay cash in the future, just like
“subscription receivable”
o Prohibition on Sec. 62 is based on 2 factors:
1. Firstly, on the underlying difference in legal consequences
between “notes receivable” or “accounts receivable” on one
hand, and “subscription receivable” on the other hand
2. Secondly, on the philosophical basis that underlies the trust
fund doctrine, i.e., that the capital stock of a corporation,
especially the paid-up portion thereof, should be backed-up by
assets which have their own intrinsic value other than the
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promise of a person to pay in the future. In fact, when property

other than cash is paid for subscription, their proper valuation
must be proved before SEC to ensure that shares are not
issued in exchange for properties which do not have value
equal to par or issued values of the shares issued
o If a note receivable is accepted as payment for subscription
of shares of stock, the face value of the note would appear as an
addition to the assets in the corporation’s balance sheet, without
the corresponding deduction on the capital stock of the equity
portion.
 Consequently, creditors who examine the financial
statements of such corporation would be led to believe
on face value alone that the entire paid-up capital stock
of the corporation has been paid in cash or property that
has intrinsic value that is not dependent upon the
fulfilment of the promise or credit standing of a person
 Notes or Accounts receivables arising from dealings
with third parties tend to have better valuation since
they are the product of arm’s length transactions, than
notes or accounts receivables received from an insider,
where conflict of interest situation may lead to
compromising the valuation or even the collection
efforts, to the detriment of the corporation, and
consequently, the creditors
 Subscription Receivables are correctly treated not as
assets of the corporation, and are reflected properly in
the balance sheet of the corporation as deductions from
SH’s equity and the difference shows only a net amount
of the SH’s equity which is backed-up by assets actually
received by the corporation which have values that do
not depend on the credit standing of another person. In
short, the presentation of subscription receivable in the
corporation’s balance sheet clearly informs the creditors
of the actual net amount of capital stock which is truly
backed up by realizable assets
b) Property Consideration
o The property which a corporation may accept in change for its stock
must be of a kind which it may lawfully acquire and hold in carrying
out the purposes of its incorporation, and which is necessary or
proper for it to own in carrying on its business
o it cannot lawfully issue stock for property which its charter does not
authorize it to acquire, or for property acquired for an unauthorized
purpose
o Property must be of substantial nature, having a pecuniary value
capable of being ascertained, and must be something real and
tangible as distinguished from something constructive or
speculative; and it must be of such character that it can be delivered
to the corporation, instead of being merely communicated to its
officers or employees. It must also be such as is capable of being
applied to the payment of debts and of distribution among the SH
 SEC has ruled that property, such as financial

instruments and receivables, may be legally
accepted as capital contributions, subject to the ff
conditions:
1. Actually received by the corporation
2. Necessary or convenient for the corporation’s
use and lawful purpose; and
3. At a fair valuation equal to the par value of the
stock issued to be approved by the SEC
 Pre-Existing Receivables may be accepted by the
corporation as valid payment for subscription, being
considered as property consideration, and not as cash
payments
- SEC has ruled that such receivables shall be
subject to the verification by the SEC of their
existence and collectability; and since non-
payment of the stocks may still be possible in
the event that the creditors of the parent
company fail to pay their obligations, the
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shares to be issued in consideration thereof

shall be held in escrow until the actual payment
of the amount
c) Debts and Service as Consideration

o A corporation is allowed to receive as payment for its stocks not
only money and property but also labor performed for or other
services actually rendered to the corporation provided the
transaction is in good faith and no corporation provided the
transaction is in good faith and no fraud is perpetrated upon
other SHs
o Compensation payable for services actually rendered to
the corporation is credit which is property and the value of which
is ascertainable
o Agreement to issue stock for services to be rendered in
the future is void under Sec. 62, and the corporation should
not be estopped to deny that the services constituted payment
of the stock subscription even though it has received the benefit
thereof
o Although a previously incurred debt is a valid consideration
for subscription, future services are not allowed as consideration
for subscription because the value of such service to the
corporation in exchange for shares of stock would again depend
on the future performance of the subscriber of the service
offered, and there would be a tendency to short-change the
corporation
o In the case of previously incurred debt, their valuation
would have been established at arm’s length prior to even
negotiating on the subscription agreement, and they would
more often represent the true value of services which the
corporation has received
o Movie star contracts cannot be accepted as payment for
subscription inasmuch as the services of movie stars under such
contracts are not yet considered as actually rendered/received
as their services will still be performed in the future
d) Set-Off of Corporation’s Indebtedness

o Previously incurred debt would be converted to capital and it is
likely that having been established at arm’s length, they
represent the true value of the corporation
o Since previously incurred obligations of the corporation exists in
its books, the corporation would be have had to pay the same
in cash to its creditor, and in turn the same cash is paid back by
such creditor to the corporation for subscription of shares
e) Unrestricted Retained Earnings or Existing Capital as

Consideration
o Section 62: Consideration constituting “amounts transferred
from unrestricted retained earnings to stated capital” and
“outstanding shares exchanged for stocks in the event of
reclassification or conversion,” are merely booking entries
o The amounts transferred from unrestricted retained to stated
capital cover the declaration of stock dividends, which has the
effect of “capitalizing” unrestricted retained earnings
o Stock Dividends are in the nature of shares of stock, where
the consideration is the amount of restricted retained earnings
converted into equity in the corporation’s books
o Declaration of stock dividends should be distinguished from
reclassification or conversion of shares which do not really affect
the financial integrity of capital stock which has been paid-up
previously, but only changes its composition or manner of
classification
f) Consequences of Unlawful Consideration

o Sec. 62: Shares of stock shall not be issued in exchange for
promissory notes or future services. What happens therefore,
when, in spite of the clear injunction under Sec. 62, the
corporation enters into a subscription agreement that covers a
disallowed consideration. it would not be in consonance with the
trust fund doctrine, nor to the best interest of the corporation
and its creditors, to consider such subscription contract as void.
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- The reasonable interpretation is that the

subscription contract would be valid and
binding on both the corporation and the
subscriber, but the provision on such unlawful
consideration is deemed void, such that the
subscription agreement would be construed to
be for cash and the unpaid amount be treated
as part of the subscription receivable
o The entering into such unlawful consideration clause
under the subscription agreement would be subject to the
BOD and participating officers to the same liabilities provided
for under Sec. 65 of the CC for watered stocks
WATERED STOCKS
 These are shares issued as fully paid when in truth the consideration received is known to be less
than the par value or issued value of the shares
 Also used to include bonus shares, under an agreement that nothing shall be paid to the
corporation for them; and discount shares issued at a discount under an agreement to pay less
than the par value in money
 Stock watering is prohibited because of the injuries caused to:
1. The corporation, which is deprived of needed capital and the opportunity to market is
securities to its own advantage, thus, hurting its business prospects and financial
responsibility
2. Existing and future SH, who are also injured by the dilution of the proportionate interests
in the corporation and who pay full value for their shares
3. Present and future creditors, who are injured as the corporation is deprived of the assets
or capital required by law to be contributed by all SH as substitute for individual liability
of corporate debts; and
4. Persons who deal with the company or purchase its securities who are deceived because
stock watering which are invariably accompanied with misleading corporate accounts and
financial statements, particularly by an overstatement of the value of assets received for
the shares to cover up a capital deficit resulting from overvaluation and underpayment of
purported capital contributions
THREE THEORIES HAVE BEEN ADVANCED AS BASES FOR HOLDING SH AND

OFFICERS LIABLE FOR WATERED STOCKS
a. Subscription Contract Theory
- it holds that the subscription contract is the source and measure of the duty
of a subscriber to pay for his shares, if the contract releases him from further
liability, the subscriber ceases to be liable
- it is unacceptable in our jurisdiction because of the peremptory language of
then Sec. 16 of the Corporation Law, and now Sections 62 and 65 of the CC
b. Fraud Theory
- It holds a SH liable for watered stock on the basis of tort or misrepresentation,
the wrong done to creditor is fraud or deceit in falsely representing that par value
has been paid or agreed to be paid in full
- Subsequent creditors without notice are presumed to have been deceived by
this misrepresentation, but prior creditors with notice are not protected
- Hospes v Northwestern Manufacture & Car Co:
“Trust implies two estate or interests – one equitable and one legal;
one person as a trustee, holding the legal title, while the another, as
the cestui que trust, has the beneficial interests. Absolute control and
power of disposition are inconsistent with the idea of trust”
c. Trust Fund Doctrine
- All corporate creditor would have legal basis to recover against SH and
guilty officers
- Capital of a corporation constitute a fund to which creditors have a
right to look for satisfaction of their claims and that the assignee in
insolvency can maintain an action upon any unpaid stock subscription in
order to realize assets for the payment of its debts
- Section 65: No distinction is made as to creditors whether they become
such prior to or subsequent to the issuance of the watered stock and fraud
is not made an element. In any event, Section 65 is by itself sufficient
basis to hold a SH liable to any corporate creditor without need to resorting
to any of the discussed theories
- The legal standing of corporate creditors against guilty SH and
officers for watered stock is clear in a situation when the corporation
is insolvent since then all corporate assets would be held for the
satisfaction of the claims of the creditors, before any distribution is made
to the SH.
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- In the payment of property for subscribed shares, Sec. 62 provides

that valuation thereof shall initially be determined by incorporators or the
BoD subject to approval by the SEC
- In actual practice, the watering of stock is not supposed to happen
because property consideration for subscription is always evaluated by the
SEC which often conducts an examination of the involved properties and
appraisal reports are submitted to establish the fair value of such
properties. When the SEC approves the valuation it may be difficult to
sustain an assertion later on that there has been watering of the shares.
RELEASES FROM SUBSCRIPTION OBLIGATIONS

 A corporation can release a subscriber from his subscription, in whole or in part, only with the
express or implied consent of all the other SH, and only when there is no prejudice to corporate
directors
 A corporation has no power to release an original subscriber to its capital stock from the
obligation of paying for his shares, without a valuable consideration for such release and as
against creditors a reduction of the capital stock can take place only in the manner and under
the conditions prescribed by the statute or the charter of the AOI. Moreover, strict compliance
with the statutory obligations is necessary
 Valid and binding subscription for stock corporation cannot be cancelled so as to release
the subscriber from liability thereon without the consent of all the SH
o Exceptions:
1. In the case of bona fide compromise, or to set off debt due from the
corporation, a release, supported by consideration, will be effectual as against
dissenting SH and subsequent existing creditors (Lingayen Gulf vs Baltazar)
 Subscriptions payable can be cancelled if there is a reduction in capital stock:
a. Which is possible if done with the consent of the creditors, or
b. If they will not be prejudiced by such move, in which case, consent is necessary
 It is important to make a distinction between dates specified to make payment that
is made in a subscription contract and a simple subscription contract:
SUBSCRIPTION SIMPLE SUBSCRIPTION
CONTRACT CONTRACT
Payments to the subscription A call is necessary in order for
must be made on said dates, delinquency to set in
without need of a call; and
non-compliance with said
date can be converted to a
delinquency status
 PNB vs Bitulok Sawmill:

- It gives the essence of a subscription agreement – it is indeed a species of
contracts in general under the Law on Contracts, but the principles in Corporate
Law prevail, one of which is that when one enters into a subscription agreement,
one cannot deny the obligation to pay, even when the corporation becomes
insolvent
 When one enters into a subscription agreement, the principles of Corporate Law become part
and parcel of the contract
PAYMENT OF BALANCE OF SUBSCRIPTION

 Sec. 66. Interest on unpaid subscriptions. - Subscribers for stock shall pay to the
corporation interest on all unpaid subscriptions from the date of subscription, if so required by,
and at the rate of interest fixed in the by-laws. If no rate of interest is fixed in the by-laws,
such rate shall be deemed to be the legal rate. (37)
 Sec. 67. Payment of balance of subscription. - Subject to the provisions of the contract
of subscription, the board of directors of any stock corporation may at any time declare due
and payable to the corporation unpaid subscriptions to the capital stock and may collect the
same or such percentage thereof, in either case with accrued interest, if any, as it may deem
necessary.
Payment of any unpaid subscription or any percentage thereof, together with the interest
accrued, if any, shall be made on the date specified in the contract of subscription or on the
date stated in the call made by the board. Failure to pay on such date shall render the entire
balance due and payable and shall make the stockholder liable for interest at the legal rate on
such balance, unless a different rate of interest is provided in the by-laws, computed from such
date until full payment. If within thirty (30) days from the said date no payment is made, all
stocks covered by said subscription shall thereupon become delinquent and shall be subject to
sale as hereinafter provided, unless the board of directors orders otherwise.
CALL ON UNPAID SUBSCRIPTION
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Nature of the Call

 Call
a. It may mean the resolution of the BOD for the payment of the unpaid subscriptions
b. Notification of such resolution made on the SH
c. The time when subscription made payable
 Call is usually expressed in the form of resolution adopted by the BOD,

specifying the proportion of the unpaid subscription which it is desired to call
in and the time or times when it is payable. The entire amount of the unpaid
subscription may be called at once or it may be made payable by installments,
at stated intervals, or by successive calls
 Resolution to make a call prospectively is good, that is, a resolution
providing that a call made on a specified day in the future. Under such
circumstance, the date so specified is the date of the call, although the
resolution also provides for payment in installments at a still later date
 A call must be uniform to all SHs of the class of shares on which it is
made who have already paid an equal amount on their shares, and must not
exceed the balance remaining unpaid on their shares
When Call NOT Necessary

1. When, under the terms of the subscription contract, subscription is payable, not upon call, but
immediately, or on a specified day, or when it is payable in installments at specified times; and
2. If the corporation becomes insolvent, which makes the liability on the unpaid subscription due
and demandable regardless of any stipulation to the contrary in the subscription agreement
 Lingayen vs Baltazar: Provisions of the Old Corporate Law on notice of call an

delinquency sale proceeding are mandatory in nature and must be strictly complied;
when not complied with, the call would be unlawful and ineffective
 Edward Keller vs COB Group: SH is personally liable for the financial obligations
of a corporation to the extent of his unpaid subscription even when the corporation
itself, which was the main creditor for the obligation, was not shown to be insolvent
 Velasco vs Poizat: Corporation Law clearly recognizes that a stock subscription is
a subsisting liability from the time the subscription is made, since it requires the
subscriber to pay interest quarterly from that date unless he us relieved from such
liability by the by-laws of the corporation
DELINQUENCY SALE
 Section 68:
Delinquency sale. - The board of directors may, by resolution, order the sale of delinquent
stock and shall specifically state:
a. the amount due on each subscription plus
b. all accrued interest,
c. and the date, time and place of the sale which shall not be less than thirty (30)
days nor more than sixty (60) days from the date the stocks become delinquent.
Notice of said sale, with a copy of the resolution, shall be:

a. sent to every delinquent stockholder either personally or by registered mail.
b. The same shall furthermore be published once a week for two (2) consecutive
weeks in a newspaper of general circulation in the province or city where the
principal office of the corporation is located.
Unless the delinquent stockholder pays to the corporation, on or before the date specified for
the sale of the delinquent stock, the balance due on his subscription, plus accrued interest,
costs of advertisement and expenses of sale, or unless the board of directors otherwise orders,
said delinquent stock shall be sold at public auction to such bidder who shall offer to pay the
full amount of the balance on the subscription together with accrued interest, costs of
advertisement and expenses of sale, for the smallest number of shares or fraction of a share.
The stock so purchased shall be transferred to such purchaser in the books of the corporation
and a certificate for such stock shall be issued in his favor. The remaining shares, if any, shall
be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance
of a certificate of stock covering such shares.
Should there be no bidder at the public auction who offers to pay the full amount of the balance
on the subscription together with accrued interest, costs of advertisement and expenses of
sale, for the smallest number of shares or fraction of a share, the corporation may, subject to
the provisions of this Code, bid for the same, and the total amount due shall be credited as
paid in full in the books of the corporation. Title to all the shares of stock covered by the
subscription shall be vested in the corporation as treasury shares and may be disposed of by
said corporation in accordance with the provisions of this Code
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 Section 67:
Payment of balance of subscription. - Subject to the provisions of the contract of

subscription, the board of directors of any stock corporation may:
1. at any time declare due and payable to the corporation unpaid subscriptions to
the capital stock and
2. may collect the same or such percentage thereof, in either case with accrued
interest, if any, as it may deem necessary.
Payment of any unpaid subscription or any percentage thereof, together with the interest
accrued, if any, shall be made on the date specified in the contract of subscription or on the
date stated in the call made by the board.
Failure to pay on such date shall render the entire balance due and payable and shall make
the stockholder liable for interest at the legal rate on such balance, unless a different rate of
interest is provided in the by-laws, computed from such date until full payment.
If within thirty (30) days from the said date no payment is made, all stocks covered by said
subscription shall thereupon become delinquent and shall be subject to sale as hereinafter
provided, unless the board of directors orders otherwise
 Highest Bidder
- Such bidder who shall offer to pay the full amount of the balance on the
subscription together with the accrued interests, costs of advertisements and
expenses of sale, for the smallest number of shares or a fraction of share (Sec.
68)
- The stock so purchased shall be transferred to such purchaser in the books of
the corporation and a certificate of stock shall be issued in his favor
- Remaining shares, if any, shall be credited in favor of the delinquent SH who
shall likewise be entitled to the issuance of a certificate of stock covering such
shares
 Reason: Sec. 68 protects the delinquent SH, and that
corporations are not supposed to make money out of
sale, but should only collect in full the subscription due,
plus accrued interest and expenses incurrerd
- Should there be no bidder at the public auction who offers to pay the full
amount of the balance on the subscription together with accrued interest,
costs of advertisement and expenses of sale, for the smallest number of
shares or fraction of a share, the corporation may, subject to the provisions
of this Code, bid for the same, and the total amount due shall be credited as
paid in full in the books of the corporation. Title to all the shares of stock
covered by the subscription shall be vested in the corporation as treasury
shares and may be disposed of by said corporation in accordance with the
provisions of this Code.
 Questioning the Delinquency Sale

- When sale may be questioned. - No action to recover delinquent stock
sold can be sustained upon the ground of irregularity or defect in the notice
of sale, or in the sale itself of the delinquent stock, unless the party seeking
to maintain such action first pays or tenders to the party holding the stock
the sum for which the same was sold, with interest from the date of sale at
the legal rate; and no such action shall be maintained unless it is commenced
by the filing of a complaint within six (6) months from the date of sale (Sec.
69)
 Other Remedies Available to the Corporation

- Sec. 70
Court action to recover unpaid subscription. - Nothing in this Code
shall prevent the corporation from collecting by action in a court of proper
jurisdiction the amount due on any unpaid subscription, with accrued
interest, costs and expenses
- De Silva vs Aboitiz
“BOD has absolute discretion to choose which remedy it deems proper in
order to collect on the unpaid subscriptions. If it did not wish to make use
of the authority given in the By-Law, it still had 2 other remedies:
a. Sell the unpaid stock, or
b. File an action in court
 Effects of Delinquency
- Sec. 71
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Effect of delinquency. - No delinquent stock shall be voted for be

entitled to vote or to representation at any stockholder's meeting, nor shall
the holder thereof be entitled to any of the rights of a stockholder except
the right to dividends in accordance with the provisions of this Code, until
and unless he pays the amount due on his subscription with accrued
interest, and the costs and expenses of advertisement, if any.
- Delinquency is achieved in 2 ways:
a. Failure to pay the subscription on the date provided in the call
b. Failure to pay the subscription on the date specified in the
subscription agreement
- Once a share of stock becomes delinquent, it shall have the ff
effects on its SHs
1. It disqualifies the SH to be voted for or be entitled to vote
or to representation at any SHs meeting
2. It disqualifies the SH from exercising any right as a SH,
except the right to receive dividends, until and unless he
pays the amount due on his subscription, with accrued
interests and costs and expenses of advertisement, if any
- Holders of Delinquent Shares:
 Shall not be entitled to notice of the special or special meetings of
the SH, nor shall the shares be included in the determination of a
quorum for shareholdings’ meetings
 The only right remaining to a delinquent SH is the right to
receive dividends, but the cash dividend due shall first be applied
to the unpaid balance, while stock dividend shall be withheld until
the unpaid balance is fully paid. In effect, the SH’s right to dividend
is even restricted
 Prescription Rule of Subscription Agreement

- The obligation to pay arises from t
- he date of the subscription, but the coming into being of an obligation
should not be confused with the time it becomes demandable
CERTIFICATE OF STOCK
Nature
 Definition:
o It is an instrument formally by the corporation, with intention that the same
constitute the best evidence of the issuance of shares of stock that are fully paid and
no longer assessable
o It is an evidence of a holder’s interest and status in corporation, signed by the proper
officer of a corporation stating or acknowledging that the person named in the
document is the owner of a designated number of shares of its stock. It is a prima
facie evidence that the holder is a shareholder of a corporation
 Section 64:
Issuance of stock certificates. - No certificate of stock shall be issued to a subscriber until
the full amount of his subscription together with interest and expenses (in case of delinquent
shares), if any is due, has been paid
 Institution of CoS constitute the basis under Corporate Law to realize and promote:
1. Free Transferability of Units of Ownership
 2 Levels at which the Doctrine operates:
a. Intra-Corporate Level: covers the relationship between the corporation as
the issuer of the SoS, and the original subscriber thereof
b. Extra-Corporate Level: covers the nature and effect of the issuance or
non-issuance of the shares of stock to parties who are not within the intra-
corporate relationship, such as the buyer of the shares issued from the
registered SH, and those who take the shares as security from the principal
obligations of the registered SH
 Certificate of Stock evidences shares covered

Tan vs SEC
“A Certificate of Stock is not necessary to render one a SH in a corporation.
Nevertheless, a CoS is the paper representative or tangible evidence of the
stock itself and of the various interests therein. The CoS is not stock in the
corporation, but is merely evidence of the holder’s interests and status in the
corporation, his ownership of the share represented thereby, but is not in law
the equivalent of such ownership. It expresses the contract between the
corporation and the SH, but it is not essential to the existence of a share of
stick or the creation of the relation of SH to the corporation”
Sec. 72. Rights of unpaid shares. - Holders of subscribed shares not fully
paid which are not delinquent shall have all the rights of a stockholder
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Sec. 63. Certificate of stock and transfer of shares. - The capital stock of
stock corporations shall be divided into shares for which certificates signed:
1. by the president or vice president,
2. countersigned by the secretary or assistant secretary,
3. and sealed with the seal of the corporation shall be issued in accordance
with the by-laws.
Shares of stock so issued are personal property and may be transferred:

1. by delivery of the certificate or certificates endorsed by:
a. the owner or
b. his attorney-in-fact or
c. other person legally authorized to make the transfer.
No transfer, however, shall be valid, except as between the parties,

until the transfer is recorded in the books of the corporation showing:
1. the names of the parties to the transaction,
2. the date of the transfer,
3. the number of the certificate or certificates and
4. the number of shares transferred.
No shares of stock against which the corporation holds any unpaid claim shall
be transferable in the books of the corporation
CoS are the prime facility under the PH Corporate Law by which to evidence
ownership in, and undertake dealings with, shares of stocks, the state of
statutory provisions do not make certificate of stocks the exclusive facility by
which to deal with the “free transferability” features of the SoS
 Certificates of Stock are Quasi-Negotiable in Character

Jurisprudence states that a CoS is not a negotiable instrument, but is
regarded as quasi-negotiable in a sense that it may be transferred by
endorsement, coupled with delivery, but it is not negotiable because the holder
thereof takes it without prejudice to such rights or defenses as the registered
owners or transferor’s creditors may have under the law, except insofar as such
rights or defenses are subject to the limitations imposed by the principles
governing estoppel
Sec. 63: A sale of SoS, even when coupled with endorsement and delivery of
the covering of stock certificates “shall not be valid, except as between the
parties”, until it is entered and noted upon the books of the corporation, and
that such sale is absolutely void and hence, as good as non-existent, as far as
third parties and the corporation is concerned
Tan vs SEC: Lack of endorsement of CoS which had been previously
delivered to the corporation by the registered SH for cancellation would not
prevent the corporation from cancelling in the books of the corporation of such
certificate and issuance of a new certificate in favor of the new owner of the
shares
Republic bs Estate of Menzi: Stock certificate is merely a tangible evidence
of ownership of SoS. Its presence or absence does not affect the right of the
registered owner to dispose of the shares covered by the stock certificate
SEC: A person may own SoS without possessing a stock certificate, for as long
as the subscriber to the stock is duly recorded in the stock and transfer book
of the book of the corporation as the owner, he is considered a SH of record
and is entitled to all the rights of SH
 Probative Value of a Certificate of Stock

Bitong vs CA: acknowledged the probative value certificate of stock once he
has been issued by the corporation to cover fully paid shares. It held that
certificate, once issued is a continuing affirmation or representation by the
corporation that issued it that the stock described therein is valid and genuine
ad is at least prima facie evidence that it was legally issued in the absence of
evidence to the contrary; however, this presumption may be rebutted
Three Fold Steps that must be complied under Sec. 63 to make
effective the transfer of title to the shares in the name of a buyer:
1. There must be delivery of the stock certificate
2. Certificate must be endorsed by the owner of his attorney in fact or other
persons legally authorized to make the transfer
3. To be valid against 3rd parties, the transfer must be recorded in the books
of the corporation
When a corporation issued CoS, it has a right to insist that the certificates
be surrendered, duly endorsed and delivered, to support the cancellation of the
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registration in the name of the registered SH and effect the transfer thereof un
the name of the assignee/transferee
WHEN CERTIFICAE OF STOCK DEEMED ISSUED

 Sec. 63: CoS must be signed by the President, Vice-President, countersigned by the secretary
or assistant secretary, and sealed with the seal of the corporation, issued in accordance with
the by-laws
 Not properly issued CoS: void, and is not binding upon the corporation
- HOWEVER, one should not confuse the nullity of the issuance of the certificate
from the validity of the underlying SoS that have been duly issued pursuant to
a valid subscription agreement
 There is no issuance of the certificate WHEN:
1. It is never detached from the certificate book although the blanks therein are properly
filled up, if the person whose name is inserted therein has no control over the books of
the corporation
2. Certificate made out in the name of the subscriber is never delivered to him, but is
retained by the corporation as security for notes given by him for the unpaid portion of
his subscription; and thus has been held to be true even though the subscriber votes the
stock and through dividends are declare on it which are credited on the notes
ORIGINAL DEALINGS WITH SHARES OF STOCK
Right to Issuance of Certificate of Stock

 Sec. 63: CoS must be signed by the President, Vice-President, countersigned by the secretary
or assistant secretary, and sealed with the seal of the corporation, issued in accordance with
the by-laws. Shares of stock so issued are personal property and may be transferred by delivery
of the certificate or certificates endorsed by the owner or his attorney-in-fact or other person
legally authorized to make the transfer.
 Sec. 64: Issuance of stock certificates. - No certificate of stock shall be issued to a
subscriber until the full amount of his subscription together with interest and expenses (in case
of delinquent shares), if any is due, has been paid
 Unpaid subscription can be voted upon in corporate meetings. Such
delinquent shares are also entitled to dividends, subject to the rules set forth
in Sec. 43 of the CC on the delinquent shares
 Sec. 43. Power to declare dividends. - The board of directors of a stock
corporation may declare dividends out of the unrestricted retained earnings
which shall be payable in cash, in property, or in stock to all stockholders on
the basis of outstanding stock held by them: Provided, That any cash dividends
due on delinquent stock shall first be applied to the unpaid balance on the
subscription plus costs and expenses, while stock dividends shall be withheld
from the delinquent stockholder until his unpaid subscription is fully paid:
Provided, further, That no stock dividend shall be issued without the approval
of stockholders representing not less than two-thirds (2/3) of the outstanding
capital stock at a regular or special meeting duly called for the purpose. (16a)
Stock corporations are prohibited from retaining surplus profits in 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 institution or creditor, whether local or foreign,
from declaring dividends without its/his consent, and such consent has not yet
been secured; or (3) when it can be clearly shown that such retention is
necessary under special circumstances obtaining in the corporation, such as
when there is need for special reserve for probable contingencies.
 SEC Opinion, January 6, 1999: While the issuance of a stock certificate is not a condition
precedent to render one a SH, under Sec. 63, every SH has a right to have a proper certificate
issued to him by the corporation upon demand, as soon as he complied with the conditions
under Sec. 64 which requires full payment of the subscription
 Pacific Basin vs Oriental Petroleum: characterized the right of a transferee to have stocks
transferred in his name as “an inherent right flowing from his ownership of stocks – the only
limitation imposed by Sec. 63 of the CC is when the corporation holds any unpaid claim against
the shares intended to be transferred.”
 Purpose of the Prohibition:
1. To prevent partial disposition of a subscribed share which is not fully paid,
because if it is permited, and the subscriber subsequently becomes delinquent
in the payment of his subscription, the corporation may not be able to sell as
many of the subscribed shares as would be necessary to cover the total amount
due from him, which is authorized under Sec. 68 of the CC
 Sec. 64: does not provides for any prohibition on the part of the corporation to divide the
subscription of a subscriber by considering portion thereof as fully paid and issuing a
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corresponding certificate over the paid-up shares, but pursuant to Section 64, such option is
available to the corporation
 Subscription is one, entire and indivisible whole contract. This indivisibility is
absolute, and speaks of no exception
 In the absence of contrary by-law provisions, a corporation may apply
payments made by subscribers on account of their subscriptions either as:
a. Full payment for the corresponding number of shares, the par value
of which is covered by such payment, or
b. Payment pro rata to each and the entire number of shares subscribed
for
o Alternative
o Once chosen, it must be applied uniformly to all SH
similarly situated, and therefore, it cannot be changed
without the consent of all SH who might be affected
Remedies Available when corporation refuses to Issue Certificate of Stocks

1. Specific Performance of an express or implied contract
2. Alternative relief by way of Damages, where specific performance cannot be granted
3. Petition for Mandamus, to compel the issuance of the certificate where the conditions, facts
and circumstances of the particular case bring it within the legal rules which govern the
granting of the writ, or
4. To rescind the contract of subscription, if the corporation wrongfully refuses to deliver a
certificate, and sue to recover back what has been paid
 If the corporation, through Board Resolution, is without power, to relieve

any SH from the payment of his subscription, then it is doubtful whether the 4 th
remedy is actually available to a subscriber who cannot get the corporation to issue
the corresponding certificate, for it would in effect be in violation of the trust fund
doctrine
 Remedies should be understood to apply only with respect to those who are already
SH of record, and not to those who subsequently purchase shares from registered
SHs
SUBSEQUENT DEALINGS WITH SHARES OF STOCKS
No inherent right to be issued certificate to one who merely bought shares from a registered
stockholder
 General Rule: SH has a right to be issued the Certificate of Stock covering his fully paid
subscription
 Said right does not extend to a third party who has bought the registered
shares of a selling SH, even when the shares are fully paid
 Reason: A third party is a stranger to the corporation, and it is the obligation of
the corporation, to deal with the SoS of a registered SH only in accordance with
the instructions of a registered SH
 Third Party Buyer of Shares must first establish, by clear evidence his rightful purchase
of the entire title and interests of the registered SH to the shares before the corporation may
be compelled to cancel the covering certificates and issue new ones in his own name as new
owner thereof
Negotiation of Certificates of Stock

 Quasi-negotiable: the normal mode of dealing with certificates is by the process of
endorsement and delivery
 Endorsement and Delivery may be for any 3 purposes:
1. For sale or assignment of the shares
2. Pursuant to a trust or nominee arrangement
3. By way of pledge or encumbrance of the shares
o Endorsement: essential ingredient in dealing with certificates of stock, and

generally cannot be dispensed with
- Bitong vs CA: Endorsement is sufficient to effect the transfer of shares
only if the same is coupled with delivery, and that the delivery of the stock
certificate duly endorsed by the owner is the operative act of transfer of shares
from lawful owner to the new transferee
 Requisites for Valid Transfer of Stocks:
a. Certificate must be endorsed by the owner or his attorney-in-
fact or other persons legally authorized to make the transfer
b. There must be delivery of the stock certificate
c. To be valid against third parties, the transfer must be
recorded in the books of the corporation
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FORGED AND ILLEGAL TRANSFER OF CERTIFICATES OF STOCK

 General Rule: Since CoS are only quasi-negotiable, they do not afford the same protection
to a holder in gf and for value who receives them in the course of their being negotiated, and
that the ownership of the true owner should be preferred
Exception: When the circumstances showed that the true owner was guilty of negligence that
directly contributed to the loss
 De Los Santos vs Republic:
General Rule: Since CoS are not negotiable, transferee under a forged assignment acquires
no title which can be asserted against the true owner,
Exception: unless the latter’s own negligence has been such as to create an estoppel against
him
 Street Certificate: When a stock certificate is endorsed in blank by the owner thereof, the
holder becomes, upon its face, entitled to demand its transfer into his name from the issuing
corporation. Such certificate is deemed quasi-negotiable, and as such the transferee thereof is
justified in believing that it belongs to the holder and transferor
LOST OR DESTROYED CERTIFICATES

 Sec. 73: procedures
Lost or destroyed certificates. - The following procedure shall be followed for the
issuance by a corporation of new certificates of stock in lieu of those which have
been lost, stolen or destroyed:
1. The registered owner of a certificate of stock in a corporation or his legal
representative shall file with the corporation an affidavit in triplicate setting forth, if
possible:
a. the circumstances as to how the certificate was lost, stolen or destroyed,
b. the number of shares represented by such certificate,
c. the serial number of the certificate and
d. the name of the corporation which issued the same.
e. He shall also submit such other information and evidence which he may deem
necessary;
2. After verifying the affidavit and other information and evidence with the books of
the corporation, said corporation shall publish a notice in a newspaper of general
circulation published in the place where the corporation has its principal office, once
a week for three (3) consecutive weeks at the expense of the registered owner of
the certificate of stock which has been lost, stolen or destroyed.
 The notice shall state:
a. the name of said corporation,
b. the name of the registered owner and the serial number of said
certificate, and
c. the number of shares represented by such certificate, and
3. that after the expiration of one (1) year from the date of the last publication, if no
contest has been presented to said corporation regarding said certificate of stock,
the right to make such contest shall be barred and said corporation shall cancel in
its books the certificate of stock which has been lost, stolen or destroyed and issue
in lieu thereof new certificate of stock, unless the registered owner files a bond or
other security in lieu thereof as may be required, effective for a period of one (1)
year, for such amount and in such form and with such sureties as may be satisfactory
to the board of directors, in which case a new certificate may be issued even before
the expiration of the one (1) year period provided herein:
Provided, That if a contest has been presented to said

corporation or if an action is pending in court regarding the
ownership of said certificate of stock which has been lost, stolen
or destroyed, the issuance of the new certificate of stock in lieu
thereof shall be suspended until the final decision by the court
regarding the ownership of said certificate of stock which has
been lost, stolen or destroyed.
Except in case of fraud, bad faith, or negligence on the part of

the corporation and its officers, no action may be brought against
any corporation which shall have issued certificate of stock in lieu
of those lost, stolen or destroyed pursuant to the procedure
above-described. (R. A. 201a)
 SEC Opinion: requirements under Sec. 73 are not mandatory

Exceptions to Sec. 73:
1. Corporation voluntarily issues a new certificate
2. Corporation is certain as to the real owner of the shares to whom the new certificate shall
be issued
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 Disadvantages of the SEC Opinion: A corporation cannot avail

of the free and harmless clause provided under the last paragraph
of Sec. 73
SPECIAL RULES ON REGISTERED OR LISTED SHARES
a. Rule on Uncertified Shares

Section 43. Uncertificated Securities. – Notwithstanding Section 63 of
the Corporation Code of the Philippines under 43.1 of of the SRC, a
corporation whose securities are registered pursuant to this Code or listed on
securities exchange may:
a. If so resolved by its Board of Directors and agreed by a shareholder,
investor or securities intermediary, issue shares to, or record the transfer
of some or all its shares into the name of said shareholders, investors or,
securities intermediary in the form of uncertified securities.
b. The use of uncertified securities in these circumstances shall be without
prejudice to the rights of the securities intermediary subsequently to
require the corporation to issue a certificate in respect of any shares
recorded in its name; and
c. If so provided in its articles of incorporation and by-laws, issue all of the
shares of a particular class in the form of Uncertificated securities and
subject to a condition that investors may not require the corporation to
issue a certificate in respect of any shares recorded in their name.
b. Binding Effect on Shares Transactions

43.3. Transfers of securities, including an uncertificated securities, may be validly
made and consummated by:
1) appropriate book-entries in the securities intermediaries, or
2) in the stock and transfer book held by the corporation or stock transfer
agent and
3) such bookkeeping entries shall be binding on the parties to the transfer.
A transfer under this subsection has the effect of the delivery of a security in bearer form or
duly indorsed in blank representing the quantity or amount of security or right transferred,
including the unrestricted negotiability of that security by reason of such delivery.
- However, transfer of uncertificated shares shall only be valid, so far
as the corporation is concerned, when a transfer is recorded in the
books of the corporation so as to show the names of the parties to
the transfer and the number of shares transferred.
However, nothing in this Code shall compliance by banking and other institutions under the
supervision of the Bangko Sentral ng Pilipinas and their stockholders with the applicable
ceilings on shareholding prescribed under pertinent banking laws and regulations.
c. Evidentiary Value of the Records of the Clearing Agency
44. Evidentiary Value of Clearing Agency Record. – The official records and book entries
of a clearing agency shall constitute the best evidence of such transactions between clearing
agency and its participants and memebrs, without prejudice to the rights of participants’ or
members’ clients to prove their rights, title and entitlement with respect to the book-entry
security holdings of the participants or members held on behalf of the clients.
However, the corporation shall not be bound by the foregoing transactions unless
the corporate secretary is duly notified in such manner as the Commission may
provide.
d. Pledging a Security or Interest Therein
Section 45. Pledging a Security or Interest Therein. – In addition to other methods

recognized by law, a pledge of, including an uncertificated security, is properly constituted and
the instrument proving the right pledged shall be considered delivered to the creditor under
Articles 2093 and 2095 of the Civil Code if a securities intermediary indicates by book entry
that such security has been credited to a specially designated pledge account in favor of the
pledgee.
A pledge under this subsection has the effect of the delivery of a security in bearer form or
duly indorsed in blank representing the quantity or amount of such security or right pledged.
In the case of a registered clearing agency, the procedures by which, and the exact time at
which, such bookentries are created shall be governed by the registered clearing agency’s
rules. However, the corporation shall not be bound by the foregoing transactions unless the
corporate secretary is duly notified in such manner as the Commission may provide.
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e. Issuer’s Responsibility for Wrongful Transfer to Registered Clearing Agency
Section 46. Issuer’s Responsibility for Wrongful Transfer to Registered Clearing

Agency. - The registration of a transfer of a security into the name of and by a registered
clearing agency or its name of or by a registered clearing agency or its nominee shall be final
and conclusive unless the clearing agency had notice of an adverse claim before the registration
was made. The above provisions which the claimant may have against the issuer for wrongful
registration in such circumstances.
POWER OF SEC TO ISSUE RULES COVERING SHARES
Section 47. Power of the Commission With Respect to Securities Ownership. – The Commission
is authorize, having due regard to the public interest and the protection of investors, to promulgate rules
and regulations which:
1. Validate the transfer of securities by book-entries rather than the delivery of physical
certificates;
2. Establish when a person acquires a security or an interest therein and when delivery of a
security to a purchaser occurs;
3. Establish which records constitute the best evidence of a person’s interests in a security and
the effect of any errors in electronic records of ownership;
4. Codify the rights of investors who choose to hold their securities indirectly through a registered
clearing agency and/ or other securities intermediaries;
5. Codify the duties of securities intermediaries (including clearing agencies) who hold securities
on behalf of investors; and
6. Give first priority to any claims of a registered clearing agency against a participant arising
from a failure by the participant to meet its obligations under the clearing agency’s rules in
respect of the clearing and settlement of transactions in securities, in a dissolution of the
participant, and any such rules and regulation shall bind the issuers of the securities, investors
in the securities, any third parties with interests in the securities, and the creditors of a
participant of a registered clearing agency.
STOCK AND TRANSFER BOOK

 Sec. 74. Every stock corporation must keep a stock and transfer boo, in which must
kept a record of:
1. All stocks in the names of the SH alphabetically arranged
2. Installments paid and unpaid for which subscription has been made, and the date of
payment of any installment
3. A statement of every alienation, sale or transfer of stock made
4. Such other entries as the by-laws may prescribe
 Registration with SEC

- SEC Rules Requiring the Maintenance of Stock and
Transfer Book require that all stock corporations must set-
up and register their stock and transfer books with the SEC
within 30 days from receipt of their certificates of
incorporation
- SEC: has the primary competence and means to determine
and verify the authenticity of a stock and transfer book
 Where Kept
- Principal office of the corporation or in the office of its stock
transfer agent and shall be open for inspection to any
director or SH of the corporation at reasonable hours on
business days
 Who May be Transfer Agent

- No stock transfer agent or one engaged principally in the
business of registering transfers of stocks in behalf of a
stock corporation shall be allowed to operate in the
Philippines unless he secures a license from the Securities
and Exchange Commission and pays a fee as may be fixed
by the Commission, which shall be renewable annually:
Provided, That a stock corporation is not precluded from
performing or making transfer of its own stocks, in which
case all the rules and regulations imposed on stock transfer
agents, except the payment of a license fee herein
provided, shall be applicable
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 Who may make proper entries

- Corporate Secretary has the duty and obligation to
register valid transfer of stock, and if said corporate officer
refuses to comply, the transferor-stockholder may
rightfully bring suit to compel performance; but he cannot
effect such transfer in the corporate books by himself,
since he cannot take the law in his own hands
 Registration in the Stock and Transfer Book

- Dispositions and purchases of shares of stock, although
valid as between the transferor and transferee, would not
be valid to the corporation and the world unless the
transaction is registered in the stock and transfer book
- Transfer of Shares is not valid unless recorded in the
book of the corporation
 A person who has purchased stock, and
who desires to be recognized as a SH for
the purpose of voting, must secure such a
standing by having the transfer recorded
on corporate books, until the transfer is
registered, the transferee is not a SH but
an outsider
- Purpose of Registration
1. To enable the transferee to exercise all the rights of
a SH including the right to vote and to be voted for
2. To inform the corporation of any change in share
ownership so that it can ascertain the persons entitled
to the rights and subject to the liabilities of a SH
o Until challenged in a proper
proceedings, a stockholder of
record has:
a. Right to participate in any
meeting
b. His vote can be properly
counted to determine whether
a SH’s resolution was approved,
despite the claim of the alleged
transferee
- Ponce vs Alsons: A transfer of shares of stocks not
recorded in the stock and transfer book of the corporation
is non-existent as far as the corporation is concerned
 BIR CERTIFICATION TO EFFECT TRANSFER OF SHARES

- Sec. 97 of NIRC: The Corporate Secretary is not
authorized to effect transfer of shares to any new owner
in the books of the corporation
Unless, accompanied by a CERTIFICATION
from the Commissioner that the taxes, either
capital gains tax, estate tax, or donor’s tax have
been paid
 PROBATIVE VALUE OF STOCK AND TRANSFER BOOK

- SEC has opined that corporate books and records are
merely private books and records, and as such, they are
subject to the general rule of evidence, which are
commonly applicable to documentary evidence
 STOCK AND TRANSFER BOOKS vs GIS
STB GIS
Submitted with SEC, included
certain individuals as SH of the
company
GIS alone does not conclusively
prove that they are SH
Information in this document will
still have to be correlated with the
corporate books
83
 PERIOD WITHIN WHICH TO ENFORCE REGISTRATION

RIGHTS
- No prescription
- The action to enforce the right does not accrue until there
has been a demand and a refusal concerning the transfer
SUBSEQUENT DEALING WITH SHARES OF STOCK
1. Trust Relations on SoS

- Examples:
a. Sec. 10: each of the incorporators of a stock corporation must be own or be a
subscriber to at least 1 share of the CS
b. Sec. 23: Every director must own at least 1 share of CS
c. Sec. 59: Voting Trust Arrangements
- Bitong vs CA: Even when it has been shown that the registered owners of SoS holds
the share in trust for the benefit of its principal, it is necessary that the trustee must
still endorse the stock certificate to validate the cancellation of her share and to have
the transfer recorded in the books of the corporation in favor of the principal or
another trustee
2. Voluntary Contracts of Disposition
- Right of SH to transfer or to sell his shares of stock
- Reasonable Restrictions on the transfer of shares (Sec. 98)
1. Restriction must appear in the AOI, BL and CoS
2. Said restriction shall not be more onerous than granting the existing SH or the
corporation that option to purchase the shares of the transferring SH with such
reasonable terms, conditions or period stated therein
 WHEN SHARES ARE NOT FULLY PAID

- Sec. 63: No shares of stock against which the
corporation holds any unpaid claim shall be
transferable in the books of the corporation
- Unpaid Claims: refers to any unpaid claims arising
from unpaid subscription, and not to any indebtedness
which a subscriber or SH may owe the corporation
arising from any other transactions
a. Sale of Portion of not Fully-Paid Shares

- SH who has not paid the full amount of his subscription
cannot transfer part of his subscription in view of the
indivisible nature of a subscription contract
- Reason: It would be difficult to determine whether or
not the partial payments made should be applied as
full payment for the corresponding number of shares
which can only be covered by such payment or as
proportional payment to each and all of the entire
number of subscribed shares, and the difficulty in
determining the unpaid balance to be assumed by each
transferee
b. Sale of Entire not Fully-Paid Shares

- SEC has opined that the entire subscription, although
not yet fully paid, may be transferred to a single
transferee, who as a result of the transfer must assume
the unpaid balance
- it is necessary however to secure the consent of the
corporation since the transfer of subscription rights
and obligations contemplates a novation of contract
which under Art. 1293 of the NCC cannot be made
without the consent of the debtor
 WHEN FULLY-PAID SHARES ARE COVERED BY STOCK

CERTIFICATES
- Sec. 63: SoS so issued with covering CoS are personal
property and may be transferred by delivery of the
certificate indorsed by the owner or his attorney-in-fact
or other person legally authorized to make the transfer
- The proper mode to deal with fully paid shares
covered by CoS would be by endorsement of the
certificates and their due delivery to the assignee
- The same section provides that no transfer shall be
valid, except as between the parties, until the transfer
84
is recorded in the books of the corporation showing the

names of the parties to the transaction, the date of the
transfer, the number of the certificate or certificates
and the number of the shares transferred
- Escano vs Filipinas enumerated the ff reasons for
holding registration of a sale or disposition of SoS valid
only when registered in the STB, thus:
1. To enable the corporation to know at all times
who the actual SHs are, because mutual rights
and obligations exist between the corporation and
its SHs
2. To afford the corporation an opportunity to object
or refuse its consent to the transfer in case it has
any claim against the stock sought to be
transferred, or for any valid reason
3. To avoid fictitious or fraudulent transfers
- Requirements of Registration applies to escrow,
but the jurisprudence see no valid reason for treating
unissued shares different from the former
- Requisites under Sec 63 which envisions that a
formal CoS may be issued only upon compliance
with the ff:
1. Certificate must be signed by the President, or VP,
countersigned by the Secretary or Assistant
Secretary, and sealed with the seal of the
corporation
2. Delivery of the certificate is an essential element
of its issuance
3. The par value, as to par value shares, or the full
subscription as to no par value shares, must first
be fully paid
4. Original certificate must be surrendered where
the person requesting the issuance of a certificate
is transferee from a SH
 NON-EXCLUSIVITY OF SEC. 63 ON MODES OF

REGISTRATION
- Sec. 63 governs, strictly speaking:
a. Sale or assignment of SoS covered by a Certificate
of Stock
- “may”: indicates that the endorsement and delivery of
the certificate and the registration of the transfer in the
book of the corporation is only one of the modes
recognized by law by which to legally and effectively
sell and assign shares of stock that would be binding
not only upon the contracting parties, but also to the
corporation and its officers and third parties who will
deal with covered shares
- Primary Means by which corporation may
choose to recognize voluntary dealings with
Shares of Stock
1. Having issued a covering CoS, the corporation has
a right to insist only dealings of the covered
shares through the CoS may be recognized in
accordance with the provisions of Sec. 63
2. The legal right to recognize other modes of
delivery that affects the ownership of the shares
is with the corporation, and not with the dealing
public, unless the corporation is by its own act or
admission estopped
 FILING OF DEEDS OF ASSIGNMENT WITH SEC

- Deeds of assignment shall be entered in a Registry Boo
to be kept by the Corporate Secretary and Corporate
Legal Department and impressing on them a
certification duly signed by one of the division chiefs of
CLD and affixing the official seal of the SEC to signify
that they have been presented and registered with SEC
85
 REMEDY IS REGISTRATION OF TRANSFER IS REFUSED

- Registration of Acquisition of Shares of Stock in
the STB: operative act by which a purchase or
assignee of such shares shall be entitled to exercise
the prerogatives of SH, it is axiomatic that one who has
established his purchase of SoS, should be entitled to
the registration of his ownershio, and the covering CoS
to allow him to deal with the shares as he pleases as
owner thereof
- Execution of Public Document or the
Endorsement and Delivery of the Covering of
CoS: sufficient bases for the corporation to effect the
transfer of the shares in the books of the corporation
in the name of the buyer or assignee
- Deeds of Assignment: a public instrument that can
cover both an outright sale of shares or as a form of
equitable mortgage on the shares
- Endorsement and Delivery of the covering CoS:
may be a sale of the shares or would be the same form
to constitute a valid pledge of the covered shares of
stock
- A corporation may be compelled to cancel the
registration of SoS unto the assignee, if there is
a clear instructions in writing from the registered
owner to that effect
REMEDIES
1. Mandamus: to compel the
corporations that wrongfully or
unjustifiably refuse to record the
transfer or to issue new CoS. It is
available even upon the instance of a
bona fide transferee who is able to
establish a clear legal right to the
registration of the transfer
Bona Fide Ownership: mere

endorsement of stock certificates by
the supposed owners of the stock,
which alone could not be the basis of
an action for mandamus in the
absence of express instructions from
them
2. Claims for Damages: extent of the

definite value of shares, and the
docket fees shall also be included
PRESCRIPION ON CAUSE OF
ACTION
 Begins to run only upon
demand for registration
INVOLUNTARY DEALINGS WITH SHARES OF STOCK
1. Pledge, Mortgage and Other Encumbrances
Sec. 55: Right to vote of pledgors, mortgagors, and administrators. -

In case of pledged or mortgaged shares in stock corporations, the pledgor or
mortgagor shall have the right to attend and vote at meetings of stockholders,
unless the pledgee or mortgagee is expressly given by the pledgor or mortgagor
such right in writing which is recorded on the appropriate corporate books. (n)
Executors, administrators, receivers, and other legal representatives duly

appointed by the court may attend and vote in behalf of the stockholders or
members without need of any written proxy
Incident of ownership, being a personal property

Reasonable restrictions. (see requisites under Sec. 98)
2. Mortgage Contracts vs Attachment and Levies
86
MORTGAGE ATTACHMENT LEVY

If registration of the SoS or an interest in SoS
chattel mortgage covering shall be attached by leaving
shares of stocks, in the with the President or
province of the owner’s Managing Agent a copy of
domicile should be the writ, and a notice
sufficient, those who lend stating that the stock or
on such security would be interest of the party against
confronted with the whom the attachment
practical difficulty of being issued is attached in
compelled not only to pursuance of a writ
search the records of the
province in which the
mortgagor might have
been domiciled but also
every province in which a
CM by any former owner of
such shares must be
resgistered
3. Attaching or Levying of Creditors vs Other Creditors

Placing priority in the registration in the STB as the determining factor seems to be
a good rule since the only objective basis by which 3rd parties who deal with the
shares of stock of a judgment debtor would be to verify the STB to determine
whether he is still the rightful owner
Since there are involuntary dealings on the SoS of the registered SH, who may
himself be unaware of the application over his shares, it is only correct to make the
registration in the STB the final arbiter as to priority among several attaching
creditors and even as to buyers or assignees of the shares sold or assigned by the
seller in gf being unaware of the application of a writ of attachment or levy upon
his shares
87
4. Voluntary Buyer vs Attaching Creditor

No law requires that an attachment of SOS be recorded in STB
Attachment of SoS is not included in the term “transfer” as provided under Sec. 63,
since it does not constitute an absolute conveyance of property, but is primarily used
as means to seize the debtor’s property in order to secure the debt or claim of the
creditor in the event that a judgment is rendered
Chempling Ruling: Although the granting of attachment of SoS by service on the
writ on the proper corporate officer is valid, the doctrine would make it binding on
any third party who deals with the shares even when he purchases the shares in
good faith and for value
- Buyer cannot rely alone on what appears in the STB
nor on the fact that the covering certificates have been
duly endorsed and delivered to him by the registered
owner thereof, since his rights would be defeated by a
judgment creditor who has been able to previously
serve a writ on the proper corporate officer although
nothing at all is indicated in the STB
- Effect of the Doctrine
1. Dilute the quasi-negotiable character of the CoS
88
CHAPTER 12: CORPORATE CAPITAL STRUCTURE
Contrasting Equity Investment and Corporate Debts
o Investment
- whether it be equity or debt, is an expenditure to acquire property or other assets in order
to produce revenue
- it is the placing of capital or laying out money in a way intended to secure income or profit
from its employment
o To invest
- To purchase securities of a more or less permanent nature, or to place money or property
in business ventures or real estate, or otherwise lay it out, so that it may produce a revenue
or income
o Sources of Investment
1. Equity
2. Debt Placements
The choice between equity sourcing and debt sourcing for the working funds
represents to the corporation the “cost burden” it has to carry in its operations
Both can be viewed as investment schemes by which the investor expects a return,
nevertheless, the motivation or impetus involved in each case is different
EQUITY INVESTMENTS CORPORATE DEBTS

Floating investments Bonds or debts
Share of Stocks or Equity Securities Bonds or Debts Securities
 Represent ownership interests or  Evidences of investment of the issuer-
participation in the issuer-corporation corporation

Firstly, One who makes an equity placement in
a corporation expects that his returns shall be
tied-up with the success or loss of the operations
of the corporation. Therefore, he places his
investment ready and willing to take a risk with
management’s style of operating the affairs of
the corporation
SHs are considered risk takers who invest capital
in the business and who can look only to what is
left after corporate debts and liabilities are fully
paid
As investment, being in the nature of equity, and

unlike a deposit of money or a loan that earns
interest, cannot be assured of a dividend or an
interest on the amount invested, for dividends on
investment are granted only after profits or gains
are generated
Investment is used for legitimate corporate

purposes, the investor bears the risk of loss
When equity is placed in a business enterprise,
the closure of the business due to losses or
insolvency is equivalent to force and cannot be
construed to be equivalent to breach of contract
as to entitle the investors to damages
Advantage: absence of carrying cost, since the

corporate enterprise is not bound to pay any
return on the investment unless there are profits,
and even then, the BOD is generally granted
business discretion to determine when to declare
such return in the form of dividends
Secondly, an equity investment in a corporate
enterprise is generally withdrawable for so long
as the corporation has not been dissolved
This assure that the corporate enterprise and its
managers will have such resources at their
disposal so long as the corporate enterprise
remains a going concern. This is also the legal
implication of trust fund doctrine
89
A person who extends a loan or debt to the

corporation, only looks at the financial condition
and operations of the corporation as a means of
gauging the ability of the corporation to pay back
the loan at the specified period.
Thirdly, the expected return between the 2
types of investment would be different.
In a loan placement in a corporation, since the
investor places no stake in the results of the
operations, he can only demand the stipulated
fixed return of his investment even if by the use
of the borrowed funds, the enterprise is able to
reap huge profits.
In the case of an equity investor, since he has
placed his stake in the results of operations, he
generally participates in all income earned by the
venture
Fourthly, the difference in legal expectations
between a debt investor and an equity investor,
also dictates the legal preference in payment
from corporate properties of the first as
compared to the latter.
POWER TO ISSUE SHARES

o Stocks corporation have the express power to issue or sell shares of the stocks
- Lodged with BOD, and no SH meeting is required to consider it because additional
issuance of shares of stocks does not need approval of the SH, since the power to
approve the opening for subscription and issuance of shares from the unissued ACS
is not expressly granted to the SH by any provision of CC; however, the same is
subject to the pre-emptive right under Sec. 39 of the CC
- It is only necessary that appropriate resolution of the BOD approving the issuance
be secured, and that the necessary application be filed with SEC to exempt the
additional issuances from the registration requirements under the SRC
- Issue: when the stock first passes from the corporation to the interest of the SH
Limitations on Power to Issue Shares

 Shares cannot be issued for a consideration less than the par value of the
price thereof, except treasury shares so long as the price is reasonable
 Shares cannot be issued in exchange for PM or future services. It would
seem that the negotiable instruments other than the PM such as checks
can be used in payment of stocks but they shall produce the effect of
payment only when they have been cashed, or when through the fault of
the creditor, they have been impaired
 When the consideration is other than actual cash, or consist of intangible
property, the value thereof shall be initially determined by the
incorporators or the BOD, subject to the approval of SEC
CAPITAL STOCK
o Outstanding Capital Stock
- means the total shares of stock issued under binding subscription agreements to
subscribers or stockholders, whether or not fully or partially paid, except treasury
shares (Sec. 137 of the CC)
o Capital Stock or ACS (SEC)
- amount fixed in the AOI that may be subscribed and paid by the SH of the
corporation. When shares are subscribed out of the ACS, that portion of the paid-up
capital arising from the subscriptions becomes the legal capital of the corporation
which cannot be returned to the SH in any form during the lifetime of the corporation
unless otherwise allowed by law
o Capital Stock
- It represents the interest and it is the property of the SH in the corporation, who can
only be deprived thereof in the manner provided by law
- it represents the legal and proportionate standing of the SH with respect to the
corporation and corporate matters, such as their rights to receive votes and to
receive dividends
- It represents the total financial or propriety claim of the SH to the net assets of the
corporation upon dissolution (financial aspect)
- It represents the totality of the portion of the corporation’s assets and receivables
which are covered by the trust fund doctrine and provide for the amount of assets
and receivables of the corporation which are deemed protected for the benefit of the
corporate creditors and from which the corporation cannot declare any dividends
90
-Composed of 2 items:
1. The portion which have been paid by the SH, represented by the account “Paid-
Up Capital”
2. The portion which is to be paid on the subscriptions, represented by the
account “subscription receivables”
o Capital (PLDT vs NTC)
- Refers to the value of the property or assets of the corporation
o Capital Subscribed (PLDT vs NTC)
- Total amount of the capital that persons have agreed to take and pay for, which
need not necessarily be, and can be more than, the par value of the shares
- It is the amount that the corporation receives, inclusive of the premiums, if any, in
consideration of the original issuance of shares
- In case of stock dividends, it is the amount that the corporation transfers from its
surplus profits account to its capital account. It is the same amount that can be
loosely termed as the “trust fund” of the doctrine
o Paid-Up Capital
- Portion of the ACS which has been both subscribed and paid
- It forms part of he ACS, subscribed and then actually paid up
ISSUANCE OF SHARES BEYOND THE ACS

 Where there is an overissuance of shares in excess of the ACS, both the increase
in the capital stock and the certificates of stock issues are void because of the fact
that is beyond the power of the corporation to create and issue the additional stock;
the holders of the certificates, therefore, whether they be the original holders of
their bona fide transferees, do not become SH to the extent of the overissuance
BOOK VALUE OF SHARES

 Book Value per Share as the amount that would be paid on each share to retiring
SH or in the event the company is liquidated. When there is only one class of stock,
the computation of the book per value is: total SH’s equity divided by the number
of outstanding shares
 it clarified that since unpaid subscriptions are part of the assets of the corporation
which the BoD may at any time declare due and payable, the computation should
be based on OCS including the unpaid subscriptions, not only the paid up capital
stock.
CLASSIFICATION OF SHARES
Section 6
Classification of shares. - The shares of stock of stock corporations may be divided into
classes or series of shares, or both, any of which classes or series of shares may have such
rights, privileges or restrictions as may be stated in the articles of incorporation: Provided,
That no share may be deprived of voting rights except those classified and issued as
"preferred" or "redeemable" shares, unless otherwise provided in this Code: Provided, further,
That there shall always be a class or series of shares which have complete voting rights. Any
or all of the shares or series of shares may have a par value or have no par value as may be
provided for in the articles of incorporation: Provided, however, That banks, trust companies,
insurance companies, public utilities, and building and loan associations shall not be permitted
to issue no-par value shares of stock.
Preferred shares of stock issued by any corporation may be given preference in the
distribution of the assets of the corporation in case of liquidation and in the distribution of
dividends, or such other preferences as may be stated in the articles of incorporation which
are not violative of the provisions of this Code: Provided, That preferred shares of stock may
be issued only with a stated par value. The board of directors, where authorized in the articles
of incorporation, may fix the terms and conditions of preferred shares of stock or any series
thereof: Provided, That such terms and conditions shall be effective upon the filing of a
certificate thereof with the Securities and Exchange Commission.
Shares of capital stock issued without par value shall be deemed fully paid and nonassessable
and the holder of such shares shall not be liable to the corporation or to its creditors in respect
thereto: 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 corporation for its no-par value shares shall be treated as capital and shall
not be available for distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of insuring compliance
with constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and stated in the certificate of
stock, each share shall be equal in all respects to every other share.
91
Where the articles of incorporation provide for non-voting shares in the cases allowed by this
Code, the holders of such shares shall nevertheless be entitled to vote on the following
matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other
corporations;
7. Investment of corporate funds in another corporation or business in accordance
with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote necessary to approve a
particular corporate act as provided in this Code shall be deemed to refer only to stocks with
voting rights.
Policies on Classification of Shares

1. It expressly recognizes the freedom and power of a corporation to classify shares
2. The Corporation Code expressly adopts the presumption of equality of rights and features of
shares when nothing is expressly provided to the contrary
3. The corporation code provides for voting rights for all types of shares on matters it considers
as fundamental measures.
Kinds of Shares
1. COMMON
- They generally represent the greatest proportion of the corporation’s capital
structure and bear the greatest risk of loss in the event of the failure of the enterprise
- The residual ownership interest in the corporation, a basic class of stock ordinarily
and usually issued without extraordinary rights or privileges and entitles the
shareholder to a pro rata division of profits
 It does not have any special contractual rights or preferences

 They are only class of stock standing
 They generally bear the greatest risk of loss in the event of the failure of
the enterprise
 Bearing the risk of loss, along with participation in corporation assets after
all claims are paid, management of the corporation, and participation in
profits are he foremost elements of the common shares
2. PREFERRED
- One which entitles the holder thereof to certain preferences over the holders of
common stock, designed to induce persons to subscribe for shares of a corporation
- It may be issued only with a stated par value
- It is given with preference in the distribution of assets of the corporation in case of
liquidation and in the distribution of dividends, or such other preferences as may be
stated in the AOI which do not violate the provisions of the Corporation Code
- Kinds of Preferred Shares:

1. PS as to assets
2. PS as to dividends
 Preferred Shares as to Assets

 Give the holder thereof preference in the distribution of the
assets of the corporation in case of liquidation
 Preferred Shares as to Dividends
 Give the holder right to receive dividends on said shares to the
extent agreed upon before any dividends at all are paid to the
holders of the common stock
COMMON PREFERRED
Both represents a contribution to the capital of the corporation
A PS is no more a debt than common stock,
and until a dividend is declares the holder of
PS is not a creditor of the corporation
The rights of Preferred SH are still subordinate
to the rights of the creditors of the corporation
92
- Entitlement to Preferences
 The preference lawfully granted to preferred shares must be interpreted
and construed in accordance with applicable Corporate Law doctrines, and
cannot be deemed absolute
- Kinds of Preferred Shares

a. Cumulative Preferred Shares
 Entitle the holders thereof to payment not only of current dividends but
also of back dividends not previously paid, when and if dividends are
declared, to the extent agreed upon, before holders of the common shares
are paid
 If the preferred dividend is not paid in full in any year, whether or not
earned, the deficiency must be made up before any dividend may be paid
on the common stock
b. Non-Cumulative Preferred Shares
 Entitle the holders merely to the payment of current dividends that are
paid from unrestricted earnings, and lose whatever agreed rate of return
where there are no available unrestricted earnings
c. Participating Preferred Shares
 Entitle the holders to participate with the holders of the common shares
in the retained earnings after the amount of stipulated dividend has been
paid to the preferred shares
d. Non-Participating Preferred Shares
 Those that entitle holders of preferred shares only to the extent of the
preferred dividends and no more
3. REDEEMABLE SHARES
- Sec. 8. Redeemable shares. - Redeemable shares may be issued by the
corporation when expressly so provided in the articles of incorporation. They may
be purchased or taken up by the corporation upon the expiration of a fixed period,
regardless of the existence of unrestricted retained earnings in the books of the
corporation, and upon such other terms and conditions as may be stated in the
articles of incorporation, which terms and conditions must also be stated in the
certificate of stock representing said shares.
- Republic Planters Bank vs Agana: When the Certificate of Stock recognizes
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 that the SH is without right to either compel or refuse the
redemption of his shares of stock
- SEC Rules Governing Redeemable and Treasury Shares: defined redeemable
shares as those which the corporation can purchase or take up from their holders as
expressly provided for in its AOI and CoS representing said shares
o All corporations which have issued redeemable shares with mandatory
redemption features are required to set up and maintain a sinking fund,
which shall be deposited with a trustee bank and not be invested in risky
or speculative ventures
o Redeemable shares may be redeemed, regardless of the existence of
unrestricted retained earnings, provided that the corporation has, after
such redemption, sufficient assets in its books to cover debts and liabilities
inclusive of capital stock.
o Redeemable shares reaquired shall be considered retired and no longer
issuable unless otherwise provided in the AOI of the redeeming
corporation
 Redemption: repurchase, a reacquisition of stock by a corporation which

issued the stock in exchange for property, whether or not the acquired
stock is cancelled, retired or held in the treasury, and that, essentially, rhe
corporation gets back some of its stock, distributes cash or property to the
shareholder in payment for the stock, and continues in business as before
 Taxability of Stock Redemptions
 CIR vs CA: When the corporation redeems shares coming from

those issued upon establishment of the corporation or from
initial capital investment, the redemption to their concurrent
value of acquisition would not be subject to tax, because that
would constitute merely a return of investment.
On the other hand, if the redemption is from previously declared

stock dividends, the proceeds of the redemption constitute
93
additional wealth, for it is no longer merely a return of capital

but a gain thereon, and subject to tax.
The Court recognized that the redemption of stock dividends

previously issued is used in commercial practice as a veil for the
constructive distribution of cash dividends, and therefore,
subject to income tax
 CIR v Lincoln Philippines Insurance: When it comes to the

DST due on stock dividends, the Court held that the basis for
determining the documentary stamps due would be their book
value as indicated in the latest audited financial statements of
the corporation, and not the par value thereof
4. FOUNDERS’ SHARE
Sec. 7. Founders' shares. - Founders' shares classified as such in the articles of
incorporation may be given certain rights and privileges not enjoyed by the owners of
other stocks, provided that where the exclusive right to vote and be voted for in the
election of directors is granted, it must be for a limited period not to exceed five (5) years
subject to the approval of the Securities and Exchange Commission. The five-year period
shall commence from the date of the aforesaid approval by the Securities and Exchange
Commission.
- They are issued basically to the founders or initial organizers of the corporation
- What makes the shares as founders’ shares would be that they are given the
exclusive rights not given to other SH, and specially the right to vote and be voted
for in the election of the directors. The existence of founders’ shares must necessarily
include the fact that there are other shares that do not enjoy such rights, and would
necessarily include the existence of common shares, which ordinarily would have the
right to vote and be voted in the BOD. That would have been the rational basis for
the restriction under Sec. 7 that such exclusive rights shall not exceed 5 years and
subject to the approval of SEC
Classification of Founder Shares are interpreted based on 2 aspects:

a. Nomenclature
b. Certain Exclusive Rights Granted to Such Shares
Indications from Interim Batasang Pambansa Proceedings

 SEC is granted the authority to disapprove any provisions on founder
shares, in case it fears that the classification of certain shares into
founders shares with his prerogative is unwarranted
Effect when exclusivity period expires

 The exclusive rights would only be transferred to common SH who are
supposed to exercise such right had there been no founders share
5. NO PAR VALUE SHARES

- SoS issued without par value shall be deemed fully paid and non-assessable and the
holder of such shares shall not be liable to the corporation or to its creditors in
respect thereto.
- SoS without par value may not be issued for a consideration less than the value of
5 pesos per share and that the entire consideration received by the corporation for
its no-par value shares be treated as capital and shall not be available for distribution
as dividends
6. TREASURY SHARES
- Sec. 9. Treasury shares. - Treasury shares are shares of stock which have been
issued and fully paid for, but subsequently reacquired by the issuing corporation by
purchase, redemption, donation or through some other lawful means. Such shares
may again be disposed of for a reasonable price fixed by the board of directors.
- SEC has opined that:
a. TS have no effect on the stated capital of the corporation unless and until they
are cancelled or retired, in which event the stated capital is reduced by the
amount then representing the shares
TREASURY SHARES AUTHORIZED, BUT UNISSUED

SHARES
Acquisition of such does not reduce he
number of issued shares or the
amount of the stated capital and their
sale does not increase the number of
94
issued shares or the amount of the

stated capital
A corporation may sell treasury shares
for any amount the BOD determines,
even if the shares have a par value
that is more than the sale price
TS have no voting rights, nor pre-
emptive rights
- Features of TS
a. TS are stocks issued and fully paid doe and re-acquired by the corporation
either by purchase, donation, forfeiture and other means
b. TS are issued shares, but being treasury, they do not have the status of
outstanding shares
c. It may be re-issued or sold again, as long as it is held by the corporation as
treasury shares, participates neither in dividends, bc such cannot be declared
by the corporation to itself, nor in the meetings of the corporation as voting
stock, for otherwise, equal distribution of voting powers among SH will be
effectively lost and the directors will be able to perpetuate their control of the
corporation, though it still represents a paid-for interest in the property of the
corporation
- SEC Rules Governing Redeemable and Treasury Shares

o TS do not revert to the unissued shares of the corporation, but are
regarded as property acquired by the corporation which may be reissued
or sold by the corporation at a price to be fixed by BOD
- Unrestricted Retained Earnings

o URE equivalent to the cost of the TS, being held shall be restricted from
being declared and issued as dividends. The dividend restriction on
retained earnings on account of TS shall be lifted only after the TS causing
the restriction are reissued or retired
o The retirement of TS shall be effected only by decreasing the capital stocl
of the corporation in accordance with Sec. 38 of the Corporation Code for
the purpose of eliminating TS
- TS is a property dividend to be issued out of the unretained earnings previously

used to support their acquisition, provided that the amount of the said retained
earnings has not been subsequently impaired by losses. Any declaration and
issuance of TS as property dividend shall be disclosed and properly designated as
property dividend in the books of the corporation and in its financial statements
- Philippine Coconut Producers Federation vs Republic: TS, which may be

common or preferred, may be used for a variety of corporate purposes, such as for
a stock bonus plan for management and employees, or acquiring another company.
It may be held indefinitely, resold or retired. While held in the company’s treasury,
the stock earns no dividends and has no vote in company affairs.
- Rule on Treasury Shares for Banks

Section 10, General Banking Law: No bank shall purchase or acquire shares of
its own capital stock or accept its own as a security for a loan, except when
authorized by the Monetary Board; and in every case the stock so purchased or
acquired shall, within 6 months from the time of its purchase or acquisition, be sold
or disposed of at a public or private sale.
7. ESCROW
o Those held by a third person to be released only upon the performance of a condition or
the happening of a certain event contained in the agreement
o SEC opined:
- Holders of escrow shares are not entitled to the rights of a SH until the conditions
set forth for the release of such shares are fully met
- Holders thereof have no right to vote or to have notice of the SH meeting
- Reason: The shares he is supposed to be entitled to are not yet actually issued to
him, thus, he is not yet the owner of said shares and consequently, he cannot be
accorded the rights belonging to a regular SH
- It does not form part of the issued SoS or the OCS of the corporation, as to be within
the operative coverage of the trust fund doctrine
- Not only are escrow shares not considered issued shares, but they are deemed to
be not covered by a subscription agreement
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HYBRID SECURITIES
o Sources of Capital Formation
1. Debt
2. Equity Investment Securities
Sale of Equity Securities

 Provides an initial and often continuing source of corporate funds
Equity Securities
 Represent an ownership interest in the corporation and include both common
and preferred stock. In addition, corporations finance much of their continued
operations through debt securities
ift
 G.R: Equity securities payments, being dividends are not tax
deductible to the corporation
 Exc: Equity securities usually grant a voting right to the holder,
allowing participation in certain management aspects of the
corporation. Also, dividends are subject to zero-rate of income tax;
while interest paid on debt securities are generally taxable to the
holder thereof.
Debt Securities
 Bonds
 Do not represent an ownership interest in the corporation, but rather create
a debtor-creditor relationship between the corporation and bondholder
 Advantages:
1. Allows a return to the investor whether or not the corporation has
unrestricted retained earnings.
2. Interest paid on the debt securities is deductible to the corporation for
income tax purposes
o Government vs Philippine Sugar Estates Co.,: In determining whether the arrangement

between two corporation was a contract of partnership or a loan agreement, noted the ff
features in the contract in ruling that it is a partnership agreement
a. There was no period fixed in the contract for the repayment of the money,
except that the first return from sale of the land was to be devoted to the
payment of the capital, and there was no date fixed for such payment
b. The entire amount of the credit was not to be turned over at once but was used
to be used by the borrowing company as it was needed
c. The return on the capital was not by a fixed rate of interests but 25% of the
profits earned by the borrowing company in todos los negocios
d. The lending company agreed tp pay 25% of all general expenditures that the
borrowing company must make for the development of the business
e. The consent of the lending company was necessary when the borrowing
company desired to sell the land below an agreed market price, but was not
required if the selling price was over the benchmark figure; and
f. The lending company acted as treasurer of the entire enterprise
 These terms indicate that the contract between 2 corporations,

although denominated as loan agreement, was actually one of
partnership, with the amount loaned, constituting actual equity
investment in the venture.
o Other practical considerations for investors in choosing between equity or loan

investments:
1. The interests returns returns on loans or credit investments are taxable to the
lending company, whereas dividend returns on equity invesments are subject
to rate of income tax
TRUST FUND DOCTRINE

o A corporate theory developed in US, which seeks to protect the interests of corporate creditors,
and is deemed to have been implanted in our jurisdiction with the adoption of the Corporation
Law, patterned after corporate statues, and carried over by jurisprudential rulings under the
present Corporation Code.
 Historical Background
 The capital stock of banks is to be deemed a pledge or trust fund for the
payment of the debts contracted by the bank (Wood vs Drummer)
 The capital stock of the corporation, especially its unpaid subscription, is a
trust fund for the benefit of the general creditors of the corporation (New
Albany vs Burke)
96
 The proper scope of the trust fund doctrine is that the capital stock of
a corporation, as well as its other property and assets are generally regarded
in equity as a trust fund for the payment of corporate debts, the creditors of
the corporation have the right to priority payment over any SH thereof
 Application of Doctrine in PH Setting

1. Where there has been a distribution or an attempt to distribute corporate
properties, or a return of the capital or portion thereof, to SHs, without
providing for the payment of creditors
2. Where it had released the subscribers to the capital stock from their
subscriptions without valuable considerations
3. Where it has transferred the corporate property in fraud of its creditors
4. Where the corporation is insolvent
 Common Law Setting

 England (English Rule): It was held invalid for a corporation to
purchase its issued stocks because such purchase was an indirect
method of reducing capital stock restricted, aside from being
inconsistent with the privilege of limited liability to creditors
 American Rule: In some American states where the English rule used
to be adopted, statutes granting authority to purchase out of surplus
funds were enacted, while others, shares might be purchased even
out of capital provided the rights of creditors were not prejudiced
 Section 41, Corporation Code

Sec. 41. Power to acquire own shares. - A stock corporation shall have the
power to purchase or acquire its own shares for a legitimate corporate purpose
or purposes, including but not limited to the following cases: Provided, That the
corporation has unrestricted retained earnings in its books to cover the shares
to be purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation, arising
out of unpaid subscription, in a delinquency sale, and to purchase
delinquent shares sold during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment
for their shares under the provisions of this Code
 Lumahan vs Cura
“The capital stock of a corporation, or the assets of an insolvent corporation
representing its capital, is a trust fund for the benefit of the company’s creditors.”
 Garcia vs Lim Chu Sing

“The capital stock of the corporation is a trust fund to be used more particularly
for the security of creditors of the corporation, who presumably deal with it on
the credit of the capital stock.”
 Sec 122, CC
Sec. 122. Corporate liquidation. - Every corporation whose charter expires
by its own limitation or is annulled by forfeiture or otherwise, or whose corporate
existence for other purposes is terminated in any other manner, shall
nevertheless be continued as a body corporate for three (3) years after the time
when it would have been so dissolved, for the purpose of prosecuting and
defending suits by or against it and enabling it to settle and close its affairs, to
dispose of and convey its property and to distribute its assets, but not for the
purpose of continuing the business for which it was established.
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
97
 SEC Rules Governing Redeemable and Treasury Shares

 Adopts the doctrine that, “The OCS of a corporation, including unpaid
subscription, shall constitute a trust fund held by the corporation for
the benefit of its creditors which shall not be returned to the SH by
repurchase of shares or otherwise, except in the manner as provided
for under the Corporation Code and these rules”
 Philippine Trust Co vs Rivera (1923)

 Subscriptions to the capital stock 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 CC, which allows the distribution of
corporation capital only in 3 instances:
1. Amendment of AOI to reduce ACS
2. Purchase of redeemable shares by the corporation,
regardless of the existence of URE
3. Dissolution and eventual liquidation of the corporatiobn
 Halley vs Printwell
 Under the trust fund doctrine, a corporation has no legal capacity to
release an original subscriber to its capital stock from the obligation of
paying for his shares, in whole or in part, without a valuable
consideration, or fraudulently, to the prejudice of creditors.
 Coverage of a Trust Fund Doctrine

 2 Precursors of the TFD
1. Capital Impairment Rule
2. Profit Rule
 PLDT vs NTC
“TFD considers the subscribed capital as a trust fund for the payment
of the debts of the corporation, to which the creditors may look for
satisfaction”
 Halley vs Printwell
“We clarify that the trust fund doctrine is not limited to reaching the
SH’s unpaid subscription.”
 Capital Stock
 The protective reach of the TFD, when the
corporation is not in a state of insolvency, would only
be up to the extent of the capital stock of the
corporation
 Since retained earnings, although part of the SH’s
equity, do not constitute part of the capital stock, it is
not covered by the doctrine, and the corporation is at
liberty to declare and pay assets to the SH by way of
dividends up to the extent of its URE
 (Corporation Code) Sec. 137. Outstanding
capital stock defined. - The term "outstanding
capital stock", as used in this Code, means the total
shares of stock issued under binding subscription
agreements to subscribers or stockholders, whether
or not fully or partially paid, except treasury shares
 SEC: The amount fixed in AOI to be subscribed and
paid up by the SH of the corporation
 In Accounting: CS is deemed to cover only legal
capital
a. Par Value Stock, CS, or LC
- Represented by the aggregate par
value of all shares issued and
subscribed
- If the par value shares are sold at a
premium, the excess is not treated as
legal capital; but, it can only be
declared as stock dividends and not
any other form of dividends
b. No-Par Value Stock
- The legal capital is the total
consideration received for the shares
of stock
 Advances in Payment of Future Subscription
98
- Funds received by the corporation to cover

subscription payments on increase in ACS prior to
approval thereof of the SEC would not be covered
within the ambits of TFD
- As a trust fund, this money is still withdrawable by
any of the subscibers at any time before the
issuance of the corresponding shares of stocks,
unless, there is a pre-subscription agreement to
the contrary
FRAUD THEORY
o The actionable wrong is the fraud or misrepresentation by directors, officers or SH in falsely
representing that the capital stock has been fully paid or covered by binding subscription
contracts
o Only creditors who may have been defrauded are entitled to relief; creditors who had notice
are not protected
o The directors of a corporation are personally liable to reimburse to the corporate officers the
amounts of dividends wrongfully declared and paid to the SH, when they failed to consider
that the recorded retained earnings in the books of the corporation was illusory considering
that the various accounts receivables should have considered as non-collectible bad debts that
their writing off would have resulted in the corporate finances sustaining a deficit. ( Steinberg
vs Velasco)
o The personal liability adjudged each of the directors was based on the theory that fraud was
exercised against the corporate creditors who had the right to assume that so long as there
are outstanding debts and liabilities, the BOD will not use the assets of the corporation to
purchase its own stocks, and that it will not declare dividends to SH when the corporation is
insolvent
DIVIDENDS
o Sec. 43. Power to declare dividends. - The board of directors of a stock corporation may
declare dividends out of the unrestricted retained earnings which shall be payable in cash, in
property, or in stock to all stockholders on the basis of outstanding stock held by them:
Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid
balance on the subscription plus costs and expenses, while stock dividends shall be withheld
from the delinquent stockholder until his unpaid subscription is fully paid: Provided, further,
That no stock dividend shall be issued without the approval of stockholders representing not
less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly
called for the purpose. (16a)
Stock corporations are prohibited from retaining surplus profits in 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 institution or creditor,
whether local or foreign, from declaring dividends without its/his consent, and such consent
has not yet been secured; or (3) when it can be clearly shown that such retention is necessary
under special circumstances obtaining in the corporation, such as when there is need for special
reserve for probable contingencies
a. Business Judgment Rule

- General Rule: Declaration of dividends is essentially within the
business judgment of the BOD of a stock corporation
b. Policy Against Retention of Excess Profits

o Sec. 43, CC
- General Rule: Stock corporations are prohibited from retaining
surplus profits in excess of 100% of their paid-up capital stock
- Exceptions:
1. when justified by definite corporate expansion projects or
programs approved by the board of directors; or
2. when the corporation is prohibited under any loan agreement
with any financial institution or creditor, whether local or
foreign, from declaring dividends without its/his consent, and
such consent has not yet been secured; or
3. when it can be clearly shown that such retention is necessary
under special circumstances obtaining in the corporation, such
as when there is need for special reserve for probable
contingencies
o SEC Rules Governing the Distribution of Excess Profits of

Corporations
99
- General Rule: All domestic stock corporations which have surplus

profits in excess of necessary requirements for capital expansion and
reserves shall declare and distribute the excess profits as dividends
to SH”
- Considerations in the Application of the Exemptions:
a. SEC considers as sufficient justification for non-distribution of
dividends when such is consistent with the policy or requirement
of a government office like BSP, Insurance Commission, BOT,
BOI, including this Office regarding the restriction on declaration
of dividends where there are treasury shares held by a
corporation to cover the cost of said shares, until the same are
issued or retired
b. Any and all appropriations out of the surplus profits for reserves
shall have the prior approval of the BOD
c. The appropriations and justifications shall be fully disclosed in the
notes to the financial statements as to explain why said surplus
profits have not been declared as dividends
- Effect of failure to declare dividends or to disclose any
appropriation/reserves approved by the Board, or disclose the
justification for non-distribution of dividends:
1. Penalty of 1/10 of 1% of the excess amount over the paid in
capital, but in no case less than 200 nor more than 10,000 for
given fiscal year, or be punished by suspension or revocation of
the license/permit to sell securities issued to the corporation
c. Report to SEC
d. Dividend Restriction on Banks
SECTION 57. Prohibition on Dividend Declaration. — No bank or quasi-

bank shall declare dividends greater than its accumulated net profits then on
hand, deducting therefrom its losses and bad debts. Neither shall the bank nor
quasi-bank declare dividends, if at the time of declaration:
1. Its clearing account with the Bangko Sentral is overdrawn; or
2. It is deficient in the required liquidity floor for government deposits
for five (5) or more consecutive days; or
3. It does not comply with the liquidity standards/ratios prescribed by
the Bangko Sentral for purposes of determining funds available for
dividend declaration; or
4. It has committed a major violation as may be determined by the
Bangko Sentral. (84a)
e. Special Dividend Rules for GOCCs
[REPUBLIC ACT NO. -7656- ]
AN ACT REQUIRING GOVERNMENT-OWNED OR -CONTROLLED CORPORATIONS TO DECLARE

DIVIDENDS UNDER CERTAIN CONDITIONS TO THE NATIONAL GOVERNMENT, AND FOR OTHER
PURPOSES
Be it enacted by the Senate and House of Representatives of the Philippines in Congress assembled:
SECTION 1. Declaration of Policy. – It is hereby declared the policy of the State that in order for the
National Government to realize additional revenues, government-owned or -controlled corporations,
without impairing their viability and the purposes for which they have been established, shall share a
substantial amount of their net earnings to the National Government.
SEC. 2. Definition of Terms. – As used in this Act, the term:
100
(a) “National Government” refers to the entire machinery of the central government, as distinguished from
the different forms of local governments.
(b) “Government-owned or controlled corporations” refers to corporations organized as a stock or non-

stock corporation vested with functions relating to public needs, whether governmental or proprietary in
nature, and owned by the Government directly or through its instrumentalities either wholly or, where
applicable as in the case of stock corporations, to the extent of at least fifty one percent (51%) of its
capital stock. This term shall also include financial institutions, owned or controlled by the National
Government, but shall exclude acquired asset corporations, as defined in the next paragraphs, state
universities, and colleges.
(c) “Acquired asset corporation” refers to a corporation: (1) which is under private ownership, the voting
or outstanding shares of which were: (i) conveyed to the Government or to a government agency,
instrumentality or corporation in satisfaction of debts whether by foreclosure of otherwise, or (ii) duly
acquired by the Government through final judgment in a sequestration proceeding; or (2) which is a
subsidiary of a government corporation organized exclusively to own and manage, or lease, or operate
specific physical assets acquired by a government financial institution in satisfaction of debts incurred
therewith, and which in any case by law or by enunciated policy is required to be disposed of to private
ownership within a specified period of time.
(d) “Net earnings” shall mean income derived from whatever source, whether exempt or subject to tax,
net of deductions allowed under Section 29 of the National Internal Revenue Code, as amended, and
income tax and other taxes paid thereon, but in no case shall any reserve for whatever purpose be
allowed as a deduction from net earnings.
SEC. 3. Dividends. – All government-owned or -controlled corporations shall declare and remit at least
fifty percent (50%) of their annual net earnings as cash, stock or property dividends to the National
Government. This section shall also apply to those government-owned or -controlled corporations whose
profit distribution is provided by their respective charters or by special law, but shall exclude those
enumerated in Section 4 hereof: Provided, That such dividends accruing to the National Government
shall be received by the National Treasury and recorded as income of the General Fund.
SEC. 4. Exemptions. – The provisions of the preceding section notwithstanding, government-owned or -

controlled corporations created or organized by law to administer real or personal properties or funds
held in trust for the use and the benefit of its members, shall not be covered by this Act such as, but not
limited to: the Government Service Insurance System, the Home Development Mutual Fund, the
Employees Compensation Commission, the Overseas Workers Welfare Administration, and the
Philippine Medical Care Commission.
SEC. 5. Flexible Clause. – In the interest of national economy and general welfare, the percentage of
annual net earnings that shall be declared by a government-owned or -controlled corporation may be
adjusted by the President of the Philippines upon recommendation by the Secretary of Finance.
SEC. 6. Penalty. – Any member of the governing board, the chief executive officer and the chief financial
officer of a government-owned or -controlled corporation who violates any provision of this Act or any of
the implementing rules and regulations promulgated thereunder, in addition to other sanctions provided
by law, upon conviction thereof, shall suffer the penalty of a fine not less than Ten thousand pesos
(P10,000.00) but not more than Fifty thousand pesos (P50,000.00) or imprisonment of not less than one
(1) year but not more than three (3) years, or both, at the discretion of the court.
SEC. 7. Implementing Rules and Regulations. – The Department of Finance shall formulate and issue
the necessary rules and regulations within sixty (60) days from the effectivity of this Act and shall exercise
primary jurisdiction in its implementation.
SEC. 8. Separability Clause. – If for any reason or reasons any part of the provision of this Act shall be
deemed to be unconstitutional or invalid, the other parts or provisions hereof which are not affected
thereby shall continue to be in force and effect.
SEC. 9. Repealing Clause. – Executive Order No. 399, dated April 29, 1990, and other laws, decrees,
executive orders, letters of instruction, rules and regulations, and portions thereof inconsistent with the
provisions of this Act are hereby repealed or modified accordingly.
SEC. 10. Effectivity Clause. – This Act shall take effect fifteen (15) days after its publication in the Official
Gazette or in at least two (2) national newspapers of general circulation, whichever comes earlier.
101
NATURE OF DIVIDENDS
o Stock Corporation
- Exists to make profits and to distribute a portion of the profits to its SH
- X
Dividends:
 portion of the profits of a corporation set aside, declared and ordered by
the directors to be paid ratably to the SH on demand or at a fixed time
 It is a payment to the SH of a corporation as a return upon their investment
 Cojuangco vs Sandiganbayan: part of portion of the profits of the
enterprise which the corporation, by its governing agents, sets apart for
ratable division among the holders of a capital stock. It is a payment to the
SH of a corporation as a return upon their investment, and the right thereto
is an incident of ownership of stock”
o Dividends vs Profits
DIVIDENDS PROFITS
Dividend is that portion of the profits or net Profits include benefits of any kind, the
earnings which the stock corporation has set excess of the value over cost, acquisition
aside for ratable distribution among the beyond expenditures, gain, or advance
stockholders.
It comes from profits It is not a dividend until so declared or set
aside by the corporation
o Right to Dividends Pertain Only to SH
SOURCES FROM WHICH DIVIDENDS MAY BE DECLARED
o Concepts of Surplus Profits and Retained Earnings

 Retained Earnings
- It represents the accumulation of net profits of the corporation over the years and
likewise losses sustained, as well as deductions made upon previous dividends
declared.
- It includes earnings from sales of goods or services of the corporation in the
ordinary course of its business, as well as the earnings from sale of corporate
property other than its stock in trade, at a price higher than its cost
- It does not include, however, premium on par stock (ex: difference between part
value and the higher price for which the stock is sold by the corporation since tjis is
regarded as paid-in capital
Deficit: accumulation resulted in a net loss over the years

- When a corporation incurs a deficit, no corporation can declare
dividends until the deficit is wiped out and the retained earnings
account shows a positive amount
 Restricted or Appropriated Retained Earnings

- It is that portion that is specifically earmarked or set-aside for a specific purpose
such as to meet contingent liabilities, or planned expansion of facilities
- A memorandum notation in the books of accounts as a reminder that the amount
restricted should not declared anymore as dividends
 Unrestricted or Unappropriated Earnings

- Represents that portion which is free and can be declared or dividends to SH
- The accumulated profits realized out of normal and continuous operations of the
business after deducting therefrom distribution of SH and transfer to capital stock
or other accounts
o Treatment of Paid-In Surplus

 Sec. 43. Power to declare dividends. - The board of directors of a stock corporation may
declare dividends out of the unrestricted retained earnings which shall be payable in cash,
in property, or in stock to all stockholders on the basis of outstanding stock held by them:
Provided, That any cash dividends due on delinquent stock shall first be applied to the
unpaid balance on the subscription plus costs and expenses, while stock dividends shall
be withheld from the delinquent stockholder until his unpaid subscription is fully paid:
Provided, further, That no stock dividend shall be issued without the approval of
stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at
a regular or special meeting duly called for the purpose
o Treatment of Consideration Received for No-Par Value

 The entire consideration received by the corporation for its no-par value shares shall be
treated as capital and shall not be available for distribution as dividends.
 In here, the entire consideration received shall be treated as capital and shall not be
available for distribution as dividends
102
o Liabilities for Illegally Received Dividends

 The SH who received them can be held liable to refund them to the corporation or its
creditors
 Directors are in GF and without negligence: they are not liable to the corporation or
to the creditors for declaring and paying dividends when they should not have done so,
and thereby diminishing the capital stock
 Directors are guilty of fraudulent breach of trust or gross negligence: they had no
right to pay them, they are personally liable to the creditors
KINDS OF DIVIDENDS
GR: No dividends can be declared out of capital

EXC:
1. Liquidating Dividends
2. Dividends from investment in a wasting asset corporation
CASH Cash Dividends may be declared by the BOD under a formal resolution and does
not require the approval or ratification of the SHs
Any cash dividends due on delinquent stock shall first be applied to the unpaid
balance on the subscription plus costs and expenses
Cash dividends are revocable before announcement to the SH
As soon as cash dividends are publicly declared, the SH have the rights to their pro
rata shares
In the absence of a record date, the dividend belongs to the SH at the time of the
declaration. When such declaration is made, the corporation becomes a debtor and
the right of the SH to distribution unless a record date is specified becomes fixed by
the declaration.
When cash dividend is duly declared, the amount due to the SH belongs to him and
it cannot, without his consent, be reverted to the surplus account of the corporation.
STOCK Stock Dividends are of issuance by the corporation of shares from the unissued
portion of the ACS, the consideration for which is the amount of unrestricted retained
earnings converted into equity in the corporation’s books
- SC is a dividend paid in shares of stocks, instead of cash, and is properly
out of surplus profit
- SC is actually of 2 things:
a. Dividend
b. The enforced used of the dividend money to purchase additional shares
of stock at par
Any stock dividends on delinquent stocks shall be withheld from delinquent SH untl
his unpaid subscription is fully paid
Stock dividends may be revoked prior to the actual issuance thereof. In the case
of scrip dividend declaration, they are just like stock dividends, revocable before
actual issuance.
PROPERTY SEC Rules Regulating the Issuance of Property Dividends

1. Within 30 days from declaration thereof, a notice must be sent by the
corporation showing the nature of the property declared as dividends, their
individual book values and market values, if any, and the manner in which such
property are distributed to the SH
2. The property declared as dividends should no longer be intended to be used in
the operation of the business of the corporation and which should be
practicable to be distributed as dividends
3. The issuance of property dividends shall not result to an inequitable distribution
to the SH in terms of the book values and market values, if any, of the property
distributed
4. Where distribution is made where some of the SH will receive cash and others
will receive property, the prevailing market value of the property, as agreed
upon by the SH shall be considered in determining the equitable distribution of
the total dividends
5. No dividends in the form of land shall be issued to a foreign individual or entity
not qualified to hold land
6. No actual distribution of property dividends shall be made without the approval
of the SEC
LIQUIDATING In the liquidation of a corporation, after the payment of all corporate debts and
liabilities, the remaining assets, if any, must be distributed to the SH in proportion to
their interests in the corporation. The share of each SH in the assets of the
corporation is known as the liquidating dividends
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POWER OF THE CORPORATION TO PURCHASE ITS OWN SHARES

o Sec. 41, CC
Power to acquire own shares. - A stock corporation shall have the power to purchase or acquire
its own shares for a legitimate corporate purpose or purposes, including but not limited to the
following cases: Provided, That the corporation has unrestricted retained earnings in its books to
cover the shares to be purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation, arising out of unpaid
subscription, in a delinquency sale, and to purchase delinquent shares sold during said
sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment for their shares
under the provisions of this Code.
o Shares of a corporation once purchased or acquired by it becomes treasury shares
o A corporation may seek to increase its treasury shares in order to decrease the cost of doing
business, especially where there are cumulative preferred shares, by decreasing the amount of
dividends which will have to be paid in the future. The whole procedure is favoured during
depression as a contraction device
RATIONALE
- TS may be availed of to perpetuate control of the enterprise without the expensive
requisite of a majority of voting stock. Since TS cannot be voted upon, by using
corporate funds to purchase the majority shares and retire them from the voting
arena, what was before a majority in the controlling group can be converted into
a majority and their control may thereby be continued indefinitely.
NEED FOR URE

- Sec. 41, CC: A stock corporation shall have the power to purchase or acquire its
own shares for a legitimate corporate purpose or purposes
 Reason: The repurchase of shares, like the distribution of dividends,
is a method of distribution or withdrawal of assets and may be subject
to abuse
 This is an implied acknowledgment that the trust fund doctrine applies
only to the subscribed capital stock as distinguished from the retained
earnings
- Dividends when declared and paid out are charged directly against retained
earnings as is the standard accounting procedure
- When a corporation acquires its own shares, the amount of acquisition is
charged to the account “Treasury Shares” which is not directly deducted from the
retained earnings, but is presented normally as a deduction from the total SH’s
equity
- Therefore, in order to preserve the capital, the retained earnings is usually
appropriated or restricted to the extent of the cost of the TS, and the same cannot
be declared as dividends until the TS is subsequently resold. To that extent, the
safeguards under the TFD are met
- Any loss in the disposition of TS is charged to:
1. Capital Stock
2. When CS is not enough, to the retained earnings
Turner vs Lorenzo Shipping

- The Trust Fund Doctrine backstops the requirement of URE to fund
the payment of the shares of stocks of the withdrawing SH
 Under the doctrine, capital stock, property, and other
assets of a corporation are regarded as equity in trust for
the payment of corporate creditors, who are preferred in
the distribution of corporate assets.
QUASI-REORGANIZATION AND OTHER SPECIAL RULES ON SHARES OF STOCK
o Methods of Quasi-Reorganization
1. The use of appraisal surplus of a corporation’s assets to wipe-out its deficit or negative
retained earnings, and
2. By the reduction of a corporation’s capital stock through the formal filing of an application
for amendment of its articles of incorporation with the SEC
 Use of Reappraisal Value of Assets

- Tenets:
1. Only companies which are financially in distress, may be
allowed to undergo quasi-reorganization
2. The company must have substantial increment in the market
value of its fixed assets as appraised by a reputable licensed
appraiser adequate to absorb its accumulated past losses
3. The appraisal increment to be considered in the plan shall be
limited to real properties, permanently installed fixed assets,
and other machineries and equipment directly needed and
actually used in the operations of the company
104
4. The appraisal increment of fixed assets undergoing repair or will

require repair before the same can be put into productive use
shall not be included in the appraisal of assets for purposes of
quasi-reorganization
5. The company shall present a project study on its future
operations to support its quasi-reorganization
6. The remaining appraisal surplus set-up in the books of the
company after the deficit shall have been offset will not be used
to wipe out losses that may be incurred in the future without the
prior approval of the SEC
7. For purposes of dividend declaration, the retained earnings of
the company shall be restricted to the extent of the deficit wiped
out and not recovered by accumulated depreciation on
appraisal increment by the appraisal surplus
8. After the quasi-reorganization of the company has been
effected and approved by the SEC, the company shall disclose
in all its financial statement for a minimum period of 3 years the
mechanics, purpose and effect of such quasi-reorganization on
the financial condition of the company
 Reduction of Capital Stock

- No decrease of the capital stock shall be approved by the
commission, if its effect shall prejudice the rights of a corporate
creditor
- Existence of a capital deficit: prevent the distribution of dividends and
the reduction of legal capacity may be used to wipe out the deficit
and permit the resumption of dividend payments from earnings either
on common or preferred shares. Otherwise, earnings must be used
to repair the deficit
- If the capital invested in the business proves to be more than what is
needed for carrying on the business: a reduction of the legal capacity
may be used to create a reduction or capital surplus. This may be
distribute to the SH by way of liquidating dividends, subject to certain
limitations for the protection of creditors and preferred SH
- Requirements:
a. Concurrence of all of the SHs or at least of all those in the same
class of shares sought to be reduced
- The reduction must operate equally on all SHs or at least, on all
holders of the same class, unless, the statute authorizing a reduction
of the capital stock provides otherwise or clearly implies otherwise.
 Debt to Equity Conversions

- A corporation may negotiate with its creditors for authority to convert
their claims against the corporation into equity
- Under this scheme, the corporation may convert existing liabilities
into equity accounts with the consent of the corporate creditors.
Sometimes, debts and liabilities are converted into capital surplus or
additional paid-in capital and then later on by using the same account
to wipe out or reduce the deficit of the corporation.
SPECIAL TREATMENTS RELATING TO SHARES
WARRANTS Definition: a type of security which entitles the holder the right to subscribe to the
unissued capital stock of a corporation or to purchase issued shares in the future,
as evidenced by the Warrant Certificate, whether detachable or not, which may be
sold or offered for sale to the public, but does not apply to a right granted under an
Option Plan duly approved by the SEC for the benefit of employees, officers and/or
directors of the issuing corporation
Types of Issuers of Warrants

1. A duly registered DC which issues or proposes to issue Subscription
Warrants
- Entitles the holder the right to subscribe to a
pre-determined number of shares out of the
unissued capital stick of the issuer
2. A person or group of persons who issue/s or propose/s to issue Covered
Warrants
- Entitles the holder the right to purchase from
the Issuer a pre-determined number of existing
issued shares
3. Detachable Warrant
- May be sold, transferred or assigned to any
person by the warrantholder separate from,
105
and independent of, the corresponding

Beneficiary securities
4. Non-Detachable Warrant
- which cannot be sold, transferred or assigned
to any person by the warrantholder separate
from, or independent of the beneficiary
securities
Warrant Certificate
It is a certificate representing the right to a warrant which may be
detachable or not, duly issued by the issuer to the warrantholder
Warrant Holder
He may exercise their right granted under a warrant within the period
approved by SEC which shall not be less than 1 year, nor more than 5
years from the date of the issue of the warrants
The exercise of price of warrants shall be the price per share at which the issuer
is required to sell the underlying shares, upon the exercise of the rights granted in
the warrant, which shall be at a price fixed at the time of the application for
registration of the warrant or computed using the stated formula approved by the
SEC
Exercise price must be paid in full upon exercise, and shall not be less than the
par value of the Underlying Shares, or not less than 5.00 per share, if the
Underlying shares are without par value
All warrants authorized for issuance by the SEC shall be transferable without need
of approval from SEC
Issuer of Warrants must provide for a Warrants Registry Book, maintained by the
warrants registrar independent of the issuer. Any sale, transfer, assignment or a
warrant must be duly recorded in the WRB, and unless recorded therein, the
transfer of warrants shall not be binding upon the issuer
Stock Options Definition: privilege granted to a party to subscribe to a certain portion of the
unissued capital stock of a corporation within a specified period and under the
terms and conditions of the grant, exercisable by the grantee at any time within the
period granted
GR: No corporation shall grant any stock option

EXC: unless approval by the SEC is first obtained
Requirements:
1. Formal Board Reso, authorizing the grant of option
2. Application with SEC should contain a detailed statement as to the plan
or scheme by which the option shall be exercised
GR: No exercise of such option shall be valid unless:

1. Accompanied by the payment of not less than 40% of the total price of
the shares so purchased, which payment shall be properly receipted for
by the corporate treasurer, except
a. Where the grantee is an employee or officer who is not a
director of the corporation in which case only 25% of the
total price shall be required, or allow a planned payroll
deduction scheme
2. If the option shall be for compensation or payment of services already
rendered, then the initial payment shall not be required
106
Stock Splits
Stock
Consolidation
107
Stock
Reclassification
and Exchange
108
CHAPTER 13: CORPORATE ACQUISITIONS, MERGERS AND CONSOLIDATION
INTRODUCTION
 Contractual Relationships Governed by the Law on Sales
1. Acquisitions
2. Sales and Transfers
 3 Levels by which the acquisitions or transfers may be affected
a. Assets-Only
b. Business-Enterprise
c. Equity
Jurisprudential Recognition of the Three-Levels of Corporate Acquisitions and Transfers

(Edward J. Nell Co vs Pacific Farms)
RULE EXPLANATION LEVELS

Where a corporation sells or Reflects the principle of
otherwise transfers its relativity that contracts and
GENERAL assets to another the rights and obligations
RULE corporation, the purchaser arising therefrom are valid
does not thereby become and binding only between
liable for the liabilities of the the contracting parties and
transferring corporation their succesors-in-interests
Where the purchaser Art. 2047: A person, not a

expressly or impliedly agree party to an existing
to such debts contract, becomes a
guarantor when he
voluntarily binds himself to
the creditor to fulfil the
obligation of the principal
debtor in case the latter
should fail to do so in which
case he becomes jointly
liable and entitled to the
benefit of excussion; or
such person may bind
himself “solidarily with the
principal debtor” and
thereby becomes a surety
Where the purchaser acted Art. 1311: Creditors are
in collusion with the protected in cases of
transferring corporation to contracts intended to
fraud of its creditors defraud them, which is
supplemented by Art. 1381, ASSETS-ONLY
which provides that the LEVEL OF
following contracts are ACQUISITION
rescissible:
(3) Those undertaken
EXCEPTIONS in fraud of creditors
when the latter cannot
in any other manner
collect claims due
them
Art. 1388: Whoever

acquires in BF the things
alienated in fraud of
creditors, shall indemnify
the latter for damages
suffered by them on
account of the alienation,
whenever, due to any
cause, it should be
impossible for him to return
them
Where the purchasing It provides for a legal

corporation merely consequence contrary to
continues the business of the principle of relativity of
BUSINESS
the transferring corporation contracts
ENTERPRISE
LEVEL
It makes the transferee
liable for the existing
liabilities of the transferor
109
pertaining to the business

enterprise transferred
Liabilities-succession effect
of business enterprise
transfers are contrary to the
rules on the primary
doctrine of separate
juridical personalities under
Corporate Law: that the
liabilities and obligations of
one juridical entity do not
pertain to another separate
entity
Where the transaction Pertains to succession
amounts to a consolidation rules
or merger of the
corporation
LIABILITY SUCCESSION RULES IN THE THREE-LEVELS OF CORPORATE ACQUISITIONS

AND TRANSFERS
The following rules apply to the enforceability of liabilities against the transferee
regardless of the separate juridical personalities of the transferor and the transferee,
thus:
1. In a pure ASSETS-ONLY TRANSFER, the transferee shall not be liable for the liabilities of
the transferor, except where the transferee expressly or impliedly agrees to assume such
debts or when it is effected in fraud of creditors
2. In a TRANSFER OF THE BUSINESS ENTERPRISE, where the transferee essentially continues

the business enterprise of the transferor, the transferee shall be liable for the liabiliries of
the transferor arising from the business enterprise transferred, and
3. In an EQUITY TRANSFER, the transferee is not liable for the debts and liabilities of the
transferor, except where the transferee expressly or impliedly agrees to assume such debt.
LEVELS OF CORPORATE ACQUISITIONS AND TRANSFERS
ASSETS-ONLY Essence and Motivation in Assets-Only Transfers

TRANSFERS - Purchase is interested only in raw assets and the properties of the business,
perhaps to be used to establish its own business enterprise or to be used for
its ongoing business enterprise
- Purchaser is not interested in the juridical entity of the corporate owner of the
assets, nor of the good will and other factors relating to the business
enterprise of the transferring corporation
Governing Law
- Law on Sales
- Law on Contracts
Rationale for Non-Assumption of Liabilities

- GR: The transferee is not liable for the debts and liabilities of the transferor
- EXC: Where the transferee expressly or impliedly assume debts
o No contractual privity
Coverage of Bulk Sales Law

- An Assets-Only Transfer, if constituting “bulk sale”, under the Bulk Sales Law,
would affect the transferee in the sense that if the sale has not complied with
the requirements of the Law, the sale could be classified as fraudulent and
void, and therefore title of the transferee over the assets would be void, even
if the purchaser is in good faith.
- The law imposes no direct obligation on the buyer, mortgagee, transferee or
assignee in a bulk sale, even in case of failure to comply with the requirements
for bulk sales
- Criminal Liabilities: None
- Civil Liabilities in Case on Non-Compliance:
110
o Non-compliance, whether or not known to the buyer,

mortgagee or transferee would render the transaction
fraudulent and void
o B, M, T may however recover what he had paid for
o BMT may find himself at the end of the suit brought by the
business creditors of the transferor to recover what he has
obtained from a bulk sale, or even liable for damages for
having conspired with the seller, mortgagor, transferor or
assignor to defraud the creditor
Special Rule in Corporate Dissolution
- When another corporation takes over the assets of another corporation which
is dissolved, the succeeding corporation is liable for the claims against the
dissolved corporation to the extent of the fair value of the assets assumed
- Gonzales vs Sugar Regulatory Administration
“The termination of the life of a juridical entity does not by itself imply the
diminution of extinction of rights demandable against such juridical entity,
among which priority claims of corporate creditors against corporate assets.
It held that since the assets must respond for payment of the lawful
obligations of a dissolved corporation, then the succeeding corporation would
be liable for such lawful claims, “to the extent of the fair value of the assets
actually taken over”
BUSINESS Nature
ENTERPRISE - Purchaser’s interest goes beyond the assets or properties used in the
TRANSFERS company’s business. However, he is not interested in obtaining the juridical
entity that owns the business enterprise, and therefore purchases directly
from the corporate owner
- Primary Interests: to obtain the earning capability of the venture
Business enterprise
- Has a separate accountability of its own, although not in the concept of being
a juridical person
- It comprises more than just the properties of the business, but it included a
“going concern”
o Concern covers:
 Employees
 Good will
 List of clientele and suppliers
o These concerns which give it value separate and distinct from its
owners or the juridical entity under which it operates. This is termed
as the economic unit, or the enterprise or the going concern or the
financial unit, recognized in both Accounting and Economics
 Accounting
1. Although a business enterprise is carried on in
the form of a single proprietorship, it is
considered and accounted for as a separate
accounting unit apart from the other assets
and businesses of the proprietor
- It is by itself a going concern that has a separate economic or selling value
from its owners’ other assets; and that the businessmen evaluating whether
to purchase such business enterprise do not only look at the properties of the
business, but many other intangibles that really have no definite monetary
value, except when expressed as good will and assigned a value under the
principles of accounting, such as moral and technical competence of the
employees and middle-management, the list of its valued clientele, location
of the business, etc
- Villa Rey Transit vs Ferrer recognized that when a purchaser buys the business
of another as a going concern, he usually wishes to keep it going; he wishes
to get the location, the building, the stock in trade and the customers; he
wishes to step into the seller’s shoes and to enjoy the same business relations
with another men. The buyer is willing to pay much more if he can get the
good will of the business, meaning by this good will of the customers, that
they may continue to tread the old footpath to his door and maintain with him
the business relations enjoyed by the seller.
Corporate Law Recognition of the Business enterprise Level of

Transactions
 All or Substantially All of the Assets of the Corporation
- If thereby the corporation would be rendered incapable of
continuing the business or accomplishing the purpose for which it
was incorporated
- Also referred to as “business transfer”
111
 Take note on the voting requirements of corporate acts
Statement of Business Enterprise Doctrine and its Rationale

 In Business Enterprise Transfer, the transferee is liable for the
liabilities of his transferor arising from the business enterprise
transferred
 Purpose:
1. To protect the creditors of the business by allowing them a
remedy against the new owner of the business enterprise
2. It recognizes the reality that although no formal mortgage
contract is executed, credtitors and suppliers extend credit to the
business-enterprise because they see the business’ earning
capacity and assets as a security to the undertaking that they will
eventually be paid back
3. It places the burden on the shoulder of the person who is in the
best position to protect himself, namely the transferee, by
obtaining certain guarantees and protection from his transferor
4. It establishes a “common law lien” on the business enterprise, and
allows recovery of the debts extended on the basis of such
business enterprise against a transferee to whom such business
enterprise is transferred
5. It represents the ability to earn profit
o Ability to earn profit is acquired by the transferee in a
business enterprise transfer, and that in fact all the
profits earned from the business enterprise acquired
pertain to the transferee as the equity-holder thereof,
then the lien becomes a personal lien against the
transferee as the new corporate entity that holds and
owns the business enterprise
 Bank of Commerce vs Radio PH (2014)
- Rejected the common law lien on the business transfer, thus:
“It is pointed out that under the common law, if one corporation
sells or otherwise transfers all its assets to another corporation, the
latter is not liable for the debts and liabilities of the transferor if it
has acted in good faith and has paid adequate consideration for the
assets, except:
1. Where the purchaser expressly or impliedly agrees to assume
such debts
2. Where the transaction amounts to a consolidation or merger
of the corporations
3. Where the purchasing corporation is merely a continuation of
the selling corporation
4. Where the transaction is entered into fraudulently in order to
escape liability for such debts
But, in the first place, common law has no application in this

jurisdiction where existing statutes governing the situation are
in place. Secondly, none of the cited exceptions apply to this
case.
 Y-l Leisure Phils., Inc vs Yu

- Embraced the doctrine of Business Enterprise
- “The legal basis in the 4 exceptions to the Nell Doctrine, where
the purchasing corporation is merely a continuation of the selling
corporation, is challenging to determine.”
- Said exceptions contemplates the business enterprise transfer, by
which, in such transfer, the transferee corporation’s interest goes
beyond the assets of the tranferor’s assets and it desires to acquire
the latter’s business enterprise, including its good will
 Application of the Doctrine

- SC’s application relate to the doctrine of piercing the veil
 Free and Harmless Clause

- Transferor and transferee may enter into a contractual stipulation
stating either that the transferee shall not be liable for any or all
debts arising from the business which were contracted or accrued
prior to the time of transfer, or that the transferor shall hold the
transferee free and harmless against all claims arising from the
business transferred which accrued prior to the time of transfer
112
- Valid and binding as between the transferor and transferee, and

to their respective successors-in-interest
- Non binding on the creditors
- The jurisprudential doctrine in business enterprise transfers has
evolved for the protection of the creditors; therefor, neither the
transferor nor the transferee can waive or modify such right or
cause of action of the creditors without the latter’s consent.
EQUITY Essence
TRANSFERS - Equity acquisition or transfer constitutes of looking at the entirety of the
business enterprise as it is owned and operated by the corporation
- The purchaser takes control and ownership of the business by purchasing
the controlling shareholdings of the corporate owner
- The control of the business enterprise is therefore indirect, since the
corporate owner remains the direct owner of the business, and what the
purchaser has actually purchased is the ability to elect the members of the
BOD of the corporation which runs the business
- Motive of the Transaction: ability to take control of the underlying business
enterprise
Rationale:
- By purchasing the shares in a corporation that owns a business, the SH does
not by that reason alone become the owner directly of the business assets
and does not become personally liable for the debts and liabilities of the
business
- Buyer of the controlling equity in the corporation may take advantage of he
limited liability feature of the corporate set-up
Application
- GR: Transferee is not liable for the liabilities of the transferor
- EXC: The transferee expressly or impliedly agreed to it, or there is a basis
for piercing the veil
MERGERS AND CONSOLIDATIONS
1. Power to Merge or Consolidate

- Since it affects the juridical personalities of the participating corporations, neither
merger or consolidation is deemed to be within the inherent powers of the
corporations, and the power to merge or consolidate must be expressly granted by
law
2. Comparison
CONSOLIDATION MERGER
 It is the union of 2 or more existing 
It is a union whereby one or more existing
corporations to form a new corporation corporations are absorbed by another
called the consolidated corporation. corporation which survives and continues
 It is a combination by agreement between the combined business
2 or more corporation by which their  In the merger of 2 or more existing
rights, franchises, privileges and corporations, one of the corporation
properties are united and become those survives and continues the combined
of a single, new corporation, composed business, while the rest are dissolved and
generally, although not necessarily, of the all their rights, properties and liabilities are
SH of the original corporations acquired by the surviving corporation
 Merger is the reorganization of 2 or more
corporations that results in their
consolidating into a single corporation,
which is one of the constitutent
corporations, one disappearing or
dissolving and other surviving
 It is the absorption of one or more
corporations by another existing
corporations, which retains its identity and
takes over the rights, privileges, franchises,
properties, claims, liabilities and
obligations of the absorbed corporations.
The absorbing corporation continues its
existence while the lives of others are
terminated
Parties: Constituent Corporations
All constituent corporations are dissolved and All constituent corporations, except the
absorbed by the new consolidated enterprise surviving corporation, are dissolved
113
There is no liquidation of the dissolved corporations, and the surviving corporation assumes
ipso jure the liabilities of the dissolve corporation, regardless of whether the creditors have
consented or not to such merger or consolidation
3. PROCEDURES IN MERGER OR CONSOLIDATION
a. Plan of Merger or Consolidation

- Sec. 76 expressly empowers the BOT of each corporation, party to the merger or
consolidation, to approve a plan of merger or consolidation setting forth the ff:
i. The names of the constituent corporations proposing to merge or
consolidate
ii. The terms of the merger or consolidation and the mode of carrying the
sane into effect
iii. A statement of the changes, if any, in the AOI of the surviving corporation
in case of merger; and, in case of consolidation, all the statements
required to be set forth in the AOI of the consolidated corporation; and
iv. Such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or desirable
b. SH or Members’ approval
- Reqs:
1. Upon approval by majority of vote of each of the BOD of the constituent
corporations of the plan of merger or consolidation, the same shall be
submitted for approval by the SH or members of each of such corporations at
separate corporate meetings duly called for the purpose
2. Notice of such meetings shall be given to all SH or members of the respective
corporations, at least 2 weeks prior to the date of the meetings, either
personally or by registered mail. Said notice shall state the purpose of the
meeting and shall include a copy or a summary of the plan or merger or
consolidation, as the case may be.
3. Affirmative vote of the SH representing at least 2/3 of the OCS of each
corporation in the case of stock corporations, or at least 2/3 of the members
in the case of the non-stock corporations, shall be necessary for the approval
of such plan
4. In stock corporations, SEC has opined that the vote for the approval of the
merger cannot be made by mail or similar means.
c. Right of Appraisal of Dissenting SH

- Any dissenting SH in a stock corporations may exercise his appraisal rights,
provided that:
1. If after the approval by the SH of such plan, the BOD should decide to abandon
the plan, the appraisal right shall be extinguished
d. Amendment of Plan of Merger or Consolidation

- Provided:
1. Amendment is approved by majority vote of the respective BOD or BOT of all
constituent corporations, and
2. Ratified by the affirmative vote of the SH, representing at least 2/3 of the OCS,
or of 2/3 of the members, of each of the constituent corporations
3. Such plan, together with any amendment, shall be considered as the
agreement of merger or consolidation
e. Articles of Merger or Consolidation

- After the approval by the SH or members of the Merger or Consolidation, articles
of merger or consolidation shall be execute by each of the constituent corporations,
to be signed by the president, vice-president and certified by the secretary or
assistant secretary of each corporation, setting forth:
1. Plan of the merger or the plan of consolidation
2. As to stock corporations, the number of shares outstanding, or in the
case of non-stock corporations, the number of members
3. As to each corporation, the number of shares or members voting for
and against such plan, respectively
f. Requirements on Submission of Financial Statements

- Under the SEC Rules, the applying constituent corporations are required to submit
their respective financial statement which serve as the basis of fixing the shares to
be issued in favor of the merged corporation vis-à-vis the net assets to be absorbed
by the surviving corporation as of a specific date
- The date is important because it indicates the values of said assets as of that date.
In fact, it is required that the articles of merger or consolidation should be filed not
more than 120 days from the date of the long form audit report for each of the
constituent corporations
- Long form audit report for the surviving corporation is required if it is insolvent. In
addition, the following are required in the processing of the application:
1. List of creditors of the absorbed corporations
114
2. List of creditors of insolvent corporations

3. Consent of creditors of insolvent constituent corporatiobns
4. List of SH of record of the constituent corporations
5. Affidavit of publication
6. Company data maintenance form
g. Approval by the SEC

 Articles of Merger or Consolidation
eSigned and certified, as required by law
- Shall be submitted to the SEC in quadruplicate for its approval
 Certificate of Merger
- Its issuance render the merger effective
- The effectivity date of the merger is crucial for determining when the
merger or absorbed corporation ceases to exist; and when its rights,
privileges, properties as well as liabilities pass on to the surviving
corporations
 SEC Opinion
- GR: Merger or consolidation shall be effective only upon issuance by
the SEC of the Certificate of Merger
- NEVERTHESS, as to constituent companies, the agreed cut-off date
for the merger shall be controlling, even when the certificate of
merger is issued by the SEC much later on
- All transactions of the absorbed corporation and the surviving
corporation after the cut-off date shall be deemed for the account of
the surviving corporation and that the net asset value of the absorbed
corporation as of the
 In case of merger or consolidation of banks, or banking institutions,
building and loan associations, trust companies, insurance companies,
public utilities, educational institutions and other special corporations
governed by special laws
- The favorable recommendation of the appropriate government
agency shall first be obtained
 Where the SEC is satisfied that the Merger or Consolidation is contrary to
or inconsistent with the provisions of existing laws
- It shall issue a certificate of merger or consolidation, as the case may
be, at which time and merger or consolidation shall be effective
 If, upon investigation, the SEC has reason to believe that the proposed
merger or consolidation is contrary to or inconsistent with the provisions
of the existing law
- It shall set a hearing to give the corporations concerned the
opportunity to be heard
- Written notice of the date, time and place of said hearing shall be
given to each constituent corporation at least 2 weeks before said
hearing
- SEC shall decide based on said hearing
4. EFEFCTS OF MERGER OR CONSOLIDATION

1) The constituent corporations shall become a single corporation which, in case of
merger, shall be the surviving corporation designated in the plan of merger; and, in
case of consolidation, shall be the consolidated corporation designated in the plan
of consolidation;
2) The separate existence of the constituent corporations shall cease, except that of
the surviving or the consolidated corporation;
3) The surviving or the consolidated corporation shall possess all the rights, privileges,
immunities and powers and shall be subject to all the duties and liabilities of a
corporation organized under this Code;
4) The surviving or the consolidated corporation shall thereupon and thereafter possess
all the rights, privileges, immunities and franchises of each of the constituent
corporations; and all property, real or personal, and all receivables due on whatever
account, including subscriptions to shares and other choses in action, and all and
every other interest of, or belonging to, or due to each constituent corporation, shall
be deemed transferred to and vested in such surviving or consolidated corporation
without further act or deed; and
5) The surviving or consolidated corporation shall be responsible and liable for all the
liabilities and obligations of each of the constituent corporations in the same manner
as if such surviving or consolidated corporation had itself incurred such liabilities or
obligations; and any pending claim, action or proceeding brought by or against any
of such constituent corporations may be prosecuted by or against the surviving or
consolidated corporation. The rights of creditors or liens upon the property of any of
such constituent corporations shall not be impaired by such merger or consolidation
115
SALIENT ADVANTAGES OF MERGERS AND CONSOLIDATION

 Mergers and consolidations are able to achieve a continuous flow of juridical
personalities and business enterprises of the constituent corporations, and under the
clear rules under Sec. 80, there is no lega break in such juridical personalities and
business enterprises as they end up combined in the surviving or consolidated
corporation.
- The surviving or consolidated corporation cannot even be treated as
the transferee of the constituent corporation, and that for all intents
and purposes, the surviving or consolidate corporation is every bit
exactly the same, although combined, entity as each of the
constituent corporation.
 Salient Feature:
1. It allows corporate planners to achieve certain ends not available to other forms
of transfers and acquisitions
- Examples:
 contractual or statutory prohibitions on transfers, which do not
expressly cover mergers or consolidations, would allow the
surviving or consolidated corporation to automatically assume
the same role as the constituent corporation covered by such
prohibition, and the merger or consolidated cannot be deemed
a violation of the non-transfer clause
 Taxation: Transfers of assets or business enterprise, or even
the transfer of controlling shareholdings, are general subject to
taxable gains tax
o NIRC, Sec. 40 (c)(2): No gain or loss shall be
recognized if in pursuance of a plan of merger or
consolidation:
a. A corporation, which is a party to a merger
or consolidation, exchanges property solely
for the stock in a corporation which is a
party to the merger or consolidation
b. A SH exchanges stock in a corporation
which is a party to the merger or
consolidation solely for the stock of another
corporation also a party to the merger or
consolidation
c. A security holder of the corporation which
is a party to the merger or consolidation
exchanges his securities in such
corporation solely for stock or securities in
another corporation which is a party to the
merger.
 Paper Industries Corp vs CA
- Refused to apply the legal effect of merger as to grant to the surviving
corporation the rights and incentives available to one of the constituent
corporation
5. DE FACTO MERGERS OR CONSOLIDATIONS

 Definition: A de facto merger can be pursued by one corporation acquiring all or
substantially all of the properties of another corporation in exchange of shares of stocks
of the acquiring corporation. The acquiring corporation: would end up with the
business enterprise of the target corporation; whereas, the target corporation would
end up with its remaining assets being only the shares of stocks of the acquiring
corporation
SPIN-OFFS
- A spin-off exists when a parent corporation organizes a subsidiary, to which the parent corporation
transfers parts of its assets to a new corporation and stock of transferee is distributed to
shareholders of transferors without surrender by them of stock in transferor
- It is one whereby a department, division or portions of the corporate business enterprise is sold
off or assigned into a new corporation that will arise by the process which may constitute it into a
subsidiary of the original corporation
- It is one where part of assets of corporation is transferred to a new corporation and stock of
transferee is distributed to SHs of transferor without surrender by them of stock in the transferor
- Not regulated by the CC
COMPULSORY NOTICE TO, AND CLEARANCE FROM, THE PHILIPPINE COMPETITION

COMMISSION (PCC)
 PCA: has the power to review mergers and acquisitions based on factors it deem relevant
 Merger: joining of two or more entities into an existing entity or to form a new entity
 Acquisition: purchase of securities or assets, through contract or other means, for the purpose
of obtaining control by:
a. One entity of the whole or part of another
b. Two or more entities of another
c. One or more entities over one or more entities
116
Compulsory Notification
Section 17. Compulsory Notification. – Parties to the merger or acquisition agreement referred to in the
preceding section wherein the value of the transaction exceeds one billion pesos (P1,000,000,000.00)
are prohibited from consummating their agreement until thirty (30) days after providing notification to the
Commission in the form and containing the information specified in the regulations issued by the
Commission:
 Provided, That the Commission shall promulgate other criteria, such as
increased market share in the relevant market in excess of minimum thresholds,
that may be applied specifically to a sector, or across some or all sectors, in
determining whether parties to a merger or acquisition shall notify the
Commission under this Chapter.
An agreement consummated in violation of this requirement to notify the Commission shall be considered
void and subject the parties to an administrative fine of one percent (1%) to five percent (5%) of the value
of the transaction.
Should the Commission deem it necessary, it may request further information that are reasonably
necessary and directly relevant to the prohibition under Section 20 hereof from the parties to the
agreement before the expiration of the thirty (30)-day period referred. The issuance of such a request
has the effect of extending the period within which the agreement may not be consummated for an
additional sixty (60) days, beginning on the day after the request for information is received by the parties:
 Provided, That, in no case shall the total period for review by the Commission
of the subject agreement exceed ninety (90) days from initial notification by the
parties.
When the above periods have expired and no decision has been promulgated for whatever reason, the
merger or acquisition shall be deemed approved and the parties may proceed to implement or
consummate it. All notices, documents and information provided to or emanating from the Commission
under this section shall be subject to confidentiality rule under Section 34 of this Act except when the
release of information contained therein is with the consent of the notifying entity or is mandatorily
required to be disclosed by law or by a valid order of a court of competent jurisdiction, or of a government
or regulatory agency, including an exchange.
In the case of the merger or acquisition of banks, banking institutions, building and loan associations,
trust companies, insurance companies, public utilities, educational institutions and other special
corporations governed by special laws, a favorable or no-objection ruling by the Commission shall not be
construed as dispensing of the requirement for a favorable recommendation by the appropriate
government agency under Section 79 of the Corporation Code of the Philippines.
A favorable recommendation by a governmental agency with a competition mandate shall give rise to a
disputable presumption that the proposed merger or acquisition is not violative of this Act.
Prohibited Mergers and Acquisitions
Section 20. Prohibited. Mergers and Acquisitions. – Merger or acquisition agreements that substantially
prevent, restrict or lessen competition in the relevant market or in the market for goods or services as
may be determined by the Commission shall be prohibited.
 If within he relevant periods under the Act, PCC determines that such
agreements if a Prohibited Merger or Acquisition, and does not qualify for
Exemption from Prohibited Mergers and Acquisition, it may prohibit the:
1. Implementation of the agreement
2. Implementation of the agreement, unless and until it is modified by
changes specified by PCC
3. Implementation of the agreement, unless and until the pertinent party or
parties enter into legally enforceable agreements specified by PCA
Exemptions from Prohibited Mergers and Acquisitions
Section 21. Exemptions from Prohibited. Mergers and Acquisitions. – Merger or acquisition agreement
prohibited under Section 20 of this Chapter may, nonetheless, be exempt from prohibition by the
Commission when the parties establish either of the following:
(a) The concentration has brought about or is likely to bring about gains in efficiencies that are
greater than the effects of any limitation on competition that result or likely to result from the
merger or acquisition agreement; or
(b) A party to the merger or acquisition agreement is faced with actual or imminent financial
failure, and the agreement represents the least anti-competitive arrangement among the known
alternative uses for the failing entity’s assets:
Provided, That an entity shall not be prohibited from continuing to own and hold the stock or other share
capital or assets of another corporation which it acquired prior to the approval of this Act or acquiring or
117
maintaining its market share in a relevant market through such means without violating the provisions of
this Act:
Provided, further, That the acquisition of the stock or other share capital of one or more corporations
solely for investment and not used for voting or exercising control and not to otherwise bring about, or
attempt to bring about the prevention, restriction, or lessening of competition in the relevant market shall
not be prohibited.
Finality or Rulings on Mergers and Acquisitions

 GR: Upon favorable ruling from PCC, mergers or acquisitions may not be challenged
EXC: when such ruling was obtained on the bases of fraud or false information
EFFECTS OF TRANSFERS ON EMPLOYEES

TRANSFERS EXPLANATION
Transferee
1. is not bound to retain the employees of the transferor, since the
former does not really step into shoes of the latter.
2. Is not liable for any of the claims against the transferor, even if the
sale of the business assets of the transferor should result in the
shutting down of the transferor’s operations and the laying off of the
transferor’s employees
Sundowner Dev.Corp vs Drilon

ASSETS-ONLY - Labor contracts such as employment contracts and CBA are not
TRANSFERS enforceable against a transferee of an enterprise, labor contracts
being in personam, thus binding only between the parties
- Labor contracts merely creates an action in personam and does
not create any real right which should be respected by third parties
- GR: There is no law requiring a bona fide purchaser of assets of an
on-going concern to absorb in its employ the employees of the latter
EXC: Although the purchaser of the assets or enterprise if not legally
bound to absorb in its employ the employees of the seller of such
assets or enterprise, the parties are liable to the employees if the
transaction between the parties is colored or clothed with bad faith
Transferee
1. Shall be bound to retain the services of the employees of the
business that it has acquired, although it is not liable for the
violations that the transferor had committed in the past and for which
the transferor remains solely liable
Dadeco Case
- There is no law requiring that the purchaser should absorb the
employees of the selling company
a. Employees have no equity claims on the business enterprise

- The most that purchasing company may do, for reasons of
public policy and social justice, is to give preference to re-
employment to the selling company’s qualified separated
employees, who in its judgment are necessary to the
BUSINESS continued operation of the business establishment
ENTERPRISE b. Piercing doctrine application
TRANSFERS - When the business transfer is done with fraud or when it
authorizes the application of the piercing doctrine to treat
both the transferor and transferee as one
c. The need for a clear break operations
- Pepsi Cola Case reiterated the doctrine that when the
business enterprise is sold or transferred even to an entirely
new entity, the transferee is deemed to assume liabilities of
the business enterprise, and the burden of proof is with the
transferee to show his non-liability
- Avon Dale Garments Case ruled that for a new company to
take over the business concerns of another as not to make
the new owner or business entity liable for the labor claims
against the predecessor-in-interests, there must be a formal
and substantial termination and break from the operations of
the predecessor as to constitute the transferee a separate
business entity
EQUITY Employees remain with the corporate employer in exactly the same manner
TRANSFERS as before the equity transfer, and therefore, the purchaser does not assume
any personal liability to the employees, since the result of equity transfer is a
change in the ownership or control of the corporate employer
MERGERS AND The CC mandates that the surviving corporation or consolidated
CONSOLIDATIONS corproration must necessarily assume all the liabilities of the constituent
corporations, it would then be logical to assume that the contractual rights of
118
employees and the existing CBA, if any, would have to be absorbed by the
surviving or consolidated corporation.
BPI vs BPI Employees Union-Davao

- CC does not mandate the absorption of employees of the non-surviving
corporation by the surviving corporation in the case of merger
- Applied the ruling on Sundowner Dev Corpo vs Drilon
SPIN OFF SMC Employees vs Confessor
- The Court denied the union’s petition to include the employees in
the spun-off divisions to be within the SMC bargaining unit, and held
that the employees in the new corporations constitute the new
bargaining unit
119

Corpo Law - Summarized

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Corpo Law - Summarized

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PHILIPPINE CORPORATE LAW by CESAR VILLANUEVA- SUMMARIZED

CHAPTER 2: BRIEF HISTORY OF PHILIPPINE CORPORATE LAW

CHAPTER 3: NATURE, ATTRIBUTES, AND CLASSIFICATIONS OF CORPORATIONS

THEORIES ON THE FORMATION OF LAW

TRI-LEVEL RELATIONSHIPS IN THE CORPORATE SETTING

CORPORATION AS A CREATURE OF LAW

ADVANTAGEOUS FEATURES OF THE CORPORATE MEDIUM

4. Free Transferability of Units of Investment

DISADVANTAGEOUS FEATURES OF A CORPORATE MEDIUM

COMPARING THE CORPORATION WITH OTHER BUSINESS MEDIA

Does a defective incorporation process result into a partnership? NO

ENTITLEMENT OF THE CORPORATION TO THE CONSTITUTIONAL RIGHTS

LIABILITY OF CORPORATION FOR TORTS

CRIMINAL LIABILITY IN CORPORATE SETTING

NON-ENTITLEMENT TO MORAL DAMAGES

CORPORATIONS DISQUALIFIED FROM OWNING ALIENABLE LANDS OF PUBLIC DOMAIN

 FRIA: Affiliate is a corporation that directly or indirectly, through one or more

CHAPTER 4: CORPORATE JURIDICAL PERSONALITY

DOCTRINE OF CORPORATE JURIDICAL PERSONALITY

MAIN DOCTINE OF SEPARATE JURIDICAL PERSONALITY

DOCTINE OF PIERCING THE VEIL OF CORPORATE FICTION

 Instances the Doctrine of Piercing the Veil of Corporate Fiction is warranted:

b. Identity of directors and officers

FRAUD PIERCING CASES

ALTER EGO PIERCING CASES

b. Identity of directors and officers

DEFEAT PUBLIC CONVENIENCE OR EQUITY PIERCING CASES

PIERCING DOCTRINE AND THE DUE PROCESS CLAUSE

ALTER EGO PIERCING CASE FRAUD PIERCING CASE DEFEAT PUBLIC

CHAPTER 5: CORPORATE CONTRACT LAW

MERGING PRINCIPLES OF CORPORATE LAW AND CONTRACT LAW

THE UNENFORCEABLE CONTRACT PREMISE

2. Subject Matter of the Contract

PRE-INCORPORATION STAGES: PROMOTER’S CONTRACT

APPLICATION OF PRINCIPLES IN THE LAW ON AGENCY

 Applying such principles in promoter’s contracts, it is clear that every

PRE-INCORPORATION SUBSCRIPTION AGREEMENTS

OTHER PROMOTER’S CONTRACTS

POST-RATIFICATION AS THE BASIS TO HOLD THE CORPORATION LIABLE

DEFECTIVELY-FORMED AND NON-EXISTENT CORPORATIONS

ULTRA VIRES DOCTRINE

TYPES OF ULTRA VIRES DOCTRINE

JUDICIAL ATTITUDE TOWARDS UV DOCTRINE

CHAPTER 6: ARTICLES OF INCORPORATION

REGISTRATION OF THE AOI

EXAMINATION AND APPROVAL BY SEC

SPECIAL RULES FOR BANKS

GROUNDS FOR DISAPPROVAL OF AOI

CONTENTS OF THE AOI

a. Name of the Corporation

CHANGE OF CORPORATE NAME

USE OF CORPORATE NAMES OF DISSOLVED PERSONS

INVESTMENT IN NON-PRIMARY PURPOSES

- Served as the residence of the corporation

EXTENSION OF CORPORATE TERM

CAPITAL STRUCTURE AT REGISTRATION

SUBSCRIPTION AND PAID UP CAPITAL

ISSUANCE OF PAR VALUE SHARES OF STOCK

AMENDMENTS TO OR REVISIONS OF THE AOI

MATTERS WHICH ARE BEYOND AMENDMENT

NON-BINDING EFFECTS OF BY-LAWS TO OUTSIDERS

PROCEDURE FOR THE ADOPTION OF BY-LAWS

BASIC CONTENTS OF BY-LAWS