MERCANTILE LAW REVIEW 1

CORPORATION LAW
Sec. 1 Title of the Code
This Code shall be known as "The Corporation Code
of the Philippines."

2.

Sec. 2 Corporation defined

Three
1.
2.
3.

forms of business
Sole Proprietorship;
Partnership; and
Corporation

Definition
A corporation is an artificial being created by
operation of law, having the right to succession and
powers, attributes and properties expressly authorized
by law or incident to its existence.

3.

4.

knowing that they cannot run after the

stockholders, which is why banks would
usually require principal stockholders
to also bind themselves in their
personal capacity.
Easy transferability of shares may allow
competitors to become stockholders;
But see Gokongwei v. SEC where it was
held that the by-laws may disqualify
stockholders who are also stockholders
of a competitor from becoming
directors.
The minority is subservient to the majority;
In large corporations, the voting rights
have become largely theoretical,
because of widespread ownership.
Double Taxation;
The corporation pays taxes for
receiving profits and the stockholders
pay taxes for receiving dividends.

Attributes of a corporation
1. Artificial being created by operation of law;
While private corporations are created
by operation of law in accordance with
the
Corporation
Code,
public
corporations are created by law.
2. Having the right to succession; and
3. Powers, attributes and properties expressly
authorized by law or incident to its existence.

Concession Theory
It is a principle in the creation of corporations,
under which a corporation is an artificial creature
without any existence until it has received the
imprimatur of the State acting according to law,
through SEC. The life of the Corporation is a concession
made by the State.

Advantages of a corporation
1. Doctrine of Separate Personality;
A corporation can exist as a legal unit
with a separate juridical personality
from its stockholders or members;
2. Principle of Limited Liability;
As a consequence of having a separate
juridical personality, the corporate
debts or credit is not the debt or credit
of the stockholder.
3. Doctrine of Centralized Management;
The board of directors/trustees is the
governing body of the corporation and
all corporate powers are exercised by
them.
4. Continuity of Existence (Right to Succession);
This means that when one, more or
even all stockholders die, resigns,
becomes insolvent or civilly interdicted,
the corporation will not be dissolved,
unlike in a partnership.
5. Easy of transferability of shares; and
Usually does not require approval of
the Board of Directors.
6. Easy to accumulate substantial capitalization
to start a business

Franchises of Corporation
1. Primary or General Franchise
It is the right to exist as a corporation
and is vested in the individuals who
compose the corporation and not in the
corporation itself.
Non-transferrable.
2. Secondary or Special Franchise
Certain rights and privileges conferred
upon existing corporations, such as the
right to use the streets of a
municipality to lay pipes of tracks,
erect poles or string wires, or the right
to engage in delivery service. It is
vested in the corporation itself.
It may ordinarily be conveyed or
mortgaged, except special franchises
as are charged with a public use.
It is subject to levy and sale on
execution together and including all
the
property necessary for the
enjoyment thereof.

Disadvantages of a corporation
1. The limited liability of stockholders also serves
as a limitation to corporate credit;
In other words, banks may be reluctant
to extend loans to corporations,

See also Sec. 19 of the Corporation Code.

Tests to determine nationality of the corporation

Generally, the corporation is considered a national
of the country where it was incorporated. This is the
Incorporation Test. However, we apply the Control
Test, which looks into the nationality of the controlling
stockholders, in the following instances:
1. In times of war;
2. Nationalized and partly nationalized activities

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Note that as a rule, all stockholders in a

corporation may be foreigners, except
for nationalized and partly nationalized
activities.

The Foreign Investment Act (FIA) defines a

Philippine national as:
1. A corporation organized under Philippine laws
of which 60% of the outstanding capital stock
and entitled to vote is owned by Filipino
citizens;
Double
60%
Rule.
Where
a
corporation
and
its
non-Filipino
stockholders own stocks in a SECregistered enterprise, at least 60% of
the members of the Board of Directors
of each of both corporations must be
citizens of the Philippines, in order that
the corporation shall be considered a
Philippine national.
2. A corporation organized abroad and registered
doing business in the Philippines under the
Corporation Code of which 100% of the capital
stocks entitled to vote belong to Filipinos.
Even if the 60-40 Filipino to foreign equity ratio is
apparently met by the subject or investee corporation
(by applying the control test), a resort to the
Grandfather Rule is necessary if doubt exists as to
the locus of the beneficial ownership and control
(Narra Nickel Mining and Development Corporation v.
Redmont Consolidated Mines Corporation, 2015).
Fully and partly nationalized activities (Sundiang
& Aquino Reviewer)
1. 100% Filipino equity / 0% foreign equity
a. Mass media except recording;
b. Retail trade enterprises with paid-up
capital of less than US$2.5 million;
c. Private security agencies;
d. Small-scale mining;
e. Cockpits;
f. Manufacture, repair, stockpiling and/or
distribution of nuclear weapons;
g. Manufacture of firecrackers and other
pyrotechnic devices
2. At least 80% Filipino equity / up to 20% foreign
equity
a. Private radio communications network
3. At least 75% Filipino equity / up to 25% foreign
equity
a. Private recruitment, whether local or
overseas employment;
b. Construction and repair of locally
funded works;
c. Construction
of
defense-related
structures
4. At least 60% Filipino equity / up to 40% foreign
equity
a. Exploration,
development
and
utilization of natural resources;
b. Realty
companies
and
other
corporations that own private lands;
c. Operation and management of public
utilities;

d.

5.

Culture, production, milling, processing,

trading except retail of rice and corn
and by-products;
e. Adjustment companies;
f. Sauna and steam bath houses,
massage clinics and similar activities;
g. Domestic market enterprises with paidin capital stock of less than $200,000.
However, the threshold paid-in capital
is $100,000 if enterprise involves
advanced technology or they employ at
least 50 direct employees. It can be
100% owned by foreigners if the
corporation is engaged entirely in
export
At least 40% Filipino equity / up to 60% foreign
equity
a. Financing companies; and
b. Investment houses

Gamboa v. Teves
For purposes of determining compliance with
Filipino equity structural requirements under the
Constitution and other laws, the term capital stock
should refer only to common shares outstanding and
entitled to vote and not to the total outstanding capital
stock which includes the common and non-voting
preferred shares.
Moral damages
The award of moral damages cannot be granted in
favor of a corporation because, being an artificial
person
and
having
existence
only
in legal
contemplation, it has no feelings, no emotions, no
senses. It cannot, therefore, experience physical
suffering and mental anguish, which can be
experienced only by one having a nervous system. The
statement in People v. Manero and Mambulao Lumber
Co. v. PNB that a corporation may recover moral
damages if it has a good reputation that is debased,
resulting in social humiliation is an obiter dictum (ABSCBN v. CA, 1999).
Constitutional guarantees
A corporation is entitled to the following
constitutional rights:
1. Due Process; and
2. Right Unlawful Search and Seizure (Stonehill v.
Diokno).
But the right to invoke this vis--vis
corporate property is the corporation
itself and not a stockholder in his
personal capacity.
However, a corporation cannot invoke the right
against self-incrimination not only because a
corporation cannot be imprisoned but also because of
the Concession Theory, hence, the state has the
continuing power to investigate whether a corporation
complies with the requirements of law and whether it is
conducting its business lawfully.
Doctrine of Piercing the Veil of Corporate Entity
The veil of corporate fiction may be pierced if it is
being used

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1.
2.
3.

To defeat public convenience as when the

corporate fiction is used as a vehicle for the
evasion of an existing obligation;
To justify a wrong, protect fraud, or defend a
crime; or
In alter ego cases, where a corporation is
merely a farce since it is a mere alter ego or
business conduit of a person or when the
corporation is so organized and controlled and
its affairs are conducted as to make it merely
an instrumentality, agency, conduit or adjunct
of another corporation.
Elements:
a. Control of majority/complete stock
control, finances, policy and business
practice of the corporation. (Mere
majority/complete
stock
control
insufficient)
b. Such control must have been used
by the defendants to commit fraud
or wrong, to perpetuate the violation
of a legal duty in contravention of
plaintiffs legal rights; and
c. The aforesaid control and breach of
duty must be the proximate cause of
the injury or unjust loss complained of.

Trust Fund Doctrine

The capital stock, property and other assets of a
corporation are regarded as equity in trust for the
payment of corporate creditors.
Also, creditors may sue stockholders for their
unpaid subscriptions pursuant to the trust fund
doctrine.
It is an established doctrine that subscriptions to
the capital of a corporation constitute a fund to which
creditors have a right to look for satisfaction of their
claims and that the assignee in insolvency can
maintain an action upon any unpaid stock subscription
in order to realize assets for the payment of its debts.
But note that the Trust Fund Doctrine does not
mean that the corporation cannot use its legal capital,
otherwise, it cannot do business at all. It just means
that the legal capital cannot be used or dissipated to
the prejudice of the creditors.
Q: Can you request management to reduce your
subscription to correspond to what you have paid?
A: No. It violates the trust fund doctrine, because
subscription paid and unpaid forms part of the legal
capital.
Sec. 3 Classes of corporations (Stock and NonStock)
Requisites of a stock corporation:
1. Its capital stock divided into shares; AND
2. It is authorized to distribute dividends.
This authority need not be stated in the
articles of incorporation or by-laws,
because the power to distribute
dividends is inherent in a stock
corporation.
Both elements must be present. If one or more is
absent, it is considered non-stock.

NB: According to Dean Dimayuga, stock vis--vis

non-stock is a misnomer, because the real distinction is
the authority to declare dividends. For instance, a
corporation which requires its members to buy its
shares of stock but are not allowed to declare
dividends is a non-stock corporation.
Stock vs. Non-Stock
Stock

Non-Stock

1. Authority to
declare dividends
2. Distribution of
profits

Yes

No

Yes

3. How
incorporator
called
4. Governing body
5. How officers
chosen

Stockholders

No, but may engage

in business if
incidental to its
purpose.
Members

6. Place of
meeting

7. Boards term of
office
8. Number of
board members
9. Transferability
of
shares/membershi
p
10. Manner of
voting

Board of Directors
Elected by the
Board of Directors
For stockholders,
within the city or
municipality
where the
principal office is
located
1 year

Board of Trustees
Elected directly by
the members
For members,
anywhere in the
Philippines

5-15

3 years (may be
extended)
May exceed 15

Transferable (as a
rule)

Non-transferable (as
a rule)

Cumulative

Straight (as a rule)

Parent, subsidiary and affiliate corporations

1. Parent Corporation a corporation that has
control over another corporation directly or
indirectly through one or more intermediaries.
It is the corporation that owns all or
substantially all or the controlling shares in the
subsidiary.
2. Subsidiary A corporation more than 50% of
the voting stock of which is owned or controlled
directly or indirectly through one or more
intermediaries by another corporation, which
thereby become a parent company.
A subsidiary may other be wholly owned or
partly owned by a parent company.
3. Affiliate A corporation that directly or
indirectly, through one or more intermediaries,
is controlled by or is under the control of
another corporation, which thereby becomes
its parent company.
Piercing the veil between the subsidiary and
parent corporations
GR: A subsidiary company may be 100% owned by a
parent company and even share the same directors
and officers as the latter, and the Doctrine of Separate
Personality would still apply.
XPN: When there is a confusion of affairs between the
parent and subsidiary, there is co-mingling of funds,

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and the finances, business and policies of the

subsidiary are controlled by the parent company. In
such case, the Doctrine of Piercing may be applied.
Sec. 4 Corporations created by special laws or
charters
Congress cannot create a private corporation by
special law.
Private corporations may only be formed under
general law, which is the Corporation Code, the
purpose of which is to avoid favoritism. Congress
cannot favor private interests.
SEC jurisdiction
The Securities and Exchange Commission (SEC)
does not have jurisdiction over public corporations,
including GOCCs with original charters.
Sec.
5

Corporators
and
stockholders and members.

incorporators,

Components of a Corporation
1. Incorporator
Stockholder or member mentioned in
the articles of incorporation as
originally forming and composing the
corporation and who are signatories
thereof.
Once an incorporator always an
incorporator.
Thus,
a
corporation
cannot
amend
its
Articles
of
Incorporation to delete, add or change
any incorporator.
GR: Only natural persons may become
incorporators, because an artificial
person cannot be a signatory to the
Articles of Incorporation.
XPN: Cooperatives which may be
incorporators of rural banks.
2. Corporator
Those who compose a corporation,
whether
as
stockholders
or
as
members. While incorporators will
forever be incorporators, corporators
may cease to be as such.
3. Stockholders
Corporators of a stock corporation.
4. Members
Corporators of a non-stock corporation.
5. Directors/Trustees
Governing body of the corporation.
6. Officers
Officers who are identified as such in
the Corporation Code, the Articles of
Incorporation or the By-laws of the
corporation.
7. Promoter
A self-constituted organizer who finds
an enterprise or venture and helps to
attract investors, forms a corporation
and launches it in business, all with a
view to promotion profits.
a.Corporation not bound by
contracts entered into by the

promoter before incorporation

unless the contract is ratified;
b.Promoter is personally liable for
contracts or agreements with
third persons contracted in
behalf of the future corporation
if the corporation does not
ratify the same or unless the
agreement was expressly made
subject to such approval or
ratification;
c. Promoter should remit to the
corporation profits that he
derived that properly pertains
to the corporation.
Sec. 6 Classification of shares
Definition of Terms:
1. Common Shares
Represent the residual ownership interest
in the corporation.
Usually issued without extraordinary rights
and privileges.
Entitles the shareholder to a pro rata
division of profits.
There shall always be a class or series of
shares which have complete voting rights.
2. Preferred Shares
Shares that are given preference either as
to either or both dividends or assets (in
case of dissolution).
Used to attract investors. Usually deprived
of voting rights kasi pera lang kailangan sa
kanila.
Preferred shares may be issued only with a
stated par value.
Types of Preferred Shares:
a.
Cumulative
If a dividend is omitted in
any year, it must be made
up in a later year before
any dividend may be paid
on the common in the
later year.
b.
Non-Cumulative
No need to make up for
undeclared dividends.
c.Participating
Entitled to participate with
the common shares in
excess of distribution.
d.
Convertible
Preferred
Shares
One which confers on the
holders the option of
exchanging such shares
for another class of shares
at a certain price within a
certain period.
If
not
authorized
by
articles of incorporation,
the corporation is not

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allowed
to
convertible shares.

issue

3. Voting Shares
Shares with voting rights.
4. Non-Voting Shares
Shares without voting rights.
5. Par Value Shares
Those with fixed value stated in the
articles of incorporation and the share
certificate.
6. No Par Value Shares
Those without a fixed value.
Conditions:
a.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;
b.The shares without par value may
not be issued for a consideration
less than P5.00 per share;
c. 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.
Hence, supposing that the issued
value of a no par value share is
P200 but it was sold for P250. The
premium of P50 is considered part
of the capital and cannot be
declared as dividends. Note: This
restriction does not apply to par
value shares where the premium
may be treated as surplus profits
that may be declared as stock
dividends.
The following cannot issue no par value
shares:
a.Banks
b.Trust companies;
c. Insurance companies;
d.Public utilities; and
e.Building and loan associations
Advantages of no par value shares over
par value share:
a.Does not pretend to place a
definite money value on the
shares
-

In par value, a prospective

buyer may be deceived by the
value
appearing
in
the
certificate.

b.Flexibility of price
Remember,

the
amount
appearing in the par value
share may not be accurate
depending on the financial
status of the corporation. The
bad thing is that a corporation
cannot sell a par value share
below its par value, otherwise
it would be considered a
watered stock. Such is not the
case with a no par value share
where the corporation has the

leeway to lower its price for

sale.

c. From

the
viewpoint
of
stockholders, there is no longer a
personal liability for unpaid shares,
because the law requires no par
value shares to be paid in full.
d. Watering of stock is lessened.
7. Escrow Shares
Result by virtue of a transaction to place
shares in escrow until the happening of an
event or fulfillment of a specified
condition.
8. 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.
9. Redeemable Shares
Shares of stocks issued by a corporation
which the latter can redeem later on.
May either be (a) Optional or (b)
Compulsory. The latter requires the issuing
corporation to redeem its preferred shares
at a fixed date or after the expiration of a
certain period at the option of the
stockholder.
10. Founders Shares
Shares that are given to those who helped
organize the corporation.
11. Stock Split
Number of shares increase but value
remains the same.
The converse of this is Reverse Stock
Split wherein multiple shares are merged
into one.
12. Guaranteed Shares
Shares, the payment of dividends of which
is guaranteed by the corporation.
A corporation cannot by itself guarantee
that it is paying a regular yearly dividends,
because dividends may be paid only out of
unrestricted
retained
earnings,
but
another corporation may make such
guarantee.
Doctrine of Equality of Shares
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.
Inalienable Voting Rights.
Preferred and Redeemable shares may be deprived
of voting rights (the right to vote and be voted for as
directors
and
other
corporate
acts
requiring
stockholders ratification). Nevertheless, they are still
entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchanged, mortgage, pledge or
other disposition of all or substantially all of the
corporate property;

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4. Incurring, created 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 the
Corporation Code; and
8. Dissolution of the corporation.
Rationale: These 8 directly affects their rights as
stockholders, thus, they are given the right to voice out
their concerned, even if they have no voting rights.
Sec. 7 Founders shares
What are Founders Shares?
Shares that are given to those who helped organize
the corporation. It may have special rights and
privileges not enjoyed by others.
Founders
shares
are
transferrable,
unless
prohibited by the articles of incorporation or by-laws.
Note: In fact, all types of shares of a stock corporation
are generally transferrable, unless prohibited by the
articles of incorporation or by-laws.
Requirement where founders shares grant
exclusive right to vote and be voted for as
directors:
It must be for a limited period not exceeding 5
years subject to the approval of the SEC. The 5-year
period commences from the date of approval.
Sec. 8 Redeemable shares
No need for unrestricted retained earnings to
redeem
A corporation may redeem shares even without
unrestricted retained earnings or surplus profits,
because a holder of redeemable shares is considered a
creditor of a corporation, hence there is no violation of
the Trust Fund Doctrine, which is precisely for the
benefit of the creditors.
However, a corporation cannot redeem shares if it
would result into its insolvency or inability to carry out
its business.
Compulsory/mandatory redemption
Compulsory redeemable share is one that requires
the issuing corporation to redeem or repurchase its
preferred shares at a fixed date or at the option of the
holder thereby giving the shareholder the right to the
return of the investment.
However, even if a stockholder is holding
mandatory redeemable shares, redemption is still
subject to the requirement that enough assets are left
to cover debts and liabilities.
Sinking fund
For the protection of the stockholders, the SEC
Rules provide that a corporation that has issued
redeemable shares shall set up and maintain a sinking
fund to be deposited with a trustee bank which shall
not be invested in risky and speculative ventures. A
sinking fund refers to a fund set up by a corporation

where cash is gradually set aside in order to

accumulate the amount necessary to meet the
redemption price of redeemable shares at specified
dates in the future.
Redemption must be in good faith
The redemption of shares must be made in good
faith and without prejudice to the rights of other
creditors or shareholders. Otherwise, the redemption
may not be undertaken or if it has already taken place,
the other creditors or shareholders may have a cause
of action for the recovery of the assets of the
corporation, which were used to redeem its own
shares.
Retirement
GR: Once redeemed, they are considered retired and
can no longer be reissued resulting in the deduction
from the legal capital.
XPN: When the articles of incorporation allows
reissuance of redeemed shares (Rules Governing
Redeemable and Treasury Shares).
Sec. 9 Treasury shares
Definition
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.
Treasury shares have no voting rights and cannot
participate in dividends.
Instances where a share becomes a treasury
share:
1. When a corporation acquires its own shares for
the following purposes:
a. To eliminate fractional shares arising
out of stock dividends;
b. To
collect
or
compromise
an
indebtedness
to
the
corporation,
arising out of unpaid subscription, in a
delinquency sale, and to purchase
delinquent shares sold during said sale;
c. To pay dissenting or withdrawing
stockholders entitled to payment for
their shares under the provisions of this
Corporation Code; and
2. When a corporation redeems its redeemable
preferred shares; and
3. When a corporation buys its shares from the
open market, provided it has sufficient surplus
profits.
What may a corporation do to treasury shares?
1. Reissue them;
2. Declare them as property dividends; or
3. Retire them
Retirement of treasury shares shall be
effected by decreasing the capital
stock of the corporation in accordance
with Sec. 38 of the Corporation Code

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for the purpose of eliminating treasury

shares. This means that the articles of
incorporation must be amended.
Sec. 10 Number
incorporators

and

qualifications

of

Number
Not less than 5 nor more than 15.
Qualifications of incorporators:
1. Natural person;
2. Legal age and have capacity to contract;
3. Each must own or be a subscriber to at least 1
share of the capital stock of the corporation;
4. Majority must be Philippine residents.
From the aforesaid qualifications, the following can be
deduced:
Aliens may be incorporators or coporators,
subject to requirements of special laws
regarding nationalized or partly nationalized
activities.
Non-residents may also be incorporators. The
Corporation Code only requires majority must
be residents.
Sec. 11 Corporate term
Maximum of 50 years. May be shorted or extended,
provided that no extension may be made earlier than 5
years prior to the expiry date, unless there are
justifiable reasons for an earlier extension as may be
determined by the SEC.
Sec. 12 Minimum capital stock required of
stock corporations
There may be no minimum authorized capital stock
(unless otherwise provided by special laws), but the
minimum paid up capital is P5,000, which is 25% of the
subscribed capital stock, which in turn is 25% of the
authorized capital stock. So, if we look at it that way,
technically, the minimum authorized capital stock is
P5,000.
Sec. 13 Amount of capital
subscribed and paid for the
incorporation

stock to be
purposes of

Definition of Terms
1. Authorized Capital Stock
Amount fixed in the articles of
incorporation to be subscribed and paid
by the stockholders of the corporation.
Maximum
amount
that
can
be
capitalized.
2. Subscribed Capital
That portion of the authorized capital
stock that is covered by subscription
agreements whether fully paid or not.
3. Paid-Up Capital
The amount of outstanding capital
stock and additional paid-in capital or

premium paid over the par value of the

shares.
4. Outstanding Capital Stock
The total shares of stock issued
whether or not fully or partially paid
except treasury shares so long as there
is a binding subscription agreement.
5. Capital
Includes properties and assets of the
corporation that are used for its
business or operation.
6. Stated Capital
Sum of the par value of all issued par
value shares, the entire amount
received for no-par value shares and
any amount transferred by a stock
dividend or other corporate action from
surplus to state capital.
Initial subscribed and paid-up capital
1. Minimum Subscribed Capital 25% of the
authorized capital stock;
2. Minimum Paid-up Capital 25% of Subscribed
Capital but must not be less than P5,000
Shortcut: To determine paid-up capital, multiply the
authorized capital stock with 0.0625.
It is not necessary that 25% of each subscribed
share must be paid. It is only required that at least 25%
of the subscribed capital must be paid. In other words,
we consider the total paid-up amount.
Example:
Corpo X has an ACS of P1 million divided into
100,000 shares. A, B, C, D and E subscribed to 25%
(P250,000 corresponding to 25,000 shares) of the
authorized capital stock.
In such case, A, B, C, D and E would each be
subscribers to P50,000 for 5,000 shares of stocks.
Now, 25% of P250,000 is P62,500. It is not
necessary that all of them must each pay P12,500
(62,000/5). It is enough that the totality of their
payments reach P62,500. So if A, B and C paid
P50,000, P12,000, P500, respectively, while D and E
paid nothing, the requirements of the Corporation Code
are satisfied.
Proceeding from the above premise, it would
appear that a person may become a stockholder
without paying anything. Would that be unfair to
paying subscribers? Not really, because corporations
usually impose interests to those who do not pay in full
upon subscription.
Sec. 14
incorporation
1.
2.
3.

Contents

of

the

articles

of

Name of the corporation;

Primary purpose and secondary purposes;
See notes below
Place where the principal office is located;
The SEC now requires EXACT address
to be stated in the articles of
incorporation, but for purposes of
stockholders meetings, Metro Manila is
still considered a city.

Page | 7

4.
5.

Corporate term;
Names, nationalities and residences of the
incorporators;
6. Number of directors/trustees;
7. Names, nationalities and residences of persons
who shall act as directors or trustees until
the first regular directors or trustees are duly
elected and qualified.
This actually refers to Incorporating
Directors whose purpose to facilitate
the organization of the corporation
during its initial stages, because
remember that there must be an
election of the Board of Directors for a
corporation to formally organize.
8. In case of stock corporation:
Amount of authorized capital stock
(must be in Philippine currency);
Number of shares into which it is
divided;
In case of par value shares, the par
value of each;
Names, nationalities and residences of
the original subscribers, and the
amount subscribed and paid by each
on his subscription;
If some or all of shares are without par
value, such fact must be stated;
9. In case of non-stock corporation, the amount
of its capital, the names, nationalities and
residences of the contributors and the amount
contributed by each; and
10. Such other matters as are not inconsistent
with law and which the incorporators may
deem necessary and convenient.
There are items that must be stated in
the articles of incorporation, otherwise,
certain corporate acts would not be
permitted.
Purpose clause
A corporation may be organized for several
purposes, but there must only be one primary purpose,
while the others would merely be secondary. Relate
this to Sec. 42 of the Corporation Code which requires
the approval of the stockholders representing 2/3 of
the outstanding capital stock if the corporation wants
to invest money in a purpose other than its primary
purpose.
The purpose clause is significant in determining
whether or not an act is ultra vires, because take note
that unlike natural persons, corporations may only
exercise express, implied and incidental powers (This
will be discussed later on in Sec. 36). There are also
corporate acts that are given different treatments
depending whether they were done in pursuit of a
primary or secondary purpose.
The following are the conditions for the validity of
purpose(s):
1. Lawful;
2. Specific;
3. Stated; and
4. Capable of being lawfully combined.

Q: Should a corporations secondary purpose(s) be in

line or related with its primary purpose?
A: No. As a general rule, the secondary purpose need
not be related to the primary purpose as long as they
are capable of being lawfully combined, EXCEPT for the
following where their secondary purposes must be
related to their primary purposes:
1. Banks;
2. Insurance companies;
3. Educational institutions;
4. Public utilities; and
5. Others imbued with public interest
Contents of Treasurers Affidavit:
Sworn statement that at least 25% of the ACS has
been subscribed, and at least 25% of the total
subscription has been fully paid to him in actual cash
and/or in property the fair valuation of which is equal
to at least twenty-five (25%) percent of the said
subscription, such paid-up capital being not less than
five thousand (P5,000.00) pesos.
Basic documents needed to incorporate
According to Dean Abella (6):
1. Name Verification Slip
To verify whether the proposed
corporate name is still available.
2. Articles of Incorporation
3. Treasurers Affidavit
4. Registration Data Sheet
5. By-laws
6. Modus Operandi
A brief write up describing how the
corporation plans to operate.
According to Dimaampao & Escalante Reviewer (5):
1. Articles of incorporation;
2. Treasurers Affidavit;
3. Bank certificate of deposit covering the paid-up
capital;
4. Letter of authority to allow SEC to examine the
bank deposit and other corporate books and
records to determine the existence of paid-up
capital;
5. Certificate
of
Authority
from
proper
government agency when appropriate; and
6. Letter undertaking to change the proposed
name
if
already
adopted
by
another
corporation, partnership or association.
When to file By-laws
1. By-laws may be filed along with the articles of
incorporation, in which case they must be
signed by all the incorporators; or
2. By-laws may be filed within 30 days from the
issuance of the certificate of incorporation, in
which case it must be ratified by majority 1 of

1 NOTE: For brevity, whenever this reviewer uses the word

majority it is understood to be referring either to
stockholders representing majority of the outstanding capital
stock (in case of a stock corporation) or majority of the
members (in case of a non-stock corporation) as the case may
be. The same applies whenever 2/3 is used. Also, when the
words board resolution is used, it means majority vote of the
board of directors/trustees.

Page | 8

the stockholders or members and singed by

those voting for the same.
By-laws are not condition precedent to the forming of a
corporation; rather, they are condition subsequent.
However, failure to file the by-laws does not result in
an automatic dissolution.
Sec. 15 Forms of Articles of Incorporation
Self-explanatory.
Sec. 16 Amendment of Articles of Incorporation
Requisites for amendment:
1. Board Resolution and 2/3 Ratification;
2. The original and amended articles together
shall contain all provisions required by law to
be set out in the articles of incorporation;
3. Amendment must underscore/highlight the
changes made;
4. Certified under oath by the corporate secretary
and a majority of the directors or trustees
stating the fact that said amendment or
amendments have been duly approved by the
required vote of the stockholders or members;
5. Favorable endorsement of proper government
agencies;
6. Must be approved by the SEC.
Amendments shall take effect upon approval of the
SEC or from the date of filing if not acted within 6
months from the date of filing for a cause not
attributable to the corporation.
Take note that not all items in the Articles of
Incorporation may be amended. There are items which
are considered accomplished facts and part of the
corporations history (i.e. name of incorporators and
incorporating directors), hence cannot be amended.
Sec. 17 Grounds when articles of incorporation
or amendment may be rejected or disapproved
1. Articles of incorporation or any amendment
thereto not in accordance with the form
prescribed;
2. Purpose(s) of the corporation are patently
unconstitutional, illegal, immoral, or contrary to
government rules and regulations;
3. The treasurers affidavit concerning the amount
of capital stock subscribed and/or paid is false;
4. Percentage of ownership of the capital stock to
be owned by citizens of the Philippines has not
been complied with as required by existing
laws or the Constitution;
5. No
favorable
recommendation
of
the
appropriate government agencies.
Sec. 18 Corporate name
Apply IPL trademark principles by analogy.
Sec. 19 Commencement of corporate existence
Like a natural person, a corporation has a date of
birth, and that is on the date where the SEC issues a
certificate of incorporation under its official seal.

Sec. 20 De facto corporations

Classes of corporations according to legal status
1. De Jure Corporation;
2. De Facto Corporation; and
3. Corporation by estoppel
De Jure

De Facto

A
de
jure A
corporation
corporation is one where there exists
organized in strict a
flaw
in
its
or
substantial incorporation. The
compliance
with requisites for its
the law and whose existence are:
right to exist as a 1. The existence
corporation cannot
of a valid law
successfully
be
under which it
attacked even in a
may
be
direct proceeding.
incorporated;
2. An attempt in
good faith to
incorporate;
and
3. Use
of
corporate
powers
With respect to
attempt in good
faith
to
incorporate, the
SC has interpreted
that to mean that
at the very least, it
must
have
a
certificate
of
incorporation
issued by the SEC.
Moreover,
the
corporation must
act in good faith
not
only
in
attempting
to
incorporate
but
also in doing their
business.
Requires strict or Requires
merely
substantial
colorable
compliance
with compliance
with
the law.
the law.
It can neither be
attacked
collaterally nor in
a
direct
proceeding,
because there is
absolutely
no
ground to attack
its existence.

Corporation by
Estoppel
Corporation
by
estoppel refers to
a group of persons
who assume to act
as a corporation
knowing it to be
without authority
to do so. They are
estopped
from
claiming lack of
corporate life in
order
to
avoid
liability. They are
also
liable
as
general partners.
Requisites:
1. Representatio
n by a group
of
persons
that they are
a corporation,
when in truth
and in fact
they are not;
2. Reliance
on
said
representatio
n
by
third
persons; and
Dealings with third
persons

No compliance at
all.

Cannot
be
collaterally
attacked. It must
be by way of a quo
warranto
proceeding.
The
reason
is
for
stability
of
transactions.

It
cannot
be
attacked
collaterally since
both parties are
under
estoppel.
Neither can it be
attacked directly,
because there is
nothing to attack.

A
de
facto
corporation
has
the same powers,
rights,
privileges

Those who assume

to
act
as
a
corporation
knowing it to be

Page | 9

and liabilities of a
de jure corporation
until its certificate
of incorporation is
revoked. It is akin
to
a
voidable
contract, which is
valid
until
annulled.

Does not require

corporate dealings
and can assert its
status against the
whole world.

without authority
to do so shall be
liable
(active
members)
as
general partners,
meaning up to
their
personal
properties. Those
who
were
not
aware
(passive
partners)
are
liable only up to
their investment.
Generally requires
dealings.

Sec. 21 Corporation by estoppel

See notes on Sec. 20.
Sec. 22 Effects on non-use of corporate charter
and continuous inoperation of a corporation
A. Two (2) years
The corporation does not formally organize and
commence transaction within 2 years from the
issuance
of
the
certificate
of
incorporation.
Consequence is dissolution.
A corporation is deemed to have formally
organized when it has complied with the following
requisites:
1. Adoption of By-Laws;
2. Election of Board of Directors; and
3. Election of Corporate Officers.
Nevertheless, substantial compliance may suffice.
Hence, where the corporation has elected its Board of
Directors, its treasurer and secretary but not has yet to
elect its president, it is deemed to have formally
organized (Perez v. Balmaceda).
B. Five (5) years
The corporation commenced operation but
becomes continuously inoperative for a period of 5
years. This shall be a ground for the suspension or
revocation of its corporate franchise or certificate of
incorporation.
No automatic dissolution
Despite the wording of this provision, there is no
automatic dissolution under this section. There must be
notice and hearing.
Sec. 23 The board of directors or trustees
Doctrine of Centralized Management
The board of directors/trustees is the governing
body of the corporation and all corporate powers are
exercised by them.
General Powers of the Board

1.
2.
3.

Exercise all corporate powers;

Conducts all corporate business; and
Controls and holds corporate property

Classification of corporate powers based on who

exercises them
1. Acts that may be performed by the Board of
Directors alone or acts
of
ordinary
management
a. Appointment of officers;
b. Fixing of compensation, pension and
retirement benefits;
c. Delegation to corporate officers of
authority for administrative actions,
subject to certain limitations;
d. Declaration of dividends (except stock
dividends); and
e. Supervision of the whole business of
the corporation
2. Acts that may not be performed by the Board
of Directors without the concurrence of the
stockholders or acts not of ordinary
management
a. Power to extend or shorten corporate
term;
b. Power to increase or decrease capital
stock;
c. Power to incur, crease or increase
bonded indebtedness;
d. Power to deny pre-emptive right where
shares are issued in good faith in
exchange for property needed for
corporate purposes or in payment of a
previously contracted debt;
e. Sale of all or substantially all corporate
property and assets;
f. Power to invest corporate funds for a
purpose other than the corporations
primary purpose;
g. Power to declare stock dividends; and
h. Power to enter into management
contracts
3. Acts that may be performed by the
stockholders alone
a. Election of Board members;
b. Removal of Board members;
c. Delegation of power to amend the bylaws;
d. Fixing of the compensation of the
Board members;
e. Ratification of ultra vires acts; and
f. Fixing the value of no par value shares
What are acts of ordinary management?
If an act does not require concurrence of the
stockholders or is not exercised exclusively by
stockholders, it is an act of ordinary management.
Delegation of corporate powers
Acts of ordinary management may be delegated,
subject to certain restrictions:
1. The Board cannot delegate the entire power
of supervision and control. Hence, the Board
does not abdicate its entire power of
supervision and control, even if it enters into

Page | 10

2.
3.
4.

a management contract with another

corporation.
The Board cannot delegate discretionary
powers which by law, charter or by-laws are
exclusively vested with the Board.
The Board cannot delegate authority specially
delegated to it.
The Board may delegate to the Executive
Committee the approval of loans not
exceeding P20 million, otherwise, the latter
has no authority to grant loans.

Three-fold duties of the Board

1. Duty of Obedience;
This duty is violated when a director or
trustee willfully and knowingly vote for
or assent to patently unlawful acts of
the corporation. (Sec. 31)
2. Duty of Diligence; and
This duty is violated when a director or
trustee is guilty of gross negligence or
bad faith in directing the affairs of the
corporation. (Sec. 31)
A director may be liable for gross
negligence if he is a perennial
absentee, and a patently unlawful act
was adopted by the other board
members during his absence.
3. Duty of Loyalty
This duty is violated in the following
cases:
i. The director or trustee acquires
any personal or pecuniary
interest in conflict with his or
her duty as such director or
trustee (Sec. 31);
ii. A director, trustee or officer
attempts
to
acquire
or
acquires, in violation of his
duty, any interest adverse to
the corporation in respect of
any matter which has been
reposed in him in confidence,
as to which equity imposes a
disability upon him to deal in
his own behalf (Sec. 31); and
iii. A director, by virtue of his
office, acquires for himself a
business opportunity which
should
belong
to
the
corporation, thereby obtaining
profits to the prejudice of such
corporation (Sec. 34).
Business Judgment Rule
Acts and contracts entered into by the Board are
binding upon the corporation beyond the interference
of the courts. The courts are barred from intruding into
business judgments of corporations when the same are
made in good faith.
The Board and the officers may not be held
personally liable for acts or contracts done in the
exercise of their business judgment.

Exceptions to Business Judgment Rule, when

board members personally and solidarily liable:
1. Assent to patently unlawful acts;
2. Gross negligence/bad faith;
3. Acquires personal or pecuniary interest in
conflict with his duty;
4. Acquires business opportunity which should
belong to the corporation;
5. Consents to the issuance of watered stocks or
who, having knowledge thereof, did not
forthwith file with corporate secretary his
written objection thereto;
6. He agrees to hold himself personally and
solidarily liable; and
7. Specific provision of law
Doctrine of Apparent Authority
The doctrine of apparent authority provides that a
corporation will be estopped from denying the agents
authority if it knowingly permits one of its officers or
any other agent to act within the scope of an apparent
authority, and it holds him out to the public as
possessing the power to do those acts.
The doctrine of apparent authority does not apply if
the principal did not commit any acts or conduct which
a third party knew and relied upon in good faith as a
result of the exercise of reasonable prudence.
Moreover, the agents acts or conduct must have
produced a change of position to the third partys
detriment.
Apparent authority is derived not merely from
practice. Its existence may be ascertained through (1)
the general manner in which the corporation holds out
an officer or agent as having the power to act or, in
other words the apparent authority to act in general,
with which it clothes him; or (2) the acquiescence in his
acts of a particular nature, with actual or constructive
knowledge thereof, within or beyond the scope of his
ordinary powers. It requires presentation of evidence of
similar act(s) executed either in its favor or in favor of
other parties. It is not the quantity of similar acts which
establishes apparent authority, but the vesting of a
corporate officer with the power to bind the
corporation.
Qualifications of a director/trustee:
1. Must own at least 1 share of the capital stock
of the corporation of which he is a director;
2. Majority of the directors/trustees must be
Philippine residents;
3. Must not have been convicted by final
judgment of an offense punishable by more
than 6 years of imprisonment;
4. Must not have committed a violation of the
Corporation Code within 5 years prior to the
date of his election or appointment; and
5. Must possess the qualifications and none of the
disqualifications in the by-laws.
Ownership of share requirement
As far as the law is concerned, a person already
owns a share when he has subscribed thereto, whether
or not fully paid.

Page | 11

When a share is levied, its stockholder may be

removed from as president.
When a person is removed as president (by reason
of losing all the shares), he cannot be president again
merely by buying new shares. He must be elected
again.
Quorum
In board meetings, quorum is determined on the
basis of the number of directors and not on their
shareholdings (unlike stockholder meeting). Also,
quorum is determined based on the presence of the
directors at the start of the meeting. So if any of them
leaves, there will still be a quorum.
In the absence of a special provision in the by-laws,
quorum should be understood in its ordinary sense,
which is +1.
Collegial Body Rule
GR:The Board must act as a collegial body in a
meeting in making corporate decisions. Thus, one
director may not just call the others by phone to
consult them for a decision.
XPNs:
1. When the directors are the only stockholders;
2. The transaction is carried out in the name of
the corporation with approval of all the
stockholders;
3. A single stockholder owns substantially all the
shares; and
4. In the case of close corporations.
Sec. 24 Election of directors or trustees
Two voting methods:
1. Straight Voting
Stockholder can cast one vote per
share for each director.
2. Cumulative Voting
Stockholder can cumulate all his votes
and give to one candidate all his votes
or he may divide the votes among two
or more candidates.
Cumulative voting is devised to give
sufficient opportunity to minority
shareholders to secure representation
in the board.
Indispensable and cannot be prohibited
in stock corporations. It may be
allowed in non-stock corporations only
if the same is provided for in the
articles of incorporation. But there are
authorities that say that cumulative
voting cannot be done in non-stock
corporations.
Sec. 25 Corporate officers, quorum
Corporate Officers
1. President;
Must also be a director;
Cannot act concurrently as treasurer
and/or secretary
2. Treasurer;

3.
4.

May or may not be a director

Secretary; and
Must be a resident and a citizen of the
Philippines.
Others
A corporation usually has a chairman
whose function is to preside in
meetings.

Incompatible offices prohibited.

A person may hold two or more positions for as
long as they are compatible. For example, an
accountant cannot be an auditor at the same time.
Proxy
Proxy may refer to two things: (1) written authority
or (2) the person himself. Proxies shall be in writing,
signed by the stockholder or member and filed before
the scheduled meeting with the corporate secretary.
Unless otherwise provided in the proxy (continuing
proxy), it shall be valid only for the meeting for which it
is intended. No proxy shall be valid and effective for a
period longer than five (5) years at any one time.
Directors/trustees cannot attend or vote by proxy
at board meetings, unlike regular stockholders.
A proxy may be expressly or impliedly revoked,
except when it was issued pursuant to a contract.
Sec. 26 Report of election of directors, trustees
and officers
General Information Sheet to be filed within 30
days from appointment of officers. Appointment of
officers immediately done once the Board is
constituted.
Sec. 27 Disqualification of directors, trustee or
officers.
See discussion on Sec. 23.
Sec. 28 Removal of directors or trustees
Procedure to remove a director/trustee
1. Removal may be done in a regular or special
meeting. If special, a secretary or any
stockholder/member must call for a meeting.
Notice of time/place of such meeting, as well
as of the intention to propose such removal,
must be given by publication or by written
notice as prescribed in the Corporation Code;
2. 2/3 vote by the stockholders/members
Removal with or without cause, exception
A director may be removed with or without case,
except in the case of a minority director who can only
be removed for a valid cause.
Sec. 29 Vacancies in the office of director or
trustee
Possible reasons for a vacancy in the Board:
1. Removal;

Page | 12

2.
3.
4.
5.

Expiration of term;
Resignation;
Death;
Others

A vacancy in the board must be filled. Who may

fill the vacancy?
A. By the remaining board members:
If still constituting a quorum, at least a majority
of the members may fill any vacancy occurring
in the board for reasons other than removal or
expiration of term.
For example, one board member resigns.
The remaining stockholders, if still constituting
a quorum, may choose a replacement.
B. By the stockholders/members:
1. When the reason of vacancy is by expiration of
term or removal or grounds other than removal
or expiration of term but the remaining
directors do not constitute a quorum;
2. Vacancy may be filled by the remaining
directors/trustees but the board refers the
matter to the stockholders/members; and
3. Increase in the number of directors by
amending the articles of incorporation results
in vacancy.
Resignation of a director in a hold-over position
considered expiration of term
When a director/trustee in a hold-over position
resigns, it is tantamount to expiration of term and not
to resignation. Hence, the vacancy shall be filled by the
stockholders/members.
Sec. 30 Compensation of directors
GR: Directors not entitled to any compensation as such
directors, except for reasonable per diems.
What would be considered reasonable depends
on the resources of the corporation.
XPNs:
1. By-laws
provide
for
such
additional
compensation;
2. Majority vote of stockholders; and
3. When the director renders other services for
the corporation. (Operative phrase: as such
directors.)

forthwith file with corporate secretary his

written objection thereto;
Directors/trustees liable as trustee for profits
which otherwise would have accrued to the
corporation when
They attempt to acquire or acquire, in violation of
his duty, any interest adverse to the corporation in
respect of any matter which has been reposed in him
in confidence, as to which equity imposes a disability
upon him to deal in his own behalf.
Sec. 32 Dealings of directors, trustees or
officers with the corporation (Self-Dealing
Director)
Status of a contract of the corporation with a
director/trustee/officer is voidable, unless the
following requirements are complied with:
1. Presence of director/trustee not necessary to
constitute a quorum;
2. Vote of director/trustee not necessary to
constitute a majority vote;
3. Contract is fair and reasonable; and
4. In case of an officer, the contract has been
previously authorized by the Board.
When the first two requisites are not complied with,
the subject contract may nevertheless be ratified by a
vote of 2/3. In all cases, the contract must be fair and
reasonable.
Note that when the Board fixes the compensation
of officers, and one or more director is actually an
officer, they are considered self-dealing directors,
hence, the procedure under Sec. 32 must be complied
with.
Sec. 33 Contracts between corporations with
interlocking directors
Interlocking Director
An interlocking director is a director in two or more
corporations. A corporation has an interlocking director
if one (or some or all) of its directors is also a director
in another corporation.

In no case shall the total yearly compensation of

directors, as such directors, exceed 10% of the net
income of the corporation BEFORE income tax during
the preceding year.

GR: A contract between two or more corporations

having interlocking directors is valid.
XPNs: When there is fraud or if the contract is not fair
and not reasonable.

Sec. 31 Liability of directors, trustees or

officers

If the interest of the interlocking director in one

corporation is substantial (stockholdings more than
20% of the outstanding capital stock) and his interest
in the other corporation is merely nominal (20% or
less), apply Sec. 32 with respect to the latter or the
corporation in which he has nominal shares.

Directors/trustees may be held solidarily liable

for damages resulting from the following:
1. Willfully and knowingly vote for or assent to
patently unlawful acts of the corporation;
2. Guilty of gross negligence or bad faith;
3. Acquired any personal or pecuniary interest in
conflict
with
their
duty
as
such
directors/trustees; and
4. Consents to the issuance of watered stocks or
who, having knowledge thereof, did not

Sec. 34 Disloyalty of a director

Doctrine of Corporate Opportunity
A director, trustee or officer, by virtue of his office,
is prohibited from appropriating for himself a business
opportunity which should belong to the corporation,

Page | 13

thereby obtaining profits to the prejudice of such

corporation.

1.

Otherwise, he must account to the latter for all

such profits by refunding the same, unless his act has
been ratified by a vote of the stockholders owning or
representing at least two-thirds (2/3) of the
outstanding capital stock. This provision shall be
applicable, notwithstanding the fact that the director
risked his own funds in the venture.

2.

A director shall refund to the corporation all the

profits he realizes on a business opportunity
which:
1. The corporation is financially able to undertake;
2. From its nature, is in line with the corporations
business and is of practical advantage to it;
and
3. The corporation has an interest or a reasonable
expectancy.
Sec. 35 Executive Committee
Purpose of an Executive Committee
In practice, it is unrealistic for all Board members
to meet often and regularly, making it difficult to
muster a quorum at a time when the corporation must
act on a vital matter. Hence, an Executive Committee
may be created to act swiftly in behalf of the Board.
They are considered as agents of the Board.
By-laws must authorize creation of an Executive
Committee
The board, by itself, cannot create an Executive
Committee if nothing is stated in the by-laws.
Must be composed of at least 3 Board members
But there may also be additional members who are
not directors.
Matters that cannot be acted upon by an
Executive Committee:
1. Approval of any action for which shareholders
approval is also required;
2. The filling of vacancies in the board;
3. The adoption, amendment or repeal of by-laws;
4. The amendment or repeal of any resolution of
the board which by its express terms is not so
amendable or repealable; and
5. A distribution of cash dividends to the
shareholders.
From the enumeration, it can be concluded that
only day-to-day business operations may be left to the
sole discretion of the Executive Committee
Appeal not available, ratification
The decision of the Executive Committee is not
appealable to the board, but if it exceeds its authority,
the board may choose to ratify its acts.
Sec. 36 Corporate powers and capacity
Kinds of Powers of a Corporation

3.

Express Those expressly authorized by the

Corporation Code and other laws, and its
Articles of Incorporation.
Implied Those that can be inferred from or
necessary for the exercise of the express
powers.
Classifications of Implied Powers:
a. Acts in the usual course of business
b. Acts to protect debts owing to the
corporation
c. Acts which involve embarking in a
different business
d. Acts which are whole or in part
intended to protect or aid employees
e. Acts to increase the business
Guidelines to determine whether power is
implied:
a. Is it essential to the purpose of the
corporation?
b. Does
it
fall
under
the
five
classifications cited above?
Incidental Powers Those that are incidental to
the existence of the corporation.

General Powers of the Corporation

1. To sue and be sued;
2. Of succession;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation;
5. To adopt its by-laws;
6. For stock corporations, to issue and sell stocks
to subscribers and treasury stocks; for nonstock corporations, to admit members;
7. To purchase, sell or deal with real properties;
Note that a corporation cannot just
acquire any property it wants. The
property
must
be
essential
or
necessary to the accomplishment of its
corporate purpose.
Acquisition of property does not require
concurrence
of
the
stockholders,
provided that such acquisition is in
furtherance of or essential to the
accomplishment of its purpose.
8. To enter into merger or consolidation;
9. To make reasonable donations for public
welfare, hospital, charitable, cultural, scientific,
civic or similar purposes;
10. To establish pension, retirement and other
plans for the benefit of its directors, trustees,
officers and employee;
11. To exercise other powers essential or necessary
to carry out its purposes.
Specific Powers of the Corporation
1. Increase or decrease corporate stock;
2. Incur, create or increase bonded indebtedness;
3. Deny pre-emptive right;
4. Sell,
dispose,
lease,
encumber all
or
substantially all of corporate assets;
5. Purchase or acquire shares;
6. Invest corporate funds in another corporation
or business for other purposes other than its
primary purpose;
7. Declare dividends out of unrestricted retained
earnings;

Page | 14

8.
9.

Enter into management contracts with other

corporations;
Amend articles of incorporation.

Sec. 37 Power to extend of shorten corporate

term
General procedure
1. Board resolution, and
2. Ratification by 2/3 vote (with prior written
notice of the proposed action)
Extension fee
1/5 of 1% of the ACS
When intent of shortening corporate term is
obviously to dissolve the corporation
SEC will not accept the application without
presenting a BIR clearance.
Sec. 38 Power to increase or decrease capital
stock;
incur,
create
or
increase
bonded
indebtedness
General procedure
1. Board resolution,
2. Ratification by 2/3 vote (with prior written
notice of the proposed action), and
3. SEC approval
Furthermore, a Directors Certificatesigned by
a majority of the directors of the corporation and
countersigned by the chairman and secretary of the
stockholders meetingshall be submitted to the SEC.
The contents of a Directors Certificate are:
1. That the requirements of this section have
been complied with;
2. The amount of the increase or diminution of
the capital stock;
3. If an increase of the capital stock, the amount
of capital stock or number of shares of no-par
stock thereof actually subscribed, the names,
nationalities and residences of the persons
subscribing, the amount of capital stock or
number of no-par stock subscribed by each,
and the amount paid by each on his
subscription in cash or property, or the amount
of capital stock or number of shares of no-par
stock allotted to each stock-holder if such
increase is for the purpose of making effective
stock dividend therefor authorized;
4. Any bonded indebtedness to be incurred,
created or increased;
5. The actual indebtedness of the corporation on
the day of the meeting;
6. The amount of stock represented at the
meeting; and
7. The vote authorizing the increase or diminution
of the capital stock, or the incurring, creating
or increasing of any bonded indebtedness.
No decrease of the capital stock shall be approved
by the SEC if its effect shall prejudice the right of
corporate creditors.

In case of increase of capital stock, another

treasurers affidavit is needed. The contents are similar
to the one filed in case of incorporation. The difference
is that this time, the basis of the 25% is the increased
amount.
Example: Corporation X has an ACS of P1 million.
Later on, it decided to increase the ACS to P5 million,
so now the treasurers affidavit must state that 25% of
the P4 million has been subscribed and 25% of the
newly subscribed amount must be paid.
Documentary requirements for the approval of
the increase of the authorized capital stock (SEC
Rules as of June 13, 2013):
1. Certificate of Increase of Capital Stock;
2. Treasurers Affidavit;
3. List of stockholders as of the date of the
meeting approving the increase;
4. Amended articles of incorporation;
5. Notarized Directors Certificate2 certifying:
a. The amendment of the articles of
incorporation increasing the ACS;
b. The votes of the directors and the
stockholders; and
c. The date and place of the stockholders
meeting, which shall be signed by a
majority of the directors and the
corporate secretary;
6. Endorsement from the appropriate government
agencies; and
7. Secretarys Certificate stating that no action or
proceeding has been filed or is pending
involving an intra-corporate dispute or claim by
any person or group against the directors,
officers or stockholders of the corporation
Documentary requirements for the approval of
the decrease of the authorized capital stock
1. Certificate of Decrease of Capital Stock;
2. Audited financial statements as of last fiscal
year, stamped received by the SEC and the
BIR;
3. If it involves a return of capital; Long form audit
report and list of creditors with the amount due
to each certified by the auditor or certified
under oath by company accountant and written
consent of each creditor;
4. List of stockholders before and after the
decrease, as certified by the corporate
secretary;
5. Amended articles of incorporation;
6. Notarized Directors Certificate; and
7. Publishers affidavit of the publication (once
only) of the decrease of capital in a newspaper
of general circulation.
Bonded Indebtedness
A bond is a promissory note where the repayment
period exceeds 5 years.

2The contents of the directors certificate here are different

from those provided under Sec. 38. Pero since mas madali
imemorize to, ito na lang ang tandaan.

Page | 15

Sec. 39 Power to deny pre-emptive right

Pre-emptive right
Right of shareholders to subscribe to all issues or
disposition of shares of any class in proportion to their
shareholdings.
The purpose is to maintain the relative and
proportionate voting strength and control of existing
shareholders. It is aimed to maintain the existing ratio
of the shareholders interest and voting power in the
corporation.
Issues or disposition
According to the SEC, the pre-emptive right covers
all issues and disposition. The prevailing opinion is that
it includes issuance of the unsubscribed shares that are
part of the original capital stock and the increase of
capital stock. It also covers selling of treasury shares.
The Benito v. SEC ruling is no longer controlling, since
the applicable law then was the Old Corporation Code
where pre-emptive right was not expressly granted.
When pre-emptive right is unavailable:
1. Right denied by articles of incorporation;
2. Shares are issued in compliance with laws
requiring stock offerings or minimum stock
ownership by the public;
3. When shares are issued in good faith with the
approval of the stockholders representing 2/3
of the outstanding capital stock, in exchange
for property needed for corporate purposes or
in payment of a previously contracted debt;
and
4. Shares are issued pursuant to stock option
plans where employees become stockholders.
Pre-emptive right transferrable
A pre-emptive right, being in the nature of a
property right, is transferrable.
Sec. 40 Sale or other disposition of assets
General procedure for sale or other dispositions
of all or substantially all corporate property and
assets
1. Board Resolution, and
2. Ratification by 2/3 vote (with prior written
notice of the proposed action)
How do we know if the sale or other disposition
involves all or substantially all corporate
property and assets?
If the corporation would be rendered incapable of
continuing the business or accomplishing the purpose
for which it was incorporated.
Example: A paper factory is not deemed to have
sold all/substantially all its property if it sold all its
stocks of papers, because it is pursuant to the ordinary
course of its business. But if it sold all its machinery
and equipment used to make paper, then it is deemed
to have sold all/substantially all its corporate property.

Even if a corporation sells or disposes of all or

substantially all its corporate property/assets, it is not
considered to be as such in the context Sec. 40 if the
intent
is
to
immediately
buy
replacement.
Consequently, ratification of the stockholders/members
is not necessary.
Limitations
1. The corporation may not use this power as a
devise to freeze out the minority, such as by
selling all of corporate properties with the
intent of forming a new corporation without the
minority stockholders.
2. The assets should be sold at a fair and
reasonable value.
3. The sale must be done in good faith and for a
legitimate purpose.
GR: The buyer does not assume the responsibilities of
the seller corporation.
XPNs:
1. If the buyer expressly or impliedly assumes
liability;
2. If there is merger and consolidation;
3. If there is fraud;
4. If the buyer is only a continuation of the seller
corporation; and
5. Bulk Sales Law
Sec. 41 Power to acquire own shares
Requirements for a corporation to acquire own
shares:
1. Must be for a legitimate corporate purpose(s);
and
2. Corporation has sufficient surplus profits which
would be used to acquire its own shares.
Note that buying back redeemable
shares do not require surplus profits.
Possible reasons why a corporation would
acquire its own shares:
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
in the exercise of their entitled to payment for
their shares pursuant to their appraisal right.
NB: The enumeration above is not exclusive, because the law
says but not limited to the following cases. So for other
instances, just apply the two-fold requisites: (a) legitimate
purpose; and (b) sufficient surplus profits.

Remedy of a corporation about to be insolvent

The corporation may convince creditors to convert
their credits into shares. In such case, the debt would
become a capital contribution.

*Intent to replace sold property and assets

Page | 16

Sec. 42 Power to invest corporate funds in

another corporation or business or for any other
purpose
General procedure
1. Board resolution, and
2. Ratification by 2/3 vote (with prior written
notice of the proposed action)
Note that Sec. 42 does not cover investment of
corporate funds if made pursuant to the corporations
primary purpose. For example, an investment
companys primary purpose is to invest in other
companies. Hence, there is no need for ratification in
such case.
Rules:
1. If the investment is for a primary purpose, no
need to be ratified by the stockholders.
2. If investment is for a secondary purpose,
ratification
is
still
needed,
because
stockholders make investments with the
primary purpose of the corporation in mind.
3. If investment is neither for a primary nor
secondary purpose, there must be an
amendment of the Articles of Incorporation,
otherwise it is an ultra vires act.
Sec. 43 Power to declare dividends
Dividends
Dividends are portions of corporate profit set aside,
declared and ordered by the directors to be paid to
stockholders on demand or at a fixed time in
proportion to their shareholding.
Types of dividends
1. Cash One in which dividends are paid in
money.
2. Property Dividends that are paid in property
instead of cash where the surplus is in that
form and it is practicable to so distribute them
among the shareholders.
3. Stock Surplus profits are distributed to the
stockholders in the form of shares of stock. It
involves conversion of surplus into capital.
4. Script It is a certificate issued to a
stockholder entitling him to money or other
benefits at a future time. It is akin to a
promissory note.
5. Bond Bonds of the corporation which it
issues as payment of dividends.
6. Liquidating Distribution of assets of the
corporation upon its dissolution.
When ratification is required/not required
Only a board resolution is necessary to declare
cash or property dividends.
But if a corporation plans to declare stock
dividends, the board resolution must also be ratified by
the stockholders, because it dilutes the investment of
stockholders.
Declaration
dividends

of

treasury

shares

as

property

In case of declaration of treasury shares as

property dividends, the corporation can only do so if
the amount of the retained earnings previously used to
support their acquisition has not been subsequently
impaired by losses. Generally, a corporation can
reacquire its own shares for legitimate corporate
purpose/s provided it has sufficient amount of
unrestricted retained earnings to support the cost of
said shares.
Stock Dividends; why it requires stockholder
approval
Declaration of stock dividends is akin to a forced
purchase of stocks. Look at it this way: When a
corporation
distributes
cash
dividends,
the
stockholders are given cash from the surplus profits.
But when the corporation declares stock dividends,
instead of giving cash from the surplus profits, the
money is used to contribute to capital and the
stockholders are given additional shares.
By receiving stock dividends, the stockholders are
forced to exchange the monetary value of their
dividend for capital stock, and the monetary value they
forego is considered the actual payment for the original
issuance of the stocks given as dividends.
Stock dividends are not subscribed to. They are
merely issued.
Illustration of Stock Dividends
Capsule Corp. has a P1 million authorized capital
stock with a par value of P1 per share. Bulma
subscribed to 300,000 shares. Later on, Capsule Corp.
declared 20% stock dividends.
20% of 300,000 is 60,000. Hence, Bulma now
has 360,000 shares of Capsule Corp.
o Note that Bulmas subscribed shares
are still 300,000. Stock dividends are
not subscribed to.
Discretion of board
Declaration of dividends is discretionary upon the
board and cannot be compelled by the stockholders or
even the courts. However, stock corporations are
prohibited from retaining surplus profits in excess of
100% of their paid-in capital, subject to the following
exceptions:
1. If justified by definite corporate expansion
project/programs approved by the board;
or
2. 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. It can be clearly shown that such retention
is necessary under special circumstances
obtaining in the corporation as for
example, when there is a need for special
reserve for probable contingencies.
Dividends are not civil fruits
Civil fruits accrue daily, whereas dividends do not.

Page | 17

Types of surplus
1. Earned surplus/surplus profit Includes (1)
Net operating profits and (2) Non-operating
profits arising from sale of fixed assets,
investment and other non-recurring profits
transactions.
2. Paid in surplus Arises from the sale of par
value shares at a premium and the sale of no
par value shares above its stated or issued
value.
a. NB: Paid in surplus arising from sale of
par value shares at a premium may be
declared as stock dividends but not
paid in surplus arising from sale of no
par value shares above its issued
value.
3. Revaluation or appraisal surplus Surplus
arising from the marking up of the value of the
assets in the books of the corporation.
a. May not be declared as dividends,
because profits are yet to be realized.
4. Reduction Surplus Surplus arising from the
reduction of the legal or stated capital.
a. For example, Corporation X has an
authorized capital stock of P1 million,
P700,000 of which already paid. It then
reduced its authorized capital stock to
P500,000. The P200,000 would be the
reduction surplus.
Who are entitled to dividends?
The stockholders of record at the time the
dividends were declared. It is immaterial when the
dividends were actually paid.
Sec. 44 Power to enter into management
contract
General procedure
1. Board resolution, and
2. Ratification by majority vote
This procedure is required from both the managed
and managing corporation.
When ratification by 2/3 vote of the managed
corporation needed
1. Where
a
stockholder
or
stockholders
representing the same interest of both the
managing and the managed corporations own
or control more than 1/3 of the total
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.
Extent of the managing corporations powers
The powers of the managing corporation are
limited to those administrative in nature. Furthermore,
the Board of the managed corporation may reverse or
countermand the acts of the managing corporation.

Other corporate powers not mentioned in the

Code
Power to guarantee debts
GR: The corporation may not enter into contracts
guaranteeing debts of others. It is an ultra vires act.
XPNs:
1. When necessary for or in furtherance of the
accomplishment of a primary purpose; or
2. When it is the primary purpose of the
corporation, such as a surety company.
Power to form a partnership
GR: A corporation has no power to form a partnership.
XPNs:
1. Expressly authorized by the Articles of
Incorporation;
2. Temporary for the accomplishment of some
particular purpose; and
3. The partnership agreement expressly provides
that the management of the business is
reserved to the corporation.
Sec. 45 Ultra vires acts of corporations
Ultra vires act
An act committed outside the purpose for which
the corporation is created as defined by the law and its
organization, and therefore beyond the powers
conferred upon it. Not illegal per se.
May be ratified, requisites:
1. ALL stockholders must consent;
2. The rights of the state are not involved;
3. The creditors are not prejudiced; and
4. The act or contract must be wholly executed.
Legal status of an ultra vires contract
1. If wholly executory (meaning the parties have
yet to comply with their respective obligations),
it is unenforceable, and either party may
invoke ultra vires.
2. If partly executory (meaning one party has
complied while the other has not), the party
who has complied with his obligation has a
right of action against the other party who is
not allowed to invoke ultra vires.
3. If wholly executed, the contract cannot be
challenged anymore.
Who may question ultra vires acts of the
corporation?
1. The State;
2. Stockholders (via derivative suit); and
3. Corporate creditors, but only if:
a. Ultra vires act constitutes fraudulent
conveyance of corporate assets;
b. Where the transaction will deplete the
legal capital;
c. When there will be a violation of the
trust fund doctrine;
d. In case of violation of the Bulk Sales
Law; and
e. In case of violation of loan agreements.

Page | 18

Suits by stockholders/members
Derivative Suits
Those brought by one or more stockholders or
members in the name and on behalf of the
corporation to redress wrongs committed
against it, or protect/vindicate corporate rights
whenever the officials of the corporation refuse
to sue, or the ones to be sued, or has control of
the corporation.
Requisites:
1. He was a stockholder or member at the
time the acts or transactions subject of
the action occurred and at the time the
action was filed;
2. He exhausted all remedies available
under the articles of incorporation, bylaws, laws or rules governing the
corporation or partnership to obtain the
relief he desires;
In one case, it was held that
there is no more need for
exhaustion of remedies if the
erring director controls the
corporation,
for
such
exhaustion would be useless.
3. No appraisal rights are available for the
act or acts complained of; and
4. The suit is not a nuisance or
harassment suit.

A. Pre-Incorporation
The by-laws may be filed along with the articles of
incorporation and other pre-incorporation documents.
In such case, the by-laws shall be approved and signed
by all the incorporators.
B. Post-Incorporation
The by-laws must be filed within 1 month after
receipt of the certificate of incorporation. In such case,
the by-laws shall be approved by a majority vote of the
stockholders or members. It must be signed by the
stockholders/members
voting for them.
(Note:
According to Sir, sometimes its impractical to convene
all stockholders/members in that short span of time, so
the signature of all incorporators may still suffice. But
apply the general rule anyway.)
Must be certified, countersigned
The copy of the by-laws to be filed with the SEC
must be duly certified to by a majority of the directors
or trustees and countersigned by the corporate
secretary.
Additional requirement for special corporations
Take note that there are special corporations which
cannot directly file or amend its by-laws without a
favorable endorsement of appropriate government
agencies.

Individual Actions
Those brought by the shareholder in his own
name against the corporation when a wrong is
directly inflicted against him.

No automatic dissolution upon failure to submit

by-laws
The filing of by-laws is a condition subsequent, but
failure in which is not a ground for an automatic
dissolution of the corporation. There must still be a
hearing.

Representative Actions
Those brought by the stockholder in behalf of
himself and all other stockholders similarly
situated when a wrong is committed against a
group of stockholders.

Binding effect
The by-laws bind the corporation, stockholders,
members and those having direction, management and
control of its affairs. But it does not bind third persons
who have no actual knowledge of its provisions.

Sec. 46 Adoption of by-laws

By-laws
By-laws are rules of action adopted by a
corporation for its internal government and for the
regulation of conduct, and prescribe the rights and
duties of its stockholders or members towards itself
and among themselves in reference to the
management of its affairs.
Requisites for validity of by-laws
1. Must be consistent with the Corporation Code,
law and other regulations;
2. Must be consistent with the articles of
incorporation;
3. Must not be contrary to morals or public policy;
and
4. It must not disturb vested rights, impair
contract or property rights of stockholders or
members or create obligations not sanctioned
by law.
There are two ways to file the by-laws:

By-laws shall be effective only upon the issuance

by the SEC of a certification that they are not
inconsistent with the Corporation Code.
Sec. 47 Contents of by-laws
The enumeration in Sec. 47 refers to the minimum
and mandatory provisions that must appear in the bylaws.
Sec. 48 Amendments to by-laws
General procedure
1. Board Resolution;
2. Approved
by
stockholders
representing
majority of the outstanding capital stock; and
3. SEC Approval
Delegation to the Board
The sole authority to amend the by-laws may be
delegated to the Board by a 2/3 vote of the
stockholders. The delegation may be revoked by
majority vote.

Page | 19

As can be gleaned from this section, the law does

not favor the delegation of the authority to the Board,
hence the stringent requirement to delegate and the
lax requirement to revoke the delegation.
Certification
A copy of the amendment or new by-laws to be
filed with the SEC shall be attached to the original bylaws, and it must be duly certified under oath by the
corporate secretary and a majority of the directors or
trustees.
Sec. 49 Kinds of meetings
Meetings may either be regular or special.
Sec. 50 Regular and special
stockholders or members

meetings

of

Sec. 51 Place and time

stockholders or members

of

meetings

of

Sec. 53 Regular and special

directors or trustees

meetings

of

Sec. 52 Quorum in meetings

Sec. 54 Who shall preside at meetings

Regular Meetings
1. Held annually (usually for the purpose of
electing directors and discussing yearly
financial performance of the corporation;
2. 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;
3. In the city or municipality where the
principal office of the corporation is
located, and if practicable in the principal
office of the corporation. This applies whether
the meeting is regular or special. For purposes
of this rule, Metro Manila shall be considered a
city; and
4. Written notice shall be sent to all
stockholders/members at least 2 weeks prior to
the meeting, unless a different period is
required by the by-laws. Notice requirement
may be waived either expressly or impliedly.
The written notice shall contain the
time and place of the meeting.
5. Matters that are taken up during annual
meetings:
a. Management report;
b. Election of the Board of Directors;
c. Election of officers; and
d. Other matters
- Acts which require special
notice to stockholders (i.e. sale
of
all/substantially
all
of
properties,
merger/consolidation,
etc.)
may be taken up in the regular
meeting, provided it is part of
the notice.

Special Meetings
1. Held at any time deemed necessary or as
provided in the by-laws;
2. In the city or municipality where the
principal office of the corporation is
located, and if practicable in the principal
office of the corporation. This applies whether
the meeting is regular or special. For purposes
of this rule, Metro Manila shall be considered a
city; and
3. Written notice shall be sent to all
stockholders/members at least 1 week prior to
the meeting, unless a different period is
required by the by-laws. Notice requirement
may be waived either expressly or impliedly.
Board Meetings
1. Held monthly, unless the by-laws provide
otherwise (if regular) or at any time upon the
call of the president or as provided in the bylaws (if special);
2. May be held anywhere in the world;
3. Notice shall be sent to every director/trustee
at least 1 day prior to the meeting, unless
otherwise provided by the by-laws.
Who
is
authorized
to
call
a
stockholders/members meeting?
1. As a rule, such person must be stated in the
by-laws;
2. In the absence thereof, the Board;
3. Otherwise, any stockholder/member may file a
petition with the SEC asking for authority to
call a meeting.
Who shall preside at meetings?
As a rule, the President whether it is a
stockholders/members meeting or a Board meeting.
Otherwise, what the by-laws provide.
What is the effect if there is a defect in the
holding or calling of the meeting (e.g. wrong
place, defective notice, etc.)?
All proceedings had and any business transacted
shall
not
be
invalidated,
PROVIDED
all
stockholders/members are present or duly represented
at the meeting.
What constitutes a quorum?
A. Stock Corporation
Stockholders representing a majority of the
outstanding capital stock, unless otherwise
provided for in the Code or in the by-laws.
NB: Hence, it is possible for a single person to
constitute a quorum.
B. Non-Stock Corporation
Majority of the members, unless otherwise
provided for in the Code or in the by-laws.
C. Board Meetings
Majority of the directors/trustees, unless
otherwise provided for in the by-laws.
NB: In election of officers, the vote of a
majority of the Board is required.
Other notes on quorum

Page | 20

1.

2.

3.

Unless otherwise provided for in this code

Note that there are matters that cannot be
acted upon by a mere majority, such as those
which requires 2/3 votes.
Quorum is determined at the start of the
meeting. So if pag may umalis while the
meeting is ongoing, problema na niya yun,
and theres still a quorum.
A provision in the by-laws stating that anyone
present in the meeting shall constitute a
quorum is valid, except those which specifically
requires majority or 2/3.

Sec. 55 Right to vote of pledgers, mortgagors

and administrators
GR: Pledgors and mortgagors of their shares of stock
shall retain the right to attend and vote at meetings.
XPN: Such right is expressly given to the pledgee or
mortgagee in writing and recorded on the corporate
books.
Executors, administrators, receivers and other legal
representatives of a stockholder do not need proxies to
attend meetings and vote.
Sec. 56 Voting in case of joint ownership of
stock.
Steve and Tony
Both Steve and Tony must attend and vote
together,
unless
they
have
a
proxy.
Furthermore, such proxy shall be signed by
both Steve and Tony.
Steve and/or Tony
Either Steve or Tony can attend and vote. And
either one of them alone can execute a proxy.
Sec. 57 Voting right for treasury shares
Treasury shares have no voting rights and cannot
participate in dividends.
Sec. 58 Proxies
Requisites for a valid proxy
1. Must be in writing;
2. Signed by the stockholder/member;
3. Must be filed before the scheduled meeting
with the corporate secretary (in practice, its
usually 5 days prior to the meeting); and
4. Unless otherwise provided in the proxy, it shall
be valid only for the meeting for which it is
intended. No proxy shall be valid and effective
for a period longer than 5 years at any one
time.
Proxies cannot be prohibited in stock corporations,
but it may be dispensed with in non-stock corporations.
Continuing Proxy
One which is valid not only for one meeting but
until it is revoked, provided that its validity and
effectivity shall not exceed 5 years.

Revocation of proxy
Revocation may either be express or implied. It is
implied when, for instance, a proxy was executed for a
particular meeting, but the stockholder nevertheless
appeared in the same meeting.
GR: Proxy may be revoked at any time.
XPN: When it is coupled with an interest.
Sec. 59 Voting trusts
Requisites
1. It must be in writing and notarized;
2. It must specify the terms and conditions;
3. GR: It must not exceed the period of 5 years at
any time;
XPN: When voting trust specifically
required as a condition in a loan
agreement, it may exceed 5 years but
shall automatically expire upon full
payment of the loan.
Procedural requirements
1. Execution and notarization of the voting
trust agreement;
2. A certified copy of such agreement shall be
filed with the (a) corporation and (b) SEC,
otherwise the agreement is void;
3. Certificate
or
certificates
of
stock
surrendered and cancelled;
4. A new certificate shall be issued in the name
of the trustee stating that they are issued
pursuant to the voting trust agreement;
5. The transfer shall be noted in corporate
books;
6. 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.
Possible purposes for entering into a voting trust
agreement
1. One of the ways to concentrate shareholder
control in one or few persons;
2. Used in corporate reorganization where it may
be used to give control to former creditors
reduced to stockholder status;
3. It may also be used by founders or
incorporators to retain control; and
4. It may be used to distribute voting power
disproportionately to share ownership.
Who are entitled to dividends?
In a voting trust agreement, the trustor is regarded
as the beneficial owner of the shares, while the trustee
is regarded as the legal owner. Hence, the right to
dividends still belongs to the trustor.
Sec. 60 Subscription contract
How may a person become a stockholder?
1. Subscription contract;

Page | 21

2.
3.

A subscription contract is any contract

for the acquisition of unissued stock in
an existing corporation or a corporation
to be formed.
A subscriber becomes a stockholder
upon perfection of the subscription
contract.
Purchase of treasury shares from the
corporation; and
Transfer from the stockholders
A transferee becomes a stockholder
upon the recording of the transfer in
the Stock and Transfer Book

Contents of a subscription contract

1. Number of shares to be subscribed;
2. Value per share; and
3. Terms of payment.
Must be in the stock and transfer book
As a rule, only persons whose ownership are
registered in the stock and transfer book are
considered stockholders of record. Mere inclusion in the
GIS is insufficient.
Trust Fund Doctrine is violated in the following
instances:
1. Corporation condones payment of unpaid
subscription;
2. Payment of dividends sans surplus profits;
3. Properties transferred in fraud of creditors;
4. Properties are disposed or undue preference is
given to some creditors while the corporation is
insolvent; and
5. Capital stock is decreased, having the effect of
relieving the stockholders of their obligation to
pay their respective subscription.
A stockholder has no right to demand for the return
of his investment until the liquidation of the
corporation.
Sec. 61 Pre-incorporation subscription
We know that there can only be 15 incorporators
at most. What if others want to be corporators?
They
would
sign
a
pre-incorporation
subscription agreement.
Revocation of pre-incorporation subscription
GR: A pre-incorporation subscription agreement shall
be irrevocable for a period of 6 months from the date
of subscription.
XPNs:
1. All other subscribers consent to the
revocation; and
2. Failure of the corporation to materialize.
No pre-incorporation subscription may be revoked
after the articles of incorporation have been submitted
to the SEC.
For example, more than 6 months have already
passed. Under such circumstance, revocation is
already allowed even without the consent of
the others. But if the articles of incorporation

have already been submitted, revocation is no

longer allowed.
Sec. 62 Consideration for stocks
Key points to remember
1. The most common consideration for stocks is
cash. Where the consideration is other than
actual cash or consists of intangible property,
the valuation thereof shall initially be
determined by the incorporators/Board, subject
to SEC approval.
2. Property (tangible or intangible) is allowed to
be used as a consideration, if the following
requisites are present:
a. Property actually received by the
corporation;
b. Property is necessary or convenient for
its use and lawful purposes;
c. Subject to fair valuation; and
d. Valuation initially determined by the
incorporators/board of directors and
approved by the SEC.
3. Shares of stock shall not be issued in exchange
for promissory notes or future services. But
labor performed or past services are allowed.
4. One of the allowable considerations is
Amounts
transferred
from
unrestricted
retained earnings to stated capital. This refers
to the issuance of stock dividends.
How issued price of no-par value shares fixed
1. Articles of Incorporation;
2. Board resolution pursuant to authority granted
by the articles of incorporation or by-laws; or
3. Stockholders representing at least a majority of
the outstanding capital stock at a meeting duly
called for the purpose will fix the issued value.
With respect to par value shares, it should be noted
that the issued value may be higher than its par value,
because a share is also a property that may appreciate
in value. But the issued value cannot be lowered less
than its par value, otherwise it would be considered a
watered stock.
Sec. 63 Certificate of stock and transfer of
shares
How transfer is made
A. When share is represented by a certificate
1. Indorsement;
However, a deed of assignment may be
a substitute to indorsement.
2. Delivery; and
3. The transfer must be recorded in the corporate
books to be valid to the corporation and third
parties.
B. When share is not represented by a certificate
1. Deed of assignment; and
2. The transfer must be duly recorded in the
corporate books.
NB: According to Dean Abella, the first mode is proper
when the transfer is made through the stock exchange,
while the second mode is proper when the shares are not

Page | 22

listed or although listed but not traded through the stock

exchange.

Watered stocks are tgise that are issued for a

consideration less than the par or issued price thereof.

Recording in the corporate books only needed

for absolute transfers
Hence, registration in the stock and transfer book
is not necessary if the conveyance is by way of chattel
mortgage. However, there must be due registration
with the Register of Deeds.

Not per se illegal

Issuance of watered stocks are not per se illegal.
But it has the consequence of making any director or
officer of a corporation consenting to the issuance of
watered stocks, 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.

Remedies if corporate officers unduly bar the

registration of the transfer
1. Mandamus;
2. Specific performance;
3. Damages; and
4. Rescission.
Sec. 64 Issuance of stock certificates
Requisites
1. The certificate must be signed by the president
or vice president, countersigned by the
secretary or vice secretary;
2. The certificate must be sealed with the seal of
the corporation;
3. The certificate must be delivered;
4. The par value, as to par value share or full
subscription as to no par value shares must
first be fully paid; and
5. The original certificate must be surrendered
where the person requesting the issuance of a
certificate is a transferee from the stockholder.
No full payment? No certificate of stock!
This is an absolute rule. Unless the subscriber has
paid the full amount of his subscription together with
interest and expenses (in case of delinquent shares),
he cannot be issued a certificate of stock. But prior to
such full payment, he is considered a stockholder
enjoying all rights pertaining thereto, unless his shares
become delinquent.
Doctrine of Indivisibility of Subscription
A subscription agreement is an indivisible contract,
the consequences of which are:
1. If a stockholder has paid a portion of his
subscription, he cannot demand to be issued a
certificate of stock representing the portion of
shares he has paid.
2. Even though a stockholder has paid a portion
of his subscription, if he fails to pay in full when
required, ALL his shares will become
delinquent.
As a rule, stockholders are free to transfer their
shares, but if they have unpaid subscriptions, the
transfer would need the consent of the Board, because
an unpaid subscription creates a debtor-creditor
relationship between the stockholder and the
corporation.
Sec. 65 Liability of directors for watered stocks
Watered Stocks

Hence, for a director or officer to evade solidary

liability, it is not enough for him to maintain his silence.
He must file a written objection with the corporate
secretary.
Purchase of stocks
The prohibition on watered stocks does not cover
purchase of stocks from another stockholder.
Sec. 66 Interest on unpaid subscriptions
When are subscribers liable to pay interest on
their unpaid subscriptions from the date of
subscription?
When required by the by-laws.
At what interest rate?
That which is fixed by the by-laws. If the by-laws
did not fix the interest rate (but requires interest to be
paid), the rate shall be deemed to be the legal rate,
which at present is pegged at 6%.
Sections 67 to 72 Delinquency
When should payment of unpaid subscription
(plus interest if any) be collected?
1. On or before the date provided in the
subscription agreement;
2. Date stated in the call made by the Board (if
date not specified, within 30 days from the
call); and
3. When the corporation becomes insolvent.
Failure to pay on such dates or 30 days after call
(where date of payment not specified) shall render the
stocks covered by said subscription shall thereupon
become delinquent and shall be subject to delinquency
sale, unless the board of directors orders otherwise.
Effects of delinquency
1. No voting rights (right to vote and be voted
for);
2. Not included in quorum (as a consequence of
losing voting rights);
3. No right of representation at any stockholders
meeting;
4. Loses all proprietary and remedial rights,
EXCEPT the right to dividends which he shall
enjoy until the eventual sale of the stock.

Page | 23

While the right to dividends is not lost,

they are applied to the stock holders
debt.
Stock dividends are withheld.

Remedies to enforce payment of delinquent

shares:
1. Delinquent Sale;
2. Judicial action/collection suit with the RTC;
3. Collection from cash dividends and withholding
of stock/property dividends.
Procedure for Delinquency Sale
1. Board Resolution ordering the sale of
delinquent shares stating the amount due on
each subscription plus all accrued interest, and
the date, time and place of the sale which shall
not be less than 30 days nor more than 60
days from the date the stocks become
delinquent;
2. Notice and a copy of the board resolution to
be sent to every delinquent stockholder either
personally or by registered mail;
3. Publication. The notice shall be published
once a week for 2 consecutive weeks in a
newspaper of general circulation;
4. Public auction. Delinquent stock shall be sold
to such bidder who shall offer to pay the full
amount of the balance of the subscription (plus
interest, costs of advertisement and expenses
of sale) for the smallest number of shares or
fraction of a share. Winning bidder shall be
issued a certificate of stock. 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.
5. Treasury Shares. No bidder? Corporation
buys and the shares shall become treasury
shares.
Winning bidder is the one willing to pay the full
amount of the balance of the subscription plus
interest, advertisement costs and expenses of
sale for the smallest number of shares. How is
this justified?
Suppose that the balance to be paid is P100,000
and the number of shares is 100,000. Bidder A wants
100,000 shares; Bidder B wants 80,000 shares; and
Bidder C wants 60,000 shares. This would translate as
follows:
Bidder A would pay P1.00 (P100k/100k) per
share;
Bidder B would pay P1.25 (P100k/80k) per
share; and
Bidder C would pay P1.67 (P100k/60k) per
share.
Hence, the winning bidder is Bidder C, because he
is the one willing to pay the highest amount per share.
On what grounds can delinquency sale be
questioned?
1. Irregularity or defect in the notice of sale; and
2. Irregularity or defect in the sale itself.
A party seeking to question the delinquency sale
based on the two mentioned grounds must first pay or

tender to the party holding the stock the sum (plus

interest from the date of the sale at the legal rate) for
which the same was sold, and he must do so within 6
months from the date of sale, lest it be barred.
Sec. 73 Lost or destroyed certificates
Procedure
1. Affidavit of Loss;
2. Verification. The corporation to verify the
affidavit and other information and evidence
with the corporate books;
3. Publication once a week for three consecutive
weeks;
4. One-year waiting period from the date of
last publication;
a. If the stockholder does not wish to
wait, he may file a bond within the oneyear period.
5. Contest; and
6. Replacement
Sec. 74 Books to be kept; stock transfer agent
1. Book of all business transactions;
2. Book of minutes of all meetings of stockholders
or members;
3. Book of minutes of all meetings of all directors
or trustees; and
4. Stock and transfer book (STB) in case of stock
corporations.
Best evidence
The books and records of a corporation are
ordinarily the best evidence of corporate acts and
proceedings.
Requisites for the right to inspect corporate
books and records
1. Must be exercised at reasonable hours on
business days;
2. The stockholder has not improperly used any
information he secured through any previous
examination*; and
3. Demand is made in good faith and for a
legitimate purpose.*
*The second and third items are lawful defenses
that may be invoked by an officer to deny a
stockholder or member his right to inspection. This is
important, because unlawful denial of the right to
inspection constitutes a crime under Sec. 144 of the
Corporation Code.
Stock transfer agent must be registered with
SEC
A stock transfer agent is one engaged principally in
the business of registering transfers of stocks in behalf
of a corporation.
No stock transfer agent shall be allowed to operate
in the Philippines, unless:
1. He has a license from the SEC; and
2. Pays the fee prescribed by the SEC.
As a rule, corporate secretary signs the minutes

Page | 24

The non-signing of the minutes by all the members

of the board is not required, because it is the signature
of the corporate secretary which gives the minutes of
the meeting probable value and credibility.

3.

Sec. 75 Right to financial statements

GR: Financial statements must be duly signed and
certified by an independent CPA.
XPN: If paid-up capital is less than P50,000 in which
case certification under oath by the treasurer or any
responsible officer of the corporation suffices.
s
Submission to SEC
The following are required to submit annual
audited financial statements:
1. Stock corporations with paid-up capital stock of
P50,000 or more;
2. Non-stock corporations with total assets each
of P500,000 or more or with gross annual
receipts of P100,000 or more.
Audited financial statements are filed annually. The
period within which to file them varies (ranging from
April 19 to May 14) depending on the last numerical
digit of the corporations SEC registration or license
number.

4.

5.

Sections 76 to 80 Merger and Consolidation

Merger
One where a corporation absorbs another
corporation and remains in existence while the other is
dissolved.
Example: Piccolo Corp. + Kami Corp. = Piccolo
Corp.
Consolidation
One where a new corporation is created, and the
consolidating corporations are extinguished.
Example: Goku Corp. + Vegeta Corp. = Vegeto
Corp.
Contents of plan of merger or consolidation
1. Names of the constituent corporations;
2. Terms of the merger or consolidation;
3. Statement of changes to be made in the AoI of
the surviving corporation (for merger) or
statements required to be set forth in the AoI of
the new corporation to be created (for
consolidation); and
4. Other necessary provisions.
Procedure
(this
applies
to
both/all
the
constituent corporations)
1. Board resolution approving a plan of
merger/consolidation;
2. Ratification by 2/3 vote of the stockholders or
members;
a) Voting shall be done in a meeting
called for such purpose with a twoweek prior written notice, either
personally or by registered mail. Notice
shall include a copy of the plan of
merger or consolidation.

6.

b) Any
dissenting
stockholder
may
exercise his appraisal right.
Any amendment to the plan or merger or
consolidation may be made, provided it is
approved by majority vote of the respective
boards of all the constituent corporations and
ratified by 2/3 vote of the stockholders or
members of the constituent corporations.
Articles of merger or consolidation shall be
executed by
each
of
the constituent
corporations, signed by the president/vicepresident
and
certified
by
the
secretary/assistant
secretary
of
each
corporation setting forth:
a. The
plan
of
the
merger
or
consolidation;
b. As to stock corporations, the number of
shares outstanding, or in the case of
non-stock corporations, the number of
members; and
c. As to each corporation, the number of
shares or members voting for and
against such plan, respectively.
Submit to SEC the articles of merger or
consolidation.
In case of banks, banking institutions,
building and loan associations, trust
companies, public utilities, educational
institutions
and
other
special
corporations governed by special laws,
SEC cannot act on their articles of
merger or consolidation without the
favorable
endorsement
of
the
appropriate government agency.
SEC to issue certificate of merger or
consolidation if it is satisfied that the merger
or consolidation is not inconsistent with the
Corporation Code or special laws. Otherwise, it
would set a hearing with a two-week prior
notice.

Legal effects of merger and consolidation

1. Single
corporation.
The
constituent
corporations shall become a single corporation;
2. Cessation of separate existence. The
separate
existence
of
the
constituent
corporations shall cease, except that of the
surviving or the consolidated corporation;
3. Assumption of rights. 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. Acquisition of properties. 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

Page | 25

5.

Assumption of liabilities. 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.

Grounds for disapproval of the merger or

consolidation
1. If the procedure prescribed by law is not
followed;
2. If the purpose for which the constituent
corporations were created are inconsistent
each other (i.e. a bank and an insurance
company);
3. If it is a device to create monopolies or
restraint of trade; and
4. If it is not done in good faith.
Important principles
1. The merger or consolidation shall only be
effective upon the issuance of a certificate of
merger or consolidation by the SEC. It does not
become effective upon the mere agreement of
the constituent corporations.
2. Non-assumption of liabilities
GR: When one corporation buys all the
shares, stocks or property of another
corporation, this will not operate to
dissolve the other corporation and as
the two corporations still maintain their
separate corporate entities, one will
not answer for the debts of the other.
XPNs: (FECCP)
a)
If the purchase as in fraud
of creditors;
b)
If there is an express
assumption of liabilities;
c)If there is a consolidation or
merger;
d)
If the purchaser is merely a
continuation of the seller; or
e)
When it is proper to pierce
the veil of corporate fiction.
3. Employees of the constituent corporations are
not automatically absorbed by the surviving
corporation or the consolidated corporation,
because they are not considered as assets and
properties.
According to Dean Abella, it is the
supervisory
employees
that
are
normally affected in case of mergers or
consolidations, because there are more
work
available
for
rank-and-file
employees.
Sections 81 to 86 Appraisal Right

Appraisal Right
The right of a stockholder to withdraw from the
corporation and demand payment of the fair value of
his shares following his dissent on certain corporate
acts. But not all corporate acts can be the subject of
appraisal right.
Instances where appraisal right may be availed
of:
1. Amendment of articles of incorporation which
has the effect of changing/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;
2. Extension or shortening of corporate term;
3. Sale or other disposition of all/substantially all
corporate property and assets;
4. Merger or consolidation; and
5. Investment
in
an
enterprise/another
corporation for any other purpose other than
its primary purpose.
Procedure
1. Written Demand. Dissenting stockholder
must make a written demand on the
corporation within 30 days from the voting in
which he dissented. Failure to make a written
demand within 30 days shall be deemed a
waiver of the appraisal right;
2. Notation. Within 10 days after demanding
payment for his shares, a dissenting
stockholder shall submit the certificates of
stock
representing
his
shares
to
the
corporation for notation thereon that such
shares are dissenting shares. His failure to do
so shall, at the option of the corporation,
terminate his appraisal right. If shares
represented by the certificates bearing such
notation are transferred, and the certificates
consequently cancelled, the rights of the
transferor as a dissenting stockholder 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;
3. Pay upon surrender of certificate. If the
proposed corporate action is implemented or
effected, 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.
4. Fair valuation of shares. 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

Page | 26

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.
What may be the basis of the fair value of
shares?
It may either be the par value (which remains
constant) or the book value/market value (which
fluctuates depending on the performance of the
corporation).
Book value is arrived at as follows:
Total Assets Total Liabilities = Net Worth
Net Worth/Number of Shares = Book Value
When right of appraisal extinguished
1. Stockholder withdraws his demand and the
corporation consents thereto;
The corporation needs to consent,
because once the stockholder decides
to make use of his appraisal right,
there is no going back.
2. The proposed corporate action is abandoned or
rescinded by the corporation;
3. The SEC disapproves or determines that the
stockholder is not entitled to the appraisal
right; and
4. No surplus profits.
Who bears the costs of appraisal?
GR: Corporation
XPN: 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 costs 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.
Surplus profits needed
Note that the money that will be used to pay the
dissenting
stockholder
must
come
from
the
corporations surplus profits.
If a stockholders filed an action against the
corporation to demand payment of the fair value of his
shares is premature if at the time of demand for
payment, the corporation had no surplus profit. The
fact that the corporation subsequent to the demand for
payment and during the pendency of the collection
case posted surplus profit did not cure the prematurity
of the cause of action. (Turner v. Lorenzo Shipping
Corporation, 2010ds)
Sections 87 to 95 Non-stock corporations

Non-stock corporation
One where no part of its income is distributable as
dividends to its members, trustees, or officers.
Non-stock corporations may be formed or
organized for the following purposes:
1. Charitable;
2. Religious;
3. Educational;
4. Professional
5. Cultural;
6. Fraternal;
7. Literary;
8. Scientific;
9. Social; or
10. Civic service;
11. Similar purposes such as trade, industry,
agricultural and like chambers, or any
combination thereof.
Right to vote in non-stock corporations
1. Voting rights may be limited, broadened by the
articles of incorporation or the by-laws.
2. Each member is entitled to 1 vote, unless
otherwise provided
in
the
articles
of
incorporation.
3. As a rule, voting is by straight voting, unless
cumulative is prescribed by the articles of
incorporation or the by-laws. But according to
sir, theres no practical reason why a non-stock
corporation would resort to cumulative voting.
4. Right to vote by proxy may be denied. (Note
that in stock corporations, right to proxy
CANNOT be denied.)
5. Voting by mail may be authorized by the bylaws, provided it is with the approval and other
the conditions prescribed by the SEC.
Membership non-transferrable
Unless otherwise provided by the articles of
incorporation or the by-laws.
Termination of membership
Membership shall be terminated in the manner and
for the causes provided in the articles of incorporation
or the by-laws.
Election and term of trustees
1. The Board of Trustees may have more than 15
members.
2. Term of 3 years on a staggered basis of 1/3 of
the Board members.
3. No person shall be elected as trustee unless he
is a member of the corporation.
4. Officers may be directly elected by the
members. (Note that in stock corporations,
officers are elected by the directors.)
Place of meetings
May be outside the place where the principal office
of the corporation is located, as long as within the
Philippines.
Rules of distribution
The assets shall be distributed as follows:
1. First, all taxes and creditors must be paid;

Page | 27

2.
3.

4.
5.

Assets held subject to return on dissolution

shall be conveyed back to the giver;
Assets received for charitable, religious,
benevolent, educational or similar purposes,
without a condition for return, shall be
transferred to one or more corporations,
societies or organizations engaged in similar
activities;
Other assets shall be distributed in accordance
with the articles of incorporation or the bylaws; and
In any other case, assets may be distributed to
such persons, societies, organizations or
corporations, whether or not organized for
profit, as may be specified in a plan of
distribution adopted.
Plan of distribution is adopted via
Board Resolution + Ratification by 2/3
vote of the members having voting
rights.

Foundation
A foundation is a non-stock, non-profit corporation
established for the purpose of extending grants or
endowments to support its goals or raising funds to
accomplish charitable, religious, educational, athletic,
cultural, literary, scientific, social welfare or other
similar objectives.
The most important thing to remember is that a
foundation must have a capital of at least P1 million.
Basic
requirements
to
incorporate
as
a
foundation
1. Verification slip;
2. Articles of incorporation and by-laws;
3. Affidavit undertaking to change corporate
name;
4. List of members certified by the corporate
secretary;
5. List of contributors and amount contributed
certified by the treasurer;
6. Notarized Certification of Bank Deposit of the
amount of not less than One Million Pesos
(P1,000,000.00); and
7. Statement of willingness to allow the
Commission to conduct and audit.
Escheat to government
Donated properties which were tax-exempt to a
foundation shall, upon the foundations dissolution, be
escheated in favor of the government.
Sections 96 to 105 Close corporations
Close corporation
A close corporation is one whose articles of
incorporation provides that:
1. All the issued stock of all classes, exclusive of
treasury shares, shall be held of record by not
more than 20 persons;
2. The issued stock of all classes shall be subject
to one or more specified restrictions on
transfer; and

3.

It shall not list in any stock exchange or make

any public offering of any of its stock of any
class.

Even if the above enumerated provisions are

present, a corporation cannot be a close corporate if at
least 2/3 of its voting stock or voting rights are owned
or controlled by another corporation which is not a
close corporation.
The following cannot be close corporations:
(MOSBIPEC)
1. Mining companies;
2. Oil companies;
3. Stock exchanges;
4. Banks;
5. Insurance companies;
6. Public utilities;
7. Educational institutions; and
8. Corporations declared to be vested with public
interest.
Restrictions on transferability must appear in 3
documents:
1. Articles of incorporation;
2. By-laws; and
3. Stock certificates
If the restrictions do not appear in any of those
documents, they will not prejudice the right of third
persons who are not aware of the same.
The restrictions shall not be more onerous than
granting the existing stockholders or the stockholders
the option to purchase the shares of the transferring
stockholder with such reasonable terms, conditions or
period stated therein. If upon the expiration of said
period, no pre-emptive right was exercised, the
transferring stockholder may sell his shares to any
third person.
Conclusive presumptions in case of transfer of
stock in breach of qualifying conditions
1. A transferee is conclusively presumed to have
notice of the fact of his ineligibility to be a
stockholder, IF
a. A stock of a close corporation is issued
or transferred to any person who is not
eligible to be a stockholder under the
articles of incorporation; and
b. The certificate of stock conspicuously
shows the qualifications of the persons
entitled to be stockholders.
2. A transferee is conclusively presumed to have
notice of the fact that the transfer would
cause the number of stockholders to
exceed the limit stated in the Articles of
Incorporation or 20, IF
a. The articles of incorporation states
such number of persons (not exceeding
20); and
b. The
certificate
for
such
stock
conspicuously states such numbers.
3. A transferee is conclusively presumed to have
notice of the fact that he has acquired stock
in violation of a restriction on transfer, IF

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a.

The stock certificate

shows such restriction.

conspicuously

Effect of transfer of stock in breach of qualifying

conditions
The corporation may refuse to register the transfer
of stock, UNLESS
1. All stockholders consent;
2. The close corporation has amended its articles
of incorporation.
Amendment of articles of incorporation
Amendment needs to be approved by the
affirmative vote of at least 2/3, IF the amendment
has the following effects:
1. Deletes or removes any provision required of
close corporations to be contained in the
articles of incorporation; or
2. Reduces a quorum or voting requirement
stated in the articles of incorporation.
When
board
meeting
is
unnecessary
or
improperly held
Unless the by-laws provide otherwise, any action
by the directors of a close corporation without a
meeting shall nevertheless be deemed valid if:
1. Before or after such action is taken, written
consent thereto is signed by all the directors;
or
2. All the stockholders have actual or implied
knowledge of the action and make no prompt
objection thereto in writing; or
3. The directors are accustomed to take informal
action
with
the
express
or
implied
acquiescence of all the stockholders; or
4. All the directors have express or implied
knowledge of the action in question and none
of them makes prompt objection thereto in
writing.
If a directors meeting is held without proper call or
notice, an action taken therein within the corporate
powers is deemed ratified by a director who failed to
attend, unless he promptly files his written objection
with the secretary of the corporation after having
knowledge thereof.
Wider coverage of pre-emptive right
Pre-emptive right extends to all stocks to be
issued, including reissuance of treasury shares.
Characteristics of a close corporation
1. Stockholders
can
directly
manage
the
corporation and perform the functions of
directors without need of election.
2. Stockholders are liable as directors.
3. Pre-emptive right extends to all stocks.
4. Deadlocks are settled by the SEC (now the RTC)
upon a written petition by any stockholder.
5. Stockholder may withdraw and avail of his right
of appraisal for any reason, provided the
corporation has sufficient assets in its books to
cover its debts and liabilities exclusive of
capital stock.

When stockholder may petition to compel

dissolution:
1. Whenever any of acts of the directors, officers
or those in control of the corporation is
a. Illegal;
b. Fraudulent;
c. Dishonest;
d. Oppressive;
e. Unfairly prejudicial to the corporation
or any stockholder; or
2. Whenever
corporate
assets
are
being
misapplied or wasted.
What to do in case of deadlock in a close
corporation
1. The proper recourse is to first exhaust
remedies
available
in
the
articles
of
incorporation or by-laws;
2. In the absence thereof or after exhaustion, file
a petition with the RTC which shall have the
power to arbitrate the dispute. In the exercise
of such power, the RTC shall have the authority
to issue the following orders:
a. Cancelling or altering any provision in
the articles of incorporation, by-laws, or
any stockholders agreement;
b. Cancelling, altering or enjoining any
resolution or act of the corporation or
its board of directors, stockholders or
officers;
c. Directing or prohibiting any act of the
corporation or its board of directors,
stockholders, officers, or other persons
party to the action;
d. Requiring the purchase at fair value of
shares of any stockholder, either by the
corporation
regardless
of
the
availability of surplus profits or by the
other stockholders;
e. Appointing a provisional director who
must be an impartial and disinterested
person;
f. Dissolving the corporation or granting
such other relief as the circumstances
may warrant.
Sections 106 to 108 Educational corporations
Key points to remember
1. Favorable recommendation of DepEd or CHEd,
as the case may be, is a prerequisite to
incorporation.
2. Educational corporations may incorporate as
either stock or non-stock (RA 7798 amending
BP 232).
3. Trustees shall not be less than 5 nor more than
15, provided that the number of trustees shall
be in multiples of 5. In short, 5, 10 or 15 lang
pwede!
4. Term of trustees is for 5 years on a staggered
basis of 1/5 of its members.
This is without prejudice to a different
term provided in the articles of
incorporation. (Petronilo v. AUP, 2011)

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5.

NB: The articles of incorporation may

provide for a different term, but it is not
sure whether it can also provide for a
different number of trustees.
For
institutions
organized
as
stock
corporations, the number and term of directors
shall be governed by the provisions on stock
corporations.

1.
2.

3.
Sections 109 to 116 Religious corporations
Key principles to remember
1. Religious corporations are classified into (a)
corporations
sole
and
(b)
religious
societies.
2. If the internal rules of a religious group prohibit
incorporation, it cannot incorporate as a
corporation sole or religious society. Hence, in
the articles of incorporation to be filed with the
SEC, there must be a statement that the
incorporation is not prohibited by the rules of
the religious group.
3. The
general
provisions
on
non-stock
corporations apply in a suppletory manner.
4. GR: For a corporation sole to sell or mortgage a
real property, it must obtain an order for that
purpose from the RTC of the province where
the property is located by filing a verified
petition.
XPN: The corporation soles own internal rules
regulate the method of acquiring, holding,
selling and mortgaging real and personal
property.
5. To fill a vacancy in a corporation sole, the
successor must file with the SEC a notarized
copy of his commission, certificate of election,
or letters of appointed.
6. For a religious group to incorporate as a
religious society, there must be a meeting and
at least 2/3 of the members must consent or
give an affirmative vote.
Sections 117 to 122 Dissolution
How are corporations dissolved?
1. Voluntarily;
2. Involuntarily;
3. By shortening corporate term; and
4. Expiration of the term.

Dissolution

(Creditors

5.
6.

Involuntary dissolution is effected by the SEC

upon filing of a verified complaint after notice
and hearing based on the following grounds:
1. Failure to organize and commence business
within 2 years from incorporation;
2. Continuous inoperatation for 5 years;
3. Failure to file the by-laws within 30 days from
issuance of certificate of incorporation;
4. Fraud
in
procuring
the
certificate
of
registration;
5. Failure to comply with reportorial requirements;
a. General Information Sheet
- Filed within 30 days from
appointment of officers.
b. Audited Financial Statements
- Filed annually (see notes on
Sec. 75).
6. Serious misrepresentation; and
7. Continuation of business is not feasible as
found by the rehabilitation receiver.
Shortening of corporate term
This involves an amendment of the articles of
incorporation which requires a board resolution and a
ratification by 2/3 vote.

Voluntary Dissolution (No creditors affected);

procedure
1. Meeting with a 30-day prior notice;
2. Notice of the meeting shall be published for 3
consecutive weeks;
3. Resolution to be approved by majority of the
board members and ratified by 2/3 vote;
4. Resolution must be certified by majority of the
board members,
countersigned by
the
corporate secretary; and
5. Resolution to be filed with the SEC which will
issue the certificate of dissolution.
Voluntary
procedure

4.

Meeting where 2/3 must vote to dissolve the

corporation;
File with the RTC a petition to dissolve, signed
by majority of the board or other officers
having the management of its affairs, and
verified by the president or secretary or
director, setting forth all claims and demands
against it;
RTC to fix by order a date on or before which
objections may be filed by any person, which
date shall not be less than 30 days nor more
than 60 days after the entry of the order;
Copy of the order to be published once a week
for 3 consecutive weeks and posted in 3 public
places for 3 consecutive weeks;
After expiration of the time to file objections,
the SEC shall fix a date of hearing with a fiveday prior notice;
RTC shall render judgment dissolving the
corporation and directing such disposition of its
assets as justice requires, and may appoint a
receiver to collect such assets and pay the
debts of the corporation.

affected);

If a corporation seeks to shorten its corporate term

and the manifest intent is to cause its dissolution, the
SEC will not act on the application without a BIR
clearance.
Liquidation
The process by which the assets of the corporation
are converted in to liquid assets or cash to facilitate
the payment of obligations to creditors, and the
remaining balance, if any, is to be distributed to the
stockholders.
Corporate life does not immediately cease upon
dissolution; 3-year period
The three-year period upon dissolution is for the
purpose of prosecuting or defending suits.

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Actions filed beyond the three-year period are

deemed to have prescribed. Note that it does not
matter if the action continues beyond the period as
long as it is instituted within the period.
5.
Methods of liquidation
1. By the corporation itself through the board of
directors or trustees;
2. Through conveyance to a trustee within the
three-year period;
3. By management committee or rehabilitation
receiver;
4. If liquidation is not completed within the threeyear period, the Board is permitted to complete
liquidation by continuing as trustee and for the
purpose of settling and closing the affairs of
the corporation.
Sections 123 to 136 Foreign corporations
A foreign corporation is one which is organized
under the laws of a foreign country which allows
Filipinos and Philippine corporations to do business
therein.
Two elements of a foreign corporation
1. Organized under the laws of a foreign country;
and
2. Right of reciprocity.
As a rule, a foreign corporation must have a license
to do business here in the Philippines.
Philippine
national
(under
the
Foreign
Investments Act)
1. Filipino citizen;
2. Domestic corporation;
3. Domestic corporation of which at least 60%
entitled to vote is owned and held by Filipino
citizens;
4. Foreign corporation doing business in the
Philippines of which 100% of the capital
outstanding stock and entitled to vote is wholly
owned by Filipinos; and
5. Trustee of funds, at least 60% of which will
accrue to the benefit of Filipinos.
From the enumeration above, a foreign corporation
may be considered a Philippine national.
How do foreign corporations do business in the
Philippines (Modes of Entry)?
1. Branch Office;
2. Resident agent;
3. Subsidiary Corporation;
No need for a license, because the
subsidiary corporation will actually be
incorporating here in accordance with
Philippine laws.
4. By investment;
Mere investment in a domestic
corporation, regardless of amount does
not mean that the corporation is doing
business in the Philippines, unless it is

6.

actively
participating
in
the
management in the affairs of the
domestic corporation, in which case it
is considered doing business and must
secure a license.
Joint Venture; and
If it merely contributes capital or
technical know-hows, it is not doing
business here.
Service Contracts.

What constitutes doing business in the

Philippines (Twin-Characterization Test)
1. Continuity Test Doing business implies a
continuity of commercial dealings; and
2. Substance Test When the corporation is
continuing the body or substance of the
enterprise of business for which it is organized
(Mentholatum Co v. Mangaliman).
Under the Foreign Investment Act
1. Doing Business
a. Soliciting orders, service contracts, opening
offices;
b. Appointing representatives, distributors
domiciled in the Philippines or who stay for
a period totaling 180 days or more;
c. Participating
in
the
management,
supervision or control of any domestic
business, firm, entity or corporation in the
Philippines; and
d. Any act or acts that imply a continuity of
commercial dealings or arrangements and
contemplate
to
some
extent
the
performance of some functions normally
incident to any in progressive prosecution
of, the purpose and object of its
organization.
This
is
actually
the
TwinCharacterization Test adopted from
jurisprudence.
2. Not doing business
a. Mere investment as shareholder and
exercise of rights as investor;
b. Having a nominee director or officer to
represent
its
interest
in
the
corporation; and
c. Appointing
a
representative
or
distributor which transacts business in
its own name and for its own account.
Requisites for a foreign corporation to engage in
business in the Philippines
1. Register with the SEC as a foreign corporation
by giving a certified true copy of all
incorporation documents in the country of
origin. If not in English, the documents must be
accompanied by an official translation in
English;
2. Inward remittance at the amount of prescribed
capitalization; and
3. Appointment of a resident agent.
Principles governing
right to sue:

foreign

corporations

Page | 31

1.
2.

3.

If a foreign corporation is doing business in the

Philippines without a license, it cannot sue
before Philippine courts;
If a foreign corporation is not doing business in
the Philippines, it needs no license to sue
before Philippine courts on an isolated
transaction or on a cause of action entirely
independent of any business transaction; and
If a foreign corporation does business in the
Philippines with the required license, it can sue
before Philippine court on any transaction.

Contracts by foreign corporations sans license

are not void
Absence of license does not affect the validity or
enforceability of a contract entered into by a foreign
corporation doing business without a license. It merely
affects the remedy.
Estoppel
A party is estopped to challenge the personality of
a corporation after having acknowledged the same by
entering into a contract with it. The principle will be
applied to prevent a person contracting with a foreign
corporation from later taking advantage of its
noncompliance with the statutes, chiefly in cases
where such person has received the benefits of the
contract. (Merril Lynch Futures v. CA)

7.
8.

9.

to the Philippine Government or any of its

agencies or political subdivisions;
Transacting business in the Philippines outside
of the purpose or purposes for which such
corporation is authorized under its license;
Transacting business in the Philippines as agent
of or acting for and in behalf of any foreign
corporation or entity not duly licensed to do
business in the Philippines; or
Any other ground as would render it unfit to
transact business in the Philippines.

A foreign corporation licensed to transact

business in the Philippines cannot be allowed by
the SEC to withdraw from the country, unless all
the following requirements are met:
1. All claims which have accrued in the Philippines
have been paid, compromised or settled;
2. All taxes, imposts, assessments, and penalties,
if any, lawfully due to the Philippine
Government or any of its agencies or political
subdivisions have been paid; and
3. The petition for withdrawal of license has been
published once a week for three (3)
consecutive weeks in a newspaper of general
circulation in the Philippines.
Letters of Credit

In pari delicto rule

No remedy can be afforded to the parties where
they have presumptive knowledge that the transaction
was tainted with illegality. (Top-Weld Manufacturing
Inc. v. ECED, SA)

What is a Letter of Credit?

Protection of intellectual property rights

Under Sec. 160 of the Intellectual Property Code,
any foreign national or juridical person not engaged in
business in the Philippines may bring a civil or
administrative action for opposition, cancellation,
infringement, unfair competition, or false designation
of origin and false description, whether or not it is
licensed to do business in the Philippines.

Although usually used in sales transactions, it may

also be used in a non-sale setting such as simple loan.

Grounds for revocation of license;

1. Failure to file its annual report or pay any fees
as required by this Code;
2. Failure to appoint and maintain a resident
agent in the Philippines as required by this
Title;
3. Failure, after change of its resident agent or of
his address, to submit to the Securities and
Exchange Commission a statement of such
change as required by this Title;
4. Failure to submit to the Securities and
Exchange Commission an authenticated copy
of any amendment to its articles of
incorporation or by-laws or of any articles of
merger or consolidation within the time
prescribed by this Title;
5. A misrepresentation of any material matter in
any application, report, affidavit or other
document submitted by such corporation
pursuant to this Title;
6. Failure to pay any and all taxes, imposts,
assessments or penalties, if any, lawfully due

It is an engagement by a bank made at the request

of its client that the bank will honor the draft or other
demand for payment upon compliance with the
conditions stated in the credit.

Is a letter of credit a contract of suretyship or

guarantee?
It is neither a contract of suretyship nor a
guarantee inasmuch as a letter of credit entails a
primary liability following default. Also, jurisprudence
has laid down a clear distinction between a letter of
credit and a guarantee in that the settlement of a
dispute is not a prerequisite for the release of funds
under a letter of credit.
Both a letter of credit and a surety ensure against
the debtors non-performance. But they function in a
different way. In a letter of credit, the creditor
reasonably expects that he will receive cash in the
event of non-performance, that he will receive it
promptly, and that he will receive it before any
litigation with the debtor over the nature of the
applicants performance takes place. In the surety
contract setting, there is no duty to indemnify the
beneficiary until the beneficiary/creditor establishes
the fact of the debtors non-performance. And that may
be proven in court.

Page | 32

In a letter of credit setting, the beneficiary avoids

the burden of litigation and receives his money
promptly upon presentation of the required documents.
What is the governing law on letters of credit?
Since the provisions on letters of credits of the
Code of Commerce are already rendered obsolete,
what is being observed at present is the Uniform
Customs and Practice for Documentary (UCP) which
was adopted by the International Chamber of
Commerce.

c)

The beneficiary of a commercial credit must

demonstrated by documents that he has
performed his contract. The beneficiary of the
standby credit must certify that his obligor has not
performed the contract.

Who are the parties in a letters of credits?

A.

Usual and Indispensable Parties

1.

The latest revision known as UCP 600 took effect

on July 1, 2007.

2.

Legal justification of the use of UCP:

o

Art. 2 of the Code of Commerce

Provides that in the absence of any
particular provision in the code,
commercial transactions shall be
governed by usages and customs
generally observed.

Q: A letter of credit was developed as a mode to

satisfy the seemingly irreconcilable interests of
a seller, who refuses to part with his goods
before he is paid, and a buyer who wants to have
control of the goods before paying. Explain this
concept.

3.

B. Other Parties (These other banks are known as

correspondent banks)
1.

Suppose that Pedro, a Filipino businessman, wants

to buy computer units from Apple, USA. Pedro would be
hesitant to transfer money to Apple, thinking there is
no guarantee that he would ever get the goods.
Likewise, Apple would be hesitant to deliver the goods,
thinking there is no guarantee that it would ever be
paid. This impasse is resolved by making use of letters
of credit, whereby a bank is made an intermediary
between the buyer and seller to ensure a fair
transaction.
What are the two types of letters of credit with
respect to the transactions?
1.

Commercial Letters of Credit When used in

the trade of goods;

2.

Standby Letters of Credit When used to

secure the performance of some service or work.

What are the differences?

a) Commercial credits involve the payment of money
under a contract of sale. Such credits become
payable
upon
the
presentation
by
the
seller/beneficiary of documents that show he has
taken affirmative steps to comply with the sales
agreement. In the standby type, the credit is
payable
upon
certification
of
a
partys
nonperformance of the agreement;
b) The documents that accompany the beneficiarys
draft tend to show that the applicant has not
performed;

Buyer/Importer one who procures

the letter of credit and obliges himself
to reimburse the issuing bank upon
receipt of the documents of title;
Issuing Bank Undertakes to pay the
seller upon receipt of the draft and
proper documents of titles and to
surrender the documents to the buyer
upon reimbursement;
Seller/Beneficiary/Exporter

In
compliance with the contract of sale,
he would ship the goods to the buyer
and delivers the documents of title and
draft to the issuing bank to recover
payment.

2.

3.
4.

Advising or Notifying Bank This

bank conveys to the seller the
existence of the credit. This bank
incurs no liability at all;
Confirming Bank This bank will lend
credence to the letter of credit issued
be a lesser known issuing bank. This
bank is directly liable to the seller;
Paying Bank Undertakes to encash
the drafts drawn by the exporter;
Negotiating Bank Instead of going
to the place of the issuing bank to
claim payment, the buyer may
approach another bank (negotiating
bank) to have the draft discounted.

Note: When dealing with problems concerning letters

of credits, or even trust receipts, immediately
identify the parties and their roles in the
transactions.

Discuss how a letter of credit operates.

A. Buyer-Seller preliminary negotiations
A contract of sale is perfected between the buyer
and seller, and they agree that the method of payment
is through a letter of credit.
B. Buyer-Issuing Bank negotiations
The buyer opens a letter of credit arrangement
with the issuing bank.
The issuing bank requires partial or full payment
depending on the credit trustworthiness and financial
standing of the buyer. It may also require additional
collaterals to ensure payment. The buyer signs an

Page | 33

undertaking to assume all costs relative to the

arrangement.
C. Seller delivers the goods
After the issuing bank and the buyer agree on the
terms of the letter of credit, the issuing bank advises
the sellers bank by telex, cable or fax, or such other
means of communication, of the existence of the letter
of credit.
The seller bank or the notifying bank advises the
exporter/seller of the letter of credit issued in his favor.
The seller delivers the goods to a shipping
company for shipment and then the issuing bank is
names as the consignee in the bill of lading.
The seller then presents the bill of lading and other
documents of title to the notifying bank which may
advance the amount of the price, or to the seller bank
so he could receive payment. If it is the notifying bank
which advances the price, it shall send the bill of lading
and other documents presented by the seller to the
issuing bank so it could claim reimbursement.
D. Buyer gets the goods
When the goods arrive at the place of destination,
the shipping company informs the consignee issuing
bank of such arrival.
The issuing bank then informs the buyer of such
arrival.
The buyer pays, unless he has already paid in full,
the issuing bank for the release of the goods. He shall
present the release paper to the shipping company to
claim his cargoes. However, if the buyer cannot pay in
cash, it may apply for the opening of a trust receipt
with the bank.
From how a letter of credits operate, explain the
independent
contracts
arising
from
such
transaction.
1.
2.
3.

Buyer-Seller;
Buyer-Issuing Bank; and
The letter of credit itself

What is the independence principle under a

letter of credit transaction?
The principle of independence assures the seller or
the beneficiary of prompt payment independent of any
breach of the main contract and precludes the issuing
bank from determining whether the main contract is
actually accomplished or not.
Under this principle, banks assume no liability or
responsibility for the form, sufficiency, accuracy,
genuineness, falsification or legal effect of any
documents, or for the general and/or particular
conditions
stipulated
in
the
documents
or
superimposed thereon, nor do they assume any liability
or responsibility for the description, quantity, weight,

quality, condition, packing, delivery, value or existence

of the goods represented by any documents, or for the
good faith or acts and/or omissions, solvency,
performance or standing of the consignor, the carriers,
or the insurers of the goods, or any other person
whomsoever.
Banks deal only with documents and not with
goods, services or obligations to which they relate.
Two aspects of the Independence Principle:
1.

Independent in toto - the credit is independent

from the justification aspect and is a separate
obligation from the underlying agreement;

2.

Only as to the justification aspect like in a

commercial letter of credit or repayment standby,
which is identical with the same obligations under
the underlying agreement.

In most cases, it is the issuing bank that invokes the

independence principle, because it is the one sued by
the defendant in case something went wrong with the
transactions. But the seller/beneficiary may also invoke
the principle, because it is the beneficiary who has the
right to ask the bank to honor the credit by allowing
him to draw thereon. (Transfield Philippines Inc vs
Luzon Hydro Corporation, 2000)
Explain the Fraud Exception Principle.
When the beneficiary, for the purpose of drawing
on the credit, fraudulently presents to the confirming
bank, documents that contain, expressly or by
implication, material representations of fact that to his
knowledge are untrue or fraudulent, the bank may be
enjoined from paying the draft. This is the exception to
the Independence Principle.
To recap, a bank need only rely on the documents
submitted by the seller/beneficiary. If such documents
conform to the terms of the letter of credit, then the
bank is under obligation to pay the seller/beneficiary,
subject to the fraud exception principle.
Explain the Strict Compliance principle.
This rule presupposes that the documents tendered
by the seller/beneficiary must strictly conform to the
terms of the letter of credit.
Pursuant to this principle, the correspondent bank
who accepts a faulty tender of the drafts by the
seller/beneficiary may not later recover from the
issuing bank or the buyer and thus, acts on its own risk
should it accept such drafts.
What are the kinds of letters of credit?
1.

Irrevocable Letter of Credit A letter of credit

wherein the terms and the undertakings of the
issuing bank cannot be amended or altered or
revoked without the consent of the beneficiary;

Page | 34

2.

Revocable Letter of Credit May be amended,

modified or revoked even without the consent of
the beneficiary;

3.

Standby Letter of Credit A letter of credit in a

non-sale setting.

4.

Commercial Letter of Credit Where the

principal transaction is a sale or importation.

5.

Confirmed Letter of Credit Where the liability

of a confirming bank is primary. There is a
confirmed letter of credit whenever the beneficiary
stipulates that the obligation of the opening bank
shall be made the obligation of a bank to himself.

Other kinds of letters of credit?

a)
b)
c)
d)
e)
f)

Revolving Letter of Credit;

Back-to-Back Letter of Credit;
General Letter of Credit;
Straight Letter of Credit;
Fixed Letter of Credit;
Sight Letter of Credit;

The entrustee bears the loss after delivery of the

goods to him, because the bank is not the owner of the
goods. It merely holds security title over them as
guarantee for payment of the advances it made in
favor of the entrustee. The bank in such case is a
preferred creditor.
Note: The Court has been consistent in ruling that
the bank/entruster does not own the goods but merely
has security interest over the same. But in DBP vs
Prudential Bank (2005), it was held that the entrustee
could not mortgage the properties covered by trust
receipts, because ownership was retained by the
entruster-bank. But it should be noted that in this case,
the contract between the entruster and entrustee
specifically provided that the entruster retains
ownership.
So, it is submitted that the general rule is the
entruster-bank does not retain ownership, except when
the entruster-bank expressly states its intention of
retaining ownership in the trust receipts. And in such
case, it is also submitted that pursuant to the principle
of res perit domino, it would be the entruster-bank who
will bear the goods loss.

Trust Receipts Law (PD 115)

Q: What is a trust receipt transaction?
Any transaction by and between a person referred
to as the entrustor (bank), and another person referred
to as entrustee (borrower) whereby the entrustor, who
owns or holds security interests over certain specified
goods, documents or instruments, releases the same
to the possession of the entrustee upon the latters
execution and delivery to the entrustor of a signed
document called a trust receipt, wherein

In connection with the DBP case, it should also be

noted that even without stipulating that the entrusterbank retains ownership, the mortgage would still have
been void, because mortgage requires absolute
ownership. And absolute ownership means that the
owner must have free disposal of it. If the bank, even
without retaining ownership, holds a security interest
over the property, it follows that the owner does not
have free disposal thereof.
Q: What happens or what is the liability of the
entrustee if he fails to turn over the proceeds of
the sale, or to return unsold goods?

1.

The entrustee binds himself to hold the goods in

trust for the entrustor;

2.

The entrustee obliges himself

otherwise dispose of the goods;

or

He may be held criminally liable for estafa under

Art. 315 (b) of the Revised Penal Code.

3.

The entrustee obliges to turn over to the

entrustor the proceeds thereof, or to return the
goods if they are unsold or not otherwise
disposed of.

The constitutional provision that no one cannot be

imprisoned for non-payment of debt is not applicable,
because what is being punished here is the act of
dishonesty and abuse of confidence in handling of
money or goods to the prejudice of another.

to

sell

Q: Discuss trust receipt vis--vis letter of credit.

Letter of credit and trust receipt usually go hand in
hand. Remember, a letter of credit transaction is
completed once the buyer/importer reimburses the
issuing bank. But sometimes the buyer/importer does
not have the money to do so. Instead, the buyer and
the bank may agree that the money advanced by the
bank will be paid by the buyer out of the proceeds of
the sale of the goods. In other words, the bank extends
a loan covered by the letter of credit, with the trust
receipt as security for the loan.
Q: Where goods are secured by a trust receipt,
who bears the lossthe bank/entrustor or the
buyer/entrustee?

Violation of the Trust Receipts Law is an act malum

prohibitum, thus, lack of criminal intent is not a valid
defense.
Q: Pedro bought 1,000 units of iPad for purposes
of resale. Delivery was made, but Pedro had no
money to pay Apple, so it applied with BPI for a
loan. BPI made Pedro execute a trust receipt.
Thereafter, BPI defaulted. Can Apple sue Pedro
for estafa for violation of the Trust Receipts Law?
No. The transaction here is not covered by the
Trust Receipts Law. Where the debtor received the
goods before the trust receipt itself was entered into,
the transaction in question is deemed a simple loan.
The Trust Receipts Law does not seek to enforce
payment of a loan, rather it punishes dishonesty and

Page | 35

abuse of confidence in handling of money or goods to

the prejudice of another regardless of whether the
latter is the owner.
Note: The foregoing leads to the conclusion that to
be covered by the Trust Receipts Law, the execution of
the trust receipt must precede the release of the goods
to the possession of the buyer/entrustor.
Q: What are the rights of the entrustor/bank
under the Trust Receipts Law?
1.
2.
3.

4.

Right to the proceeds of the sale;

Right to the return of the unsold goods;
Right to cancel the trust and take possession of
the goods, documents or instruments subject of
the trust or of the proceeds realized therefrom at
any time upon default or failure of the entrustee
to comply with any of the terms of the trust
agreement. After taking possession of the goods,
the entruster, within five days after notice to the
buyer, may sell the goods and apply the proceeds
to: (a) the payment of the expenses thereof; (b) to
the payment of the expenses of re-taking, keeping
and storing the goods, documents or instruments;
(c) to the satisfaction of the entrustees
indebtedness to the entruster. The entrustee is
entitled to the surplus but is liable for any
deficiency;
Entruster is not responsible as principal or vendor
under any sale or contract to sell by the
entrustee.

Q: After a failed venture, the entrustee returned

the goods covered by trust receipts to the
entruster-bank. Is he automatically absolved
from violation of the Trust Receipts Law?
No. The obligation of the entrustee is not
extinguished upon relinquishing possession of the
goods, because a trust receipt is a security agreement,
pursuant to which a bank acquires a security interest in
the goods. The trust receipt arrangement did not
convert the entruster bank into an inventor; the latter
remained a lender and creditor (Vintola vs Insular Bank
of Asia and America, 1987)
Q: Can a trust receipt secure contracts to sell?
No. The Trust Receipts Law does not secure
contracts to sell or any other contract where the
ownership of the good is retained by the seller.
Remember the essence of trust receipts. If the seller
retains title over the goods, then the bank cannot have
a security interest over them.
Q: What if the purpose of the goods is not for
sale but will be used as raw materials, is the
entrustee absolved from criminal liability?
Yes. Criminal liability may still exist, because nonpayment of the amount covered by a trust receipt is an
act violative of the entrustees obligation to pay. (Allied
Banking Corp vs Ordonez, 1990)
Q: Discuss the penalties of estafa.

1st. The penalty of prision correccional in its

maximum period to prision mayor in its minimum
period, if the amount of the fraud is over 12,000 pesos
but does not exceed 22,000 pesos, and if such amount
exceeds the latter sum, the penalty provided in this
paragraph shall be imposed in its maximum period,
adding one year for each additional 10,000 pesos; but
the total penalty which may be imposed shall not
exceed twenty years. In such cases, and in connection
with the accessory penalties which may be imposed
under the provisions of this Code, the penalty shall be
termed prision mayor or reclusion temporal, as the
case may be.
2nd. The penalty of prision correccional in its
minimum and medium periods, if the amount of the
fraud is over 6,000 pesos but does not exceed 12,000
pesos;
3rd. The penalty of arresto mayor in its maximum
period to prision correccional in its minimum period if
such amount is over 200 pesos but does not exceed
6,000 pesos; and
4th. By arresto mayor in its maximum period, if
such amount does not exceed 200 pesos, provided that
in the four cases mentioned, the fraud be committed
by any of the following means

Q: Who are criminally liable in case a corporation

is involved?
If the violation or offense is committed by a
corporation, partnership, association or other juridical
entities, the penalty provided for in this Decree shall be
imposed upon the directors, officers, employees or
other officials or persons therein responsible for the
offense, without prejudice to the civil liabilities arising
from the criminal offense.
The law says responsible for the offense. So it is
not correct to say that all board members are
criminally liable but only those who signed the trust
receipts. In case an agent of the corporation was the
one who was responsible, then he will be the one
liable.
Foreign Investments Act RA 7042
Purpose of the law:
To attract, promote and welcome productive
investments from foreigners in activities which
significantly contribute to national industrialization and
socio-economic development to the extent that foreign
investment is allowed in such activity by the
Constitution and relevant laws.
Who is a Philippine National?

Page | 36

1.
2.
3.

4.

5.

A citizen of the Philippines;

A domestic partnership/association wholly
owned by Philippine citizens;
Corporation organized under Philippine laws of
which at least 60% of the capital stack
outstanding and entitled to vote is owned and
held by citizens of the Philippines;
Corporation organized abroad and registered
as doing business in the Philippines of which
100% of the capital stock outstanding and
entitled to vote is owned and held by citizens
of the Philippines; or
A trustee of funds for pension or other
retirement/separation benefits, where the
trustee is a Philippine national and at least 60%
of the fund will accrue to the benefit of
Philippine nationals.

Double Majority Rule

Where
a
corporation
and
its
non-Filipino
stockholders own stocks in a SEC-registered enterprise,
at least 60% of the capital stock outstanding and
entitled to vote of both corporations and at least 60%
of the members of the board of directors of both
corporations must be Filipino citizens, in order that the
corporation shall be considered as a Philippine
national.
What is foreign investment?

Registration
A non-Philippine national who wishes to do
business in the Philippines may do so upon registration
with the Securities and Exchange Commission (SEC) or
with the Bureau of Trade Regulation and Commerce
Protection (BTRCP) under the DTI in the case of single
proprietorship.
Non-Philippine
national
Export
Enterprises
(enterprises which export at least 60% of their
outputs), in addition to registering with the SEC or
BTRCP, shall also register with the BOI. The BOI shall
advice the SEC or BTRCP of any export enterprise that
fails to meet the export ration requirement. The SEC or
BTRCP would then order the noncomplying export
enterprise to reduce its sales to the domestic market to
not more than 40% of its total production. Failure to
comply with such order without justifiable reason shall
subject the enterprise to cancellation of SEC or BTRCP
registration, and/or to other penalties provided for
under the law.
Fully and partly nationalized activities
Note that the Foreign Investments Act laid down
the general rule that there are no restrictions on the
extent of foreign ownership of business in the
Philippines, except in areas included in the negative
list.

It means an equity investment made by nonPhilippine national in the form of foreign exchange
and/r other assets actually transferred to the
Philippines and duly registered with the Central Bank.

See EO 184, 2015 for the latest Foreign Investment

Negative list attached to this reviewer.

Doing Business and Not Doing Business in the

Philippines

Small
and
medium-sized
domestic
market
enterprises with paid-in equity capital less $200,000
are reserved to Philippine nationals. However, if they
(a) involve advanced technology as determined by the
DOST or (b) they employ at least 50 direct employees,
then a minimum paid-in capital of $100,000 shall be
allowed to non-Philippine nationals.

1.

Doing Business
a.
b.
c.

d.

2.

Soliciting orders, service contracts, opening

offices;
Appointing representatives, distributors
domiciled in the Philippines or who stay for
a period totaling 180 days or more;
Participating
in
the
management,
supervision or control of any domestic
business, firm, entity or corporation in the
Philippines; and

Small and
enterprises

b.
c.

market

Punishable Acts
1.

Any act or acts that imply a continuity of

commercial dealings or arrangements and
contemplate
to
some
extent
the
performance of some functions normally
incident to any in progressive prosecution
of, the purpose and object of its
organization.

Mere investment as shareholder and

exercise of rights as investor;
Having a nominee director or officer to
represent its interest in the corporation;
and
Appointing a representative or distributor
which transacts business in its own name
and for its own account.

domestic

Anti-Dummy Law CA 108

When a Filipino citizen allows his name to be

used by a foreigner to evade any constitutional
or legal provisions requiring Philippine or any
other specific citizenship as a requisite for the
exercise or enjoyment of a right, franchise or
privilege.
-

Not doing business

a.

medium-sized

2.

Penalty:
a. Imprisonment of not less than 5 nor
more than 15 years; and
b. A fine not less than the value of the
right,
franchise
or
privilege
involved

False simulation of minimum capital stock to

comply with any constitutional or legal
provisions requiring a certain per centum of its
capital stock to be owned by citizens of the
Philippines or of any other specific country
-

Penalty
(to
be
imposed
on
presidents/managers/directors/trustees)
is
the same as the immediately preceding
item.

Page | 37

3.

When a person, having in its name or under its

control a right, franchise, privilege property or
business, the exercise/enjoyment of which is
expressly reserved by the Constitution or the
laws to citizens of the Philippines, qualified
Filipino corporations, or of any other specific
country, allows any person, not possessing the
necessary qualifications to acquire, use, exploit
or enjoy (i.e. by lease or any other form of
transfer or conveyance) such right, franchise,
privilege, property or business, to intervene in
the management, operation, administration or
control thereof, whether as an officer,
employee or laborer therein with or without
remuneration.
XPN:
Technical
personnel
whose
employment may be specifically authorized
by the Secretary of Justice.
-

Penalty
(to
be
imposed
on
the
president/manager/persons in charge):
a. Imprisonment of not less than 5 nor
more than 15 years;
b. A fine not less than the value of the
right, franchise or right involved;
and
c. Forfeiture of the right, franchise,
privilege, property or business
involved.

Evidence of Violation of the Anti-Dummy Law

1.

2.

(With respect to false simulation of minimum

capital stock) The fact that the citizen of the
Philippines, at the time of the acquisition of his
holdings in the corporations or associations, no
real or personal property, credit or other assets
the value of which shall at least be equivalent
to said holdings, shall be evidence of a
violation of the law.
The exercise, possession or control by a Filipino
citizen having a common-law relationship with
an alien of a right, privilege, property or
business, the exercise or enjoyment of which is
expressly reserved by the Constitution or the
laws to Filipinos, shall constitute a prima facie
evidence of a violation of Section 2-A (Unlawful
use, exploitation or enjoyment).

An informer is entitled to a reward of 25% of the

fine imposed in case of conviction. If the former is a
dummy, he is also entitled to immunity.
Note that the Anti-Dummy law applies not only to
wholly nationalized activities but also to partlynationalized activities (Luzon Stevedoring Corp. v. AntiDummy Board, 1972).
Retail Trade Liberalization Act of 2000 RA 8762
Purpose of the law
To promote consumer welfare in attracting,
promiting and welcoming productive investments that
will:
1.
2.
3.
4.
5.
6.

Bring down prices for the Filipino consumer;

Create more jobs;
Promote tourism;
Assist small manufacturers;
Stimulate economic growth; and
Enable Philippines goods and services to
become globally competitive through the
liberalization of the retail trade sector.

What is retail trade?

Any act, occupation or calling of habitually selling
direct to the general public merchandise, commodities
or goods for consumption (as opposed to wholesale).
Exemptions from the coverage of RA 8762
1.
2.
3.

4.

Where the capital does not exceed P100,000;

Sales by a farmer or agriculturist selling the
products of his farm;
Sales in restaurant operations by a hotel owner
or inn-keeper irrespective of the amount of
capital, provided that the restaurant is
incidental to the hotel business; and
Sales which are limited only to products
manufactured, processed or assembled by a
manufacturer
through
a
single
outlet,
irrespective of capitalization.

Registration
Entities seeking to engage in the retail business
must be registered with the SEC and DTI.

Other important matters

Foreign Equity Participation

The election of aliens as members of the board of

directors engaging in partly nationalized activities shall
be allowed in proportion to their allowable participation
or share in the capital of such entities. But, pursuant to
a DOJ Opinion (No. 37, s. 1976), such aliens may not
hold any other position (i.e. president, vice-president or
treasurer). Nevertheless, dont be confused; the
general rule is still that under the Corporation Code,
aliens are not prohibited from being elected as
directors and holding other positions, as long as they
are not engaged in nationalized or partly-nationalized
activities.

Category A (Paid-up Capital less than $2.5 million)

Any corporation or association violating the AntiDummy Law shall be dissolved upon proper court
proceedings.

Reserved exclusively for Filipinos.

Category B (Paid up capital at least $2.5 million but not

more than $7.5 million)
-

May be wholly owned by foreigners.

Category C (Paid up capital at least $7.5 million)

-

May be wholly owned by foreigners.

In no case shall the investments for
establishing a store in Categories B and C be
less than the equivalent in PHP of $830,000.

Category D (Specializing in high-end/luxury products

with paid-up capital of $250,000)
-

May be wholly owned by foreigners.

Page | 38

Note than qualified foreign retailers shall not be

allowed to engaged in retailing activities outside their
accredited stores through the use of mobile or rolling
stores or carts, the use of sales representative, etc.
Public Offering of Shares of Stock
All retail enterprises under Categories B and C in
which foreign ownership exceeds 80% of equity shall
offer at least 30% of their equity to the public within 8
years from the start of their operations.
Bulk Sales Law Act 3952

Q: Discuss the nature

warehouse receipt.

When is a sale considered a sale in bulk?

1.
2.
3.

Sale, transfer, assignment or mortgage (STAM)

other than in the ordinary course of trade and
the ordinary course of business; or
Sale is of all or substantially all of the business
or trade; or
When the sale is of all or substantially all of the
fixtures and equipment used in the business.

Formalities required by the Bulk Sales Law

1.
2.
3.
4.

The sale must be accompanied by a sworn

statement of the seller listing the names and
addresses of, and amounts owing to, creditors;
The sworn statement shall be furnished to the
buyer;
The seller is required to prepare an inventory of
stock to be sold; and
Notice to creditors at least 10 days before the
sale

Effects of violation of the Bulk Sales Law

1.
2.
3.

Sale is void as to creditors;

Buyer holds property in trust for the seller; and
Buyer is liable to sellers creditors for
properties forming part of bulk, and already
disposed by him.

Exemptions from the requirements of the Bulk

Sales Law
1.
2.
3.
4.

Sale is made in the ordinary course of

business;
Waiver from all the creditors and must be
written;
Sale is by virtue of a judicial order; and
Those sold by assignee in insolvency or those
beyond the right of creditors.

Misc.
It shall also be unlawful for any person, as owner of
any stocks of goods in bulk, to transfer title to the
same without consideration or for a nominal
consideration only.
Penalties for violation include imprisonment of not
less than 6 months to five years and/or fine not
exceeding P5,000.
Warehouse Receipts Law Act 2137

functions

of

It is a species of documents of title and has a twofold function:

1.

Proof of the possession or control of the goods

described therein; and
Authorizing or purporting to authorize the
possession of the warehouse receipt to transfer
or receive, either by endorsement or by delivery,
of the goods represented by such receipt.

2.

Purpose of the law

To prevent the defrauding of creditors by the secret
sale or disposal in bulk of all or substantially all of a
merchants stock of goods.

and

Q: Who may issue a warehouse receipt?

Only a warehouse man may issue a warehouse
receipt.
A warehouse man is a person lawfully engaged in
the business of storing goods for profit.
The fact that the deposits were made free does not
detract from the applicability of the WRL (Gonzales vs
Go Tiong and Luzon Surety Co, 1958).
The operative words are engaged in the
business. If a person is engaged in the business of
storing goods for profit, even isolated transactions
done gratuitiously will be governed by the WRL.
Q: What law will govern if the warehouseman
issues an ordinary receipt?
Still, the Warehouse Receipts Law. Any deposit
made with him as a warehouseman must necessarily
be governed by the provisions of the Law. The kind or
nature of the receipts issued by him for the deposits is
not very material, much less decisive. (Gonzales vs Go
Tiong and Luzon Surety Co, 1958)
Q: What is the form prescribed for a warehouse
receipt?
No particular form but must embody within its
written or printed terms the following:
1.
2.
3.
4.
5.
6.
7.
8.

9.

The location of the warehouse where the goods

are stored;
The date of the issue of the receipt;
The consecutive number of the receipt;
A statement whether the goods received will
be delivered to the bearer, to a specified
person or to a specified person or his order;
The rate of storage charges;
A description of the goods or of the packages
containing them;
The signature of the warehouseman which may
be made by his authorized agent;
If the receipt is issued for goods of which the
warehouseman is owner, either solely or jointly
or in common with others, the fact of such
ownership; and
A statement of the amount of advances made
and of liabilities incurred for which the

Page | 39

warehouseman claims a lien. If the precise

amount of such advances made or of such
liabilities incurred is, at the time of the issue of,
unknown to the warehouseman or to his agent
who issues it, a statement of the fact that
advances have been made or liabilities
incurred and the purpose thereof is sufficient.
Q: What will happen if one or more of the
required terms are not present in the warehouse
receipt?
It will not affect the validity or negotiability of the
warehouse receipt, but the warehouseman shall be
liable to any person injured for all damages caused by
the omission.

Q: What are the terms that cannot be included in

the warehouse receipt?
1.
2.

Those contrary to any provision of the law;

In any wise impair the warehousemans
obligation to exercise that degree of care in the
safekeeping of the goods entrusted to him
which a reasonably careful man would exercise
with regard to similar goods of his own

Q: Distinguish a negotiable warehouse receipt

from a non-negotiable warehouse receipt.
1. Negotiable Receipts
-

Receipt in which it is stated that the goods

received will be delivered to the bearer or to
the order of any person named in such receipt.
No provision shall be inserted in a negotiable
receipt that it is non-negotiable. Such provision
if inserted shall be void.
Negotiation of the document has the effect of
manual delivery so as to constitute the
transferee the owner of the goods.
The person to whom the instrument is
negotiated acquires the following rights:
a. Such title to the goods as the person
negotiating the receipt to him had or
had the ability to convey to a
purchaser in good faith for value, and
also such title to the goods as the
depositor or person to whose order the
goods were to be delivered by the
terms of the receipt had or had ability
to convey to a purchaser in good faith
for value; and
b. Direct obligation of the warehouseman
to hold possession of the goods for him
according to the terms of the receipt as
fully as if the warehouseman had
contracted with him.
The following may negotiate a warehouse
receipt:
a. By the owner thereof; or
b. By any person to whom the possession
or custody of the receipt has been
entrusted by the owner, if, by the
terms
of
the
receipt,
the
warehouseman undertakes to deliver

the goods to the order of the person to

whom the possession or custody of the
receipt has been entrusted, or if, at the
time of such entrusting, the receipt is
in such form that it may be negotiated
by delivery.
Hence, even a thief of the
warehouse receipt can negotiate
the receipt but it should be in
such a form that he need not
forge any signature. In other
words, a thief may negotiate a
bearer warehouse receipt.
Warranties of the Transferor:
a. That the receipt is genuine;
b. That he has a legal right to negotiate
or transfer it;
c. That he has knowledge of no fact which
would impair the validity or worth of
the receipt; and
d. That he has a right to transfer the title
to the goods and that the goods are
merchantable or fit for a particular
purpose whenever such warranties
would have been implied, if the
contract of the parties had been to
transfer without a receipt of the goods
represented thereby.
e. Note, however, that the transferor does
not guarantee the performance of the
obligation of the warehouseman.

2. Non-Negotiable Receipts
-

Receipt in which it is stated that the goods

received will be delivered to the depositor or to
any specified person.
A non-negotiable receipt shall have plainly
placed upon its face by the warehouseman
issuing it non-negotiable. Otherwise, a holder
may treat such instrument as negotiable,
imposing upon the warehouseman the same
liabilities he would incurred had the receipt had
been negotiable.
Rights of transferee of non-negotiable receipt:
a. Title of the goods subject to the terms
of any agreement with the transferor;
b. Right to notify the warehouseman of
the transfer to him of such receipt and
thereby to acquire the direct obligation
of
the
warehouseman
to
hold
possession of the goods for him
according to the terms of the receipt.
Note that this is the most
important distinction between
a
negotiable
and
nonnegotiable receipt. In a nonnegotiable receipt, prior to the
notification
of
the
warehouseman of the transfer,
the title of the transferee to the
goods and the right to acquire
the
obligation
of
the
warehouseman
may
be
defeated by the levy of
attachment or execution upon

Page | 40

the goods by a creditor of the

transferor or by a notification
to the warehouseman by the
transferor or a subsequent
purchaser from the transferor
of a subsequent sale of the
goods by the transferor.

6.

Q: What are the principal obligations of the

warehouseman?

9.

1. To take care of the goods entrusted to his

safekeeping;
2. To deliver them to the holder of the receipt or the
depositor provided the following conditions are fulfilled
there is demand by the depositor accompanied by
either
a) An offer to satisfy the warehousemans lien
b) An offer to surrender the receipt, if negotiable
with such indorsements as would be necessary
for the negotiation of the receipts
c) A readiness and willingness to sign, when the
goods are delivered, an acknowledgement that
they have been delivered, if such signature is
requested by the warehouseman.
Warehousemans defenses for non-delivery or
misdelivery
1.
2.
3.
4.
5.

Loss or destruction of the goods without the

fault of the bailee;
Failure to satisfy the Bailees Lien;
Failure to surrender the negotiable document
of title;
Lack of willingness to sign acknowledgment;
Receipt by the bailee of a request by or on
behalf of the person lawfully entitle to a right of
property or possession in the goods, not to
make such delivery;

7.
8.

The bailee has information that the delivery

about to be made was to one not lawfully
entitle to the possession of the goods;
Delivery to a claimant with a better right;
Attachment or levy of the goods by a creditor
where the document is surrender or its
negotiation is enjoined or the document is
impounded; and
Where the document of title is attached by a
creditor

Warehousemans Lien
The warehouseman shall have a lien on goods
deposited or on the proceeds thereof in his hands for
storage fees and all other reasonable charges,
provided that such charges are present at the time of
the issuance of the receipt and must be so state in the
receipt with the amounts thereof specified.
The lien is lost (a) by surrendering possession of
the goods; or (b) by refusing to deliver the goods when
a demand is made with which he is bound to comply.
Adverse Claimant
If more than one person claims the title or
possession of the goods, the warehouseman may (1)
refuse to deliver the goods to anyone of them until he
had reasonable time to check the validity of the claims
or (2) file an action for interpleader.
Attachment or Levy
The goods in the possession of the warehouseman
cannot be attached by garnishment or be levied upon
under an execution, unless the receipt be first
surrendered to the warehouseman or its negotiation
enjoined.
The creditors remedy is to seek for the attachment
of the receipt or compel the debtor to deliver the
receipt by injunction or otherwise.

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