I.

Corporation Law
a. The Corporation.
i. Definition (Section 2; Articles 44(3), 45, 46, and 1775, Civil Code)
Sec. 2 Corporation defined A corporation is an artificial being created by operation of law, having the
rights of succession and the powers attributes and properties, expressly authorized by law or incident to
its existence.
Civil Code. Art. 44(3) The following are juridical persons Corporations, partnerships and associations
for private interest or purpose to which the law grants a juridical personality, separate and distinct from
that of each shareholder, partner or member.
Art. 45 Juridical persons mentioned in Nos.1 and 2 of the preceding article are governed by laws
creating or recognizing them.
Private corporations are regulated by laws of general application on the subject.
Partnerships and associations for private interest or purpose are governed by the provisions of this Code
concerning partnerships.
Art. 46 Juridical persons may acquire and possess property of all kinds, as well as incur obligations and
bring civil or criminal actions, in conformity with the laws and regulations of their organization.
Art. 1775 Association and societies, whose articles are kept secret among the members, and wherein
any pone of the members may contract in his own name with third persons, shall have no juridical
personality, and shall be governed by the provisions relating to co-ownership
A corporation is an artificial being created by operation of law, having the rights of succession
and the powers, attributes and properties expressly authorized by law or incident to its
existence.
It has a personality separate and distinct from the persons composing it, as well as from any
other legal entity to which it may be related. PNB v. Andrada Electric & Engring Co., 381
SCRA 244 (2002).
As you can tell, this isnt really a definition of the corporation, but merely a list of the
attributes.
ii. Tri-Level Existence of the Corporation
(a) AGGREGATION OF ASSETS AND RESOURCES physical assets of the corporation; the
tangibles ( ex. in a grocery, the goods being sold)
(b) BUSINESS ENTERPRISE OR ECONOMIC UNIT the commercial venture; this includes not only
the tangible assets but also the intangibles like goodwill created by the business
(C)JURIDICAL ENTITY juridical existence as a person; the primary franchise granted by the
state
iii. Relationships Involved in a Corporate Setting
(A)JURIDICAL ENTITY LEVEL, which views the State-corporation relationship
- the state cannot destroy a corporation without observing due process of law
(b) INTRA-CORPORATE LEVEL, which considers that the corporate setting is at once a
contractual relationship on four (4) levels:
Between the corporation and its agents or representatives to act in the real world,
such as its directors and its officers, which is governed also by the Law on Agency
Between the corporation and its shareholders or members
Between and among the shareholders in a common venture
(C)EXTRA-CORPORATE LEVEL, which views the relationship between the corporation and
third-parties or outsiders, essentially governed by Contract Law and Labor Law.
- most important level, highest form of law in this level is contract law.
4. Theories on the Formation of Corporation:
The SC has looked upon the corp. not merely as an artificial being but more as an
AGGRUPATION OF PERSONS DOING BUSINESS or AN UNDERLYING ECONOMIC UNIT.

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- The corp. is emerging as an enterprise bounded by economics rather than an artificial
personality bounded by forms of words in a charter, minute books & books of accounts.
- The proposition that a corp. has an existence separate and distinct from its membership has
its limitations. (Separate existence is for a particular purpose.) There can be no corp.
existence w/o persons to compose it & there can be no association w/o associates.
(a) Theory of Concession (Tayag v. Benguet Consolidated, 26 SCRA 242 [1968]).
Under the theory of concession, the corporation is a creature of the state.
Under this theory, the grant of personality to a corporation is limited. No other privilege may
be exercised beyond those which are granted by the State.
To organize a corporation that could claim a juridical personality of its own and transact
business as such, is not a matter of absolute right but a privilege which may be enjoyed only
under such terms as the State may deem necessary to impose. (Ang Pue & Co. v. Sec. of
Commerce and Industry, 5 SCRA 645 (1962)
Before a corporation may acquire juridical personality, the State must give its consent either
in the form of a special law or a general enabling act, and the procedure and conditions
provided under the law for the acquisition of such juridical personality must be complied
with. The failure to comply with the statutory procedure and conditions does not warrant a
finding that such association acquired a separate juridical personality, even when it adopts
sets of constitution and by-laws. (International Express Travel & Tour Services, Inc. v. CA,
343 SCRA 674 (2000).
Since all corporations, big or small, must abide by the provisions of the Corporation Code,
then even a simple family corporation cannot claim an exemption nor can it have rules and
practices other than those established by law. (Torres v. CA)
(b) Theory of Enterprise Entity (BERLE, Theory of Enterprise Entity, 47 COL. L. REV.
343 [1947])
Under the theory of enterprise entity, while a corporation is granted juridical personality, its
basis is a contractual relation between 5 or more individuals. The effect of corporation law is to
recognize the existence of an aggregation of individuals (enterprise entity)
A corporation is but an association of individuals, allowed to transact under an assumed
corporate name, and with a distinct legal personality. In organizing itself as a collective
body, it waives no constitutional immunities and perquisites appropriate to such a body. PSE
v. Court of Appeals, 281 SCRA 232 (1997).
Corporations are composed of natural persons and the legal fiction of a separate corporate
personality is not a shield for the commission of injustice and inequity, such as to avoid the
execution of the property of a sister company. Tan Boon Bee & Co., Inc. v. Jarencio, 163
SCRA 205 (1988).
(c)Attempt at Reconciliation
According to Villanueva, while the corporation is a legal fiction, it cannot be created unless
there is an enterprise or group of persons upon whom it would be conferred.
However, in spite of the underlying contract among the persons wanting to form a corp., the
grant is only by virtue of a primary franchise given by the state.
It is within the power of the state to grant corporate existence of not.
But once the juridical personality is acquired, the corporation becomes a creature of its own
volition with a distinct personality.
5. Four Corporate Attributes Based on Section 2:
(A)A CORPORATION IS AN ARTIFICIAL BEING (Ability to Contract and Transact)
- a person created by law or by state; a legal fiction
(B)CREATED BY OPERATION OF LAW (Creature of the Law)

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 - its existence is dependent upon the consent or grant of the state EXCEPT
corporation by estoppel and de facto corporation
(C)WITH RIGHT OF SUCCESSION (Strong Juridical Personality)
- the corporation exists despite the death of its members as a corporation has a
personality separate and distinct from that of its individual stockholders. The
separate personality remains even if there has been a change in the members and
stockholders of the corporation.
(D) HAS THE POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY AUTHORIZED BY
LAW OR INCIDENT TO ITS EXISTENCE (Creature of Limited Powers)
When the corporation ( BB Sportswear, Inc. ) which the plaintiff erroneously impleaded in a
collection case was not the party to the actionable agreement and turned out to be not
registered with the Securities and Exchange Commission, the judgment may still be
enforced against the corporation ( BB Footwear, Inc. ) which filed the answer and
participated in the proceedings, as well as its controlling shareholder who signed the
actionable agreement in his personal capacity and as a single proprietorship doing business
under the trade name and style of BB Sportswear Enterprises. Benny Hung vs BPI
Finance Corporation . G.R. No. 182398, 20 July 2010
A stockholder is not the owner of any part of the capital of the corporation and is not
entitled to the possession of any definite portion of its property or assets. (Rebecca Boyer-
Roxas and Guillermo Roxas vs. CA and Heirs of Roxas)
When negotiations ensued in light of a planned takeover of company and the counsel of the
buyer advised the stockholder through a letter that he may take the machineries he brought
to the corporation out with him for his own use and sale, the stockholder cannot recover said
machineries and equipment because these properties remained part of the capital property
of the corporation. It is settled that the property of a corporation is not the property of its
stockholders or members. (Ryuichi Yamamoto vs. Nishino Leather Industries, Inc)
6. Compared with Other Business media
(a)Sole Proprietorships
A sole proprietorship is a business model whereby a person personally conducts business
under his name of the business name.
The business is an organization composed of the proprietor himself and his employees.
However, it does not have a personality separate and distinct from the proprietor.

Sole Proprietorship Corporation

Free from many requirements andHeavily regulated; a lot of requirements
regulations in its operation imposed for registration and incorporation
Owner has full control of his business Control of business is done by the BoD
Owner stands to lose more than what he Investors have limited liabilty
puts into the venture
(b) Partnerships and Other Associations (Arts. 1768 and 1775, Civil Code)
Art. 1768 The partnership has a juridical capacity separate and distinct from that of each of the partners,
even in case of failure to comply with requirements of Art. 1772 first paragraph.
Art. 1775 Association and societies, whose articles are kept secret among the members, and wherein any
pone of the members may contract in his own name with third persons, shall have no juridical personality,
and shall be governed by the provisions relating to co-ownership
In a partnership, two or more persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the profits among themselves.
Corporation Partnership
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Created by law or in accordance with law Created by mere agreement of the parties
Separate legal personality
Requires at least 5 incorporators Requires at least 2 partners

Acquires juridical personality from the date of Acquires juridical personality upon agreement.
issuance of the certificate of incorporation Registration is merely for administrative
purposes
Can only exercise the powers expressly May exercise any power not contrary to
granted by law or implied from those granted LMGCPOPP.
or incident from its existence
Investors limited liability Contractual limited liability ( when a limited
partnership is created)
Free transfer of shares Transfer with consent of partner
Centralized management; vested in board of Every partner is agent
directors or trustees
Suit against a mismanaging board is a Partners may sue mismanaging partner
derivative suit in the name of the corporation.
Right of succession No right of succession
Corporate term is 50 years, extendible for not No term limit; partners may set term, but
more than 50 years partnership terminated upon death of any of
the partners.
May only be dissolved with the consent of the May be dissolved at any time.
state
(c) Joint Ventures
A Joint venture is an association of persons or companies jointly undertaking some commercial
enterprise; generally all contribute assets and share risks. It requires a community of interest in
the performance of the subject matter, a right to direct and govern the policy in connection
therewith, and duty, which may be altered by agreement to share both in profit and losses.
Kilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110 (1994).
(d) Cooperatives Art. 3, R.A. No. 6938)
A cooperative is a duly registered association of persons, with a common bond of interest, who
have voluntarily joined together to achieve a lawful common social or economic end, making
equitable contributions to the capital required and accepting a fair share of the risks and
benefits of the undertaking in accordance with universally accepted cooperative principles.
Cooperatives are established to provide a strong social and economic organization to ensure
that the tenant-farmers will enjoy on a lasting basis the benefits of agrarian reforms.
Corpuz v. Grospe, 333 SCRA 425 (2000).
Cooperative Corporation
Separate Juridical Personality
Governed by principles of democratic control SH vote their percentage share of the stocks
where the members have equal voting rights subscribed by them
on a one-member-one vote principle
BoD manage the affairs of the coop. But it is BoD is the repository of all powers EXCEPT
the GA of full membership that exercises all for acts where the Corp. Code requires
the rights and performs all of the obligations concurrence or ratification by the SH
of the coop.
Under the supervision of the coop. Under the Supervision of the SEC
Development Authority
Organized for the purpose of providing goods Stock Corp. for profit; Non-Stock Corp
and services to its members and thus to eleemosynary (charitable, philantrophic)
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enable them to attain increased income and purpose
saving, etc.
(e)Business Trusts (Article 1442, Civil Code)
Art. 1440. A person who establishes a trust is called the trustor; one in whom confidence is reposed as
regards property for the benefit of another person is known as the trustee; and the person for whose
benefit the trust has been created is referred to as the beneficiary.
The relationship in a business trust is essentially a trust relationship. The business trust
does not have a personality which is apart from the trustor or the trustee/beneficiary. The
concept of a separate juridical personality is absent from a business trust.
(f) Sociedades Annimas
A sociedad annima was considered a commercial partnership where upon the execution of
the public instrument in which its articles of agreement appear, and the contribution of funds
and personal property, becomes a juridical personan artificial being, invisible, intangible, and
existing only in contemplation of lawwith power to hold, buy, and sell property, and to sue and
be sueda corporationnot a general copartnership nor a limited copartnership
The inscribing of its articles of agreement in the commercial register was not necessary to
make it a juridical persona corporation. Such inscription only operated to show that it
partook of the form of a commercial corporation. Mead v. McCullough, 21 Phil. 95 (1911).
The sociedades annimas were introduced in Philippine jurisdiction on 1 December 1888
with the extension to Philippine territorial application of Articles 151 to 159 of the Spanish
Code of Commerce. Those articles contained the features of limited liability and centralized
management granted to a juridical entity. But they were more similar to the English joint
stock companies than the modern commercial corporations. Benguet Consolidated Mining
Co. v. Pineda, 98 Phil. 711 (1956).
Our Corporation Law recognizes the difference between sociedades annimas and
corporations and will not apply legal provisions pertaining to the latter to the former. Phil.
Product Co. v. Primateria Societe Anonyme, 15 SCRA 301 (1965).
(g) Cuentas En Participacion
A cuentas en participacion as a sort of an accidental partnership constituted in such a
manner that its existence was only known to those who had an interest in the same, there being
no mutual agreement between the partners, and without a corporate name indicating to the
public in some way that there were other people besides the one who ostensibly managed and
conducted the business, governed under Article 239 of the Code of Commerce.
Those who contract with the person under whose name the business of such partnership of
cuentas en participacion is conducted, shall have only a right of action against such person
and not against the other persons interested, and the latter, on the other hand, shall have no
right of action against third persons who contracted with the manager unless such manager
formally transfers his right to them. Bourns v. Carman, 7 Phil. 117 (1906).
iv. Advantages and Disadvantages of Corporate Form:
(a) Four Basic Advantageous Characteristics of Corporate Organization:
(i) STRONG LEGAL PERSONALITY
A corporation is an entity separate and distinct from its stockholders. While not in fact and in
reality a person, the law treats the corporation as though it were a person by process of fiction
or by regarding it as an artificial person distinct and separate from its individual stockholders.
Remo, Jr. v. IAC, 172 SCRA 405 (1989).
The transfer of the corporate assets to the stockholder is not in the nature of a partition but
is a conveyance from one party to another. Stockholders of F. Guanzon and Sons, Inc. v.
Register of Deeds of Manila, 6 SCRA 373 (1962).
See discussions on this point, infra.
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 (ii) CENTRALIZED MANAGEMENT
As can be gleaned from Sec. 23 of Corporation Code It is the board of directors or trustees
which exercises almost all the corporate powers in a corporation. Firme v. Bukal Enterprises
and Dev. Corp., 414 SCRA 190 (2003).
The exercise of the corporate powers of the corporation rest in the Board of Directors save
in those instances where the Corporation Code requires stockholders approval for certain
specific acts. Great Asian Sales Center Corp. v. Court of Appeals, 381 SCRA 557 (2002).
(iii) LIMITED LIABILITY TO INVESTORS AND OFFICERS
One of the advantages of the corporation is the limitation of an investors liability to the amount
of investment, which flows from the legal theory that a corporate entity is separate and distinct
from its stockholders. San Juan v. Court of Appeals,
It is hornbook law that corporate personality is a shield against personal liability of its
officersa corporate officer and his spouse cannot be made personally liable under a trust
receipt where he entered into and signed the contract clearly in his official capacity.
Consolidated Bank and Trust Corp. v. Court of Appeals, 356 SCRA 671 (2001).
Obligations incurred by the corporation acting through its directors, officers and employees,
are its sole liabilities. Malayang Samahan ng mga Manggagawa sa M. Greenfield v. Ramos,
357 SCRA 77 (2001).
(iv) FREE TRANSFERABILITY OF UNITS OF OWNERSHIP FOR INVESTORS
Authority granted to corporations to regulate the transfer of its stock does not empower the
corporation to restrict the right of a stockholder to transfer his shares, but merely authorizes
the adoption of regulations as to the formalities and procedure to be followed in effecting
transfer. Thomson v. Court of Appeals, 298 SCRA 280 (1998).
(b) Disadvantages:
(i) Abuse of corporate management
(ii) Abuse of limited liability feature
(iii) High cost of maintenance
(iv) Double taxation
(c)Advantages and Disadvantages of Corporate Form:
Four Basic Advantageous Characteristics of Disadvantages:
Corporate Organization:
(i) Strong Legal Personality (i) Abuse of corporate
- entity attributable powers; management
- continuity of existence; - there is severance of control
having the right of succession, the death of an and ownership. Control will
individual stockholder does not affect corporate be vested with the BoD, thus
existence investors have no say over the
not a natural occurrence, exists mainly because use of their investment and
the law provides for it. This is what distinguishes little voice in the conduct of
the separate juridical personality of a corporation the business
from a partnership. The legal personality of a (ii) Abuse of limited liability
corp is strong because the law provides for the feature
right of succession, surviving even w/o those who - this feature had been abused
incorporated it while in a partnership the separate and may hurt innocent
juridical personality is extinguished upon the creditors.
death of a partner (ii) Cost of maintenance
no delectus personarum - the formation and
(ii) Limited Liability of Investors ( provided for by incorporation of a corp.
jurisprudence only) entails a lot of difficulties and

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 - the liability of an investor is limited their investments costs, particularly the
and investors cannot be held accountable for more requirements made by the
than what they invested. law so as to qualify for
- CLV: However there are a lot of ways to circumvent incorporation.
the law and make the shareholders liable for more (iv) Double taxation
than his actual investment (ex. A creditor requiring Dividends received by
the chairmn or president of the company as a joint individuals from domestic
debtor of the loan) corporations are subject to
- A trade-off to the abdication made by the investor of final 10% tax for income
his right to manage the property he had invested in earned on or after 1 January
the company. Under property law, a person exercises 1998 (Sec. 24(B)(2), 1997
full ownership over his property but when he invests NIRC)
it in a corporation, the owner abdicated the six jus Inter-corporate dividends
of ownership between domestic
(iii) Free Transferability of shares corporations, however, are
- A legal relationship is created which is more stable not subject to any income tax
for there are laws which govern, and the corp. and (Sec. 27(D)(4), 1997 NIRC)
In addition, there is re-
the stockholders are bound by the law.
imposition of the 10%
(iv) Centralized Management
improperly accumulated
- One of the advantages of a corp. is the limitation of
earnings tax for holding
an investors liability, this flows from the legal theory
companies (Sec. 29, 1997
that a corp. entity is separate and distinct from its
NIRC)
stockholders

III. Nature and Attributes of a Corporation

1. Nature of Power to Create a Corporation (Sec. 16, Article XII, 1987 Constitution)
The Congress shall not except by general law, provide for the formation, organization or regulation of
private corporations, Government-owned or controlled corporations may be created or established by
special charters in the interest of the common good and subject to the test of economic viability.
Congress cannot enact a law creating a private corporation with a special charter, and it follows
that Congress can create corporations with special charters only if such corporations are
government-owned or controlled. Feliciano v. Commission on Audit, 419 SCRA 363 (2004).
Note that by private corporation is not meant a corporation made with a private purpose.
What is meant is a corporation which is owned by private persons rather than the
government.
2. CORPORATION AS A PERSON:
(a) Entitled to Due Process
The due process clause is universal in its application to all persons without regard to any
differences of race, color, or nationality. Private corporations, likewise, are persons within the
scope of the guaranty insofar as their property is concerned. Smith Bell & Co. v. Natividad, 40
Phil. 136, 144 (1920).
(b) Equal Protection Clause (Smith Bell & Co. v. Natividad, 40 Phil. 136 [1920]).
(c) Unreasonable Searches and Seizure
A corporation is protected by the constitutional guarantee against unreasonable searches and
seizures, but its officers have no cause of action to assail the legality of the seizures, regardless
of the amount of shares of stock or of the interest of each of them in said corporation, and
whatever the offices they hold therein may be, because the corporation has a personality
distinct and separate from those of said officers. Stonehill v. Diokno, 20 SCRA 383 (1967).

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 A corporation is but an association of individuals under an assumed name and with a
distinct legal entity. In organizing itself as a collective body it waives no constitutional
immunities appropriate for such body. Its property cannot be taken without
compensation; can only be proceeded against by due process of law; and is protected
against unlawful discrimination. Bache & Co. (Phil.), Inc. v. Ruiz, 37 SCRA 823, 837
(1971),
A corporation enjoys constitutional rights. In that manner, it enjoys the same protection
the law grants to an individual. A corporation is entitled to due process and equal
protection by virtue of the juridical personality given by the State through the primary
franchise of the corporation.
The constitution did not distinguish whether the term person in Sec. 1 Art. III of the
Constitution refers to an individual or a juridical entity, which therefore extends to
private corporations within the scope of the guaranty.
The corporation being entitled to due process and equal protection is the consequence of the
States grant of a primary franchise to a corporation.
It emanates from the Theory of Concession, whereby the government recognizes not only
the separate juridical personality of the corporation but also grants unto it all the rights
and protections that a natural individual would possess which includes the right to due
process and equal protection.
However, a corporation is also entitled to protection against unreasonable searches and
seizures. This right however does not emanate from the grant of the State by way of
primary franchise but is sourced through the Theory of Enterprise Entity which
recognizes that regardless of Section 2 of the Corporation Code, a corporation is still for
all intents and purposes an association of individuals under an assumed name and with a
distinct legal personality. In organizing itself as a collective body, it waives no
constitutional immunities for such body.
(1) Its properties cannot be taken without just compensation
(2) it can only be proceeded against by due process of law
(3) it is protected against unlawful discrimination.
In the same line of reasoning, although a corporation is a legal fiction, a search and seizure
involves physical intrusion into the premises of the corporation, and therefore also intrudes
into the personal and business privacy of the stockholders or members who compose it. It
can be seen that the right of the individual against unreasonable searches and seizures is
extended to corporations upon whom they are members.
(d) But Not Entitled to Privilege Against Self incrimination
It is elementary that the right against self-incrimination has no application to juridical
persons. Bataan Shipyard & Engineering v. PCGG, 150 SCRA 181 (1987).
While an individual may lawfully refuse to answer incriminating questions unless protected
by an immunity statute, it does not follow that a corporation, vested with special privileges
and franchises, may refuse to show its hand when charged with an abuse of such privilege.
Hale v. Henkel, 201 U.S. 43 (1906); Wilson v. United States, 221 U.S. 361 (1911); United
States v. White, 322 U.S. 694 (1944).
The right to self-incrimation is not extended to corporation because:
1. The right is meant to prevent individuals from having to lie under oath in order to
protect his interest. It is to protect the individual from having to commit perjury just
to keep himself from going to jail. However, if a corporation lies under oath, there is
no one to bring to jail, as a corporation is just a legal fiction.

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 2. The corporation is subject to the reportorial requirements of the law. The corporation
being a mere creature of the State is subject to the whims of its Creator. The
corporation powers are limited by law.
CLV: Beats me! Perhaps such right is attributable to the moral dimension of an individual,
and since the corporation is of an amoral personality, such right may not be attributable to
it.
3. Practice of Profession
Corporations cannot engage in the practice of a profession since they lack the moral and
technical competence required by the PRC.
However, a corporation engaged in the selling of eyeglasses and which hires optometrists is
not engaged in the practice of optometry. Samahan ng Optometrists v. Acebedo International
Corp., 270 SCRA 298 (1997); Alfafara v. Acebedo Optical Company, 381 SCRA 293 (2002).
4. Liability for Torts
A corporation is civilly liable in the same manner as natural persons for torts, because the rules
governing the liability of a principal or master for a tort committed by an agent or servant are
the same whether the principal or master be a natural person or a corporation, and whether the
servant or agent be a natural or artificial person. That a principal or master is liable for every
tort which he expressly directs or authorizes, is just as true of a corporation as a natural
person. PNB v. CA.
Thus, not every tortuous act committed by an officer can be ascribed to the corporation as
its liability, for it is reasonable to presume that in the granting of authority by the
corporation to its agent, such a grant did not include a direction to commit tortuous acts
against third parties.
Our jurisprudence is wanting as to the definite scope of corporate tort. Essentially, tort
consists in the violation of a right given or the omission of a duty imposed by law; a breach
of a legal duty. The failure of the corporate employer to comply with the law-imposed duty
under the Labor Code to grant separation pay to employees in case of cessation of
operations constitutes tort and its stockholder who was actively engaged in the management
or operation of the business should be held personally liable. Sergio F. Naguiat v. NLRC,
269 SCRA 564 (1997).
a. When corporation liable for tort
A corporation is liable for tort when:
(i) the act is committed by an officer or agent
(ii) under express direction of authority from the stockholders or members acting as a body or
through the Board of Directors.
Authority given to the agent can be determined either through:
(a) such direction by the corporation is manifested, by its board adopting a resolution to
such effect
(b) by having taken advantage of such a tortious act, the corporation through its board, has
expressly or impliedly ratified such an act or estopped from impugning the same.
5. Corporate Criminal Liability (Sia v. Court of Appeals, 121 SCRA 655 [1983]; Articles
102 and 103, Revised Penal Code).
For a person to proceed criminally against a corporation, it was necessary that express
provisions of law be enacted, specifically providing that a corporation may be proceeded
against criminally and brought to court.
Since a corporation acts through its officers and agents, any violation of law by any of the
actors of the corporation in the conduct of its business involves a violation of law, the correct
rule is that all who participate in it are liable. In making actors liable, the court here said

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 attaching criminal liability to the fiction cannot be done since: (1) a corporation is only an
artificial person (2) there is a lack of intent imputable to a being since it lacks its own mind.
(Tan Boon Kong v. CA)
To apply the doctrine of separate juridical personality would allow criminals to use the
corporation as a shield or cloak to hide their criminal activities behind such.
However, the responsible officer is personally liable is personally liable for crimes
committed by the corporation only in a situation where the corporation was directly
required by law to do an act in a given manner, and the same law makes the person
who fails to perform the act in the prescribed manner expressly liable criminally.
(Sia v. People)
No criminal suit can lie against an accused who is a corporation. Times, Inc. v. Reyes, 39
SCRA 303 (1971).
When a criminal statute forbids the corporation itself from doing an act, the prohibition
extends to the board of directors, and to each director separately and individually. People v.
Concepcion, 44 Phil. 129 (1922).
While it is true that a criminal case can only be filed against the officers and not against the
corporation itself, it does not follow that the corporation cannot be a real-party-in-interest
for the purpose of bringing a civil action for malicious prosecution for the damages incurred
by the corporation for the criminal proceedings brought against its officer. Cometa v. Court
of Appeals, 301 SCRA 459 (1999).
v. Subsidiary Liability for Acts of Employees
Art. 102, RPC. Subsidiary civil liability of innkeepers, tavern-keepers and proprietors of establishments
In default of the persons criminally liable, innkeepers, tavern-keepers and any other person or
corporations shall be civilly liable for crimes committed in their establishments, in all cases where a
violation of municipal ordinances or some general or special police regulation shall have been committed
by them or their employees.
Innkeepers are also subsidiarily liable for the restitution of goods taken by robbery or theft within their
houses from guests lodging therein, or for the payment of the value therefore, provided that such guests
shall have notified in advance the innkeeper himself, or the person representing him, of the deposit of
such goods within the inn; and shall furthermore have followed the directions which such innkeeper or
his representative may have given them with respect to the care of and vigilance over such goods. No
liability shall attach in case of robbery with violence against or intimidation of persons unless committed
by the innkeepers employees.
Art. 103, RPC. Subsidiary civil liability of other persons The subsidiary liability established in the next
preceding article shall also apply to employers, teachers, persons and corporations engaged in any kind
of industry for felonies committed by their servants, pupils, workmen, apprentices, or employees in the
discharge of duties.
Thus, under these articles, a corporation is subsidiarily liable for the felonies committed
by their employees in the discharge of their duties.
vi. Recovery of Moral and Other Damages
Generally, a corporation, being an artificial person, cannot experience physical sufferings,
mental anguish, fright, serious anxiety, wounded feelings, moral shock or social humiliation
which are basis for moral damages under Art. 2217 of the Civil Code. (Prime White v. IAC)
However, a corporation may have a good reputation which, if besmirched, may be a ground
for the award of moral damages. (Mambulao Lumber Co. v. Philippine National Bank)
That being said, in such a case, it is essential to prove the existence of the factual basis
of the damage and its causal relation to petitioner's acts. Thus, where the records are
bereft of evidence that the name or reputation of the corporation has been debased, the
corporation is not entitled to moral damages. (Manila Electric Company vs. T.E.A.M.
Electronics Corporation, Technology Electronics Assembly and Management
10
 Pacific Corporation; and Ultra Electronics Instruments, Inc., G.R. No. 131723,
December 13, 2007)
A corporation whose checks were dishonored by the drawee bank despite availability of
funds and because of the negligence of the bank employees can recover moral damages for
besmirched reputation. The standing of the corporation was reduced in the business
community because of the banks negligence.(Simex International, Incorporated vs.
Court of Appeals, G.R. No. 88013 March 19, 1990)
A juridical person such as a corporation can validly complain for libel or any other form of
defamation and claim for moral damages. [Filipinas Broadcasting Network, Inc. vs. AGO
Medical And Educational Center-Bicol Christian College of Medicine, (AMEC-
BCCM) and Angelita F. Ago, G.R. No. 141994, January 17, 2005]
vii. Classes Of Corporations
a. In Relation to the State:
(a)Public Corporation (Sec. 3, Act No. 1459).
One formed or organized for the government or a portion of the state
its purpose is for general good and welfare
(b) Quasi-public Corporation. Marilao Water Consumers Associates v. IAC, 201
SCRA 437 (1991);
Marriage of both a public and a private corp.
it is granted the same powers as a private corp. but they have no incorporators, SHs or
members
An example is a water district, which, although established as a corporation, was established
for the greater good and with no stockholders. They are also placed under the jurisdiction of
the LWUA not the SEC
It is clear that a corporation is considered a government-owned or -controlled corporation
only when the Government directly or indirectly owns or controls at least a majority or 51%
share of the capital stock. Consequently, RPN was neither a government-owned nor a
controlled corporation because of the Governments total share in RPNs capital stock being
only 32.4%. (Antonio M. Carandang vs. Honorable Aniano A. Desierto, Office of the
Ombudsman, G.R. No. 153161, January 12, 2011)
(c)Private Corporation (Sec. 3, Act 1459).
One formed for some private purpose, benefit or end.
The fact that the government owns a majority of the a corporations shares does not make an
entity a public corporation. National Coal Co., v. Collector of Internal Revenue, 46 Phil. 583
(1924).
A corporation is created by operation of law under the Corporation Code while a government
corporation is normally created by special law referred to often as a charter. Bliss Dev.
Corp. Employees Union v. Calleja, 237 SCRA 271 (1994).
The test to determine whether a corporation is government owned or controlled, or private
in nature is simple is whether it is created by its own charter for the exercise of a public
function, or by incorporation under the general corporation law?.
Those with special charters are government corporations subject to its provisions, and
its employees are under the jurisdiction of the Civil Service Commission, and are
compulsory members of the GSIS. Camparedondo v. NLRC, 312 SCRA 47 (1999)
In case they get asked.
The BCDA performs basically proprietary functions, and so is a private corporation.
(Shipside v. CA)

11
 The BSP is a GOCC, although it does not receive monetary or financial subsidy from the
Government, and its funds and assets are not considered government in nature and not
subject to audit by the COA, because it received a special charter from the government, that
its governing board are appointed by the Government, and that its purpose are of public
character, for they pertain to the educational, civic and social development of the youth
which constitute a very substantial and important part of the nation. It may be considered an
instrumentality of the Government, and it employees are subject to the Civil Service Law.
Boy Scouts of the Philippines v. NLRC, 196 SCRA 176 (1991).
But being a GOCC makes it liable for laws and provisions applicable to the Government
or its entities and subject to the control of the Government. Cervantes v. Auditor
General, 91 Phil. 359 (1952).
The intervention in a transaction of the Office of the President through the Executive
Secretary does not change the independent existence of a government entity as it deals
with another government entity. PUP v. CA.
b. As to Place of Incorporation:
(a) Domestic Corporation
Incorporated in the Philippines under the laws of the Philippines
(b) Foreign Corporation (Sec. 123)
incorporated in another country and that country grants the same rights to Filipinos in terms of
doing business there; it shall have the right to transact business in the Philippines after it shall
have obtained a license to transact business in this country in accordance with this code & a
certificate of authority from the appropriate government agency
See section on foreign corporations infra.
c. As to Purpose of Incorporation:
(a) Municipal Corporation LGUs
Otherwise known as a local government unit.
Formed in order to assist the national government in local government.
(b) Religious Corporation (Secs. 109 and 116)
Section 109. Classes of religious corporations. - Religious corporations may be incorporated by one or
more persons. Such corporations may be classified into corporations sole and religious societies.
Religious corporations shall be governed by this Chapter and by the general provisions on non-stock
corporations insofar as they may be applicable.
Section 116. Religious societies. - Any religious society or religious order, or any diocese, synod, or
district organization of any religious denomination, sect or church, unless forbidden by the constitution,
rules, regulations, or discipline of the religious denomination, sect or church of which it is a part, or by
competent authority, may, upon written consent and/or by an affirmative vote at a meeting called for the
purpose of at least two-thirds (2/3) of its membership, incorporate for the administration of its
temporalities or for the management of its affairs, properties and estate by filing with the Securities and
Exchange Commission, articles of incorporation verified by the affidavit of the presiding elder, secretary,
or clerk or other member of such religious society or religious order, or diocese, synod, or district
organization of the religious denomination, sect or church, setting forth the following:
1. That the religious society or religious order, or diocese, synod, or district organization is a religious
organization of a religious denomination, sect or church;
2. That at least two-thirds (2/3) of its membership have given their written consent or have voted to
incorporate, at a duly convened meeting of the body;
3. That the incorporation of the religious society or religious order, or diocese, synod, or district
organization desiring to incorporate is not forbidden by competent authority or by the constitution, rules,
regulations or discipline of the religious denomination, sect, or church of which it forms a part;
4. That the religious society or religious order, or diocese, synod, or district organization desires to
incorporate for the administration of its affairs, properties and estate;

12
5. The place where the principal office of the corporation is to be established and located, which place
must be within the Philippines; and
The names, nationalities, and residences of the trustees elected by the religious society or religious order,
or the diocese, synod, or district organization to serve for the first year or such other period as may be
prescribed by the laws of the religious society or religious order, or of the diocese, synod, or district
organization, the board of trustees to be not less than five (5) nor more than fifteen (15). (160a)
Since in matters purely ecclesiastical the decisions of the proper church tribunals are
conclusive upon the civil tribunals, then a church member who is expelled from the
membership by the church authorities, or a priest or minister who is by them deprived of his
sacred office, is without remedy in the civil courts. Long v. Basa, 366 SCRA 113 (2001).
Luckily these provisions have been excluded so whatever.
(c) Educational Corporations (Secs. 106, 107 and 108; Sec. 25, B.P. Blg. 232)
Section 106. Incorporation. - Educational corporations shall be governed by special laws and by the
general provisions of this Code. (n)
Section 107. Pre-requisites to incorporation. - Except upon favorable recommendation of the Ministry of
Education and Culture, the Securities and Exchange Commission shall not accept or approve the articles
of incorporation and by-laws of any educational institution. (168a)
Section 108. Board of trustees. - Trustees of educational institutions organized as non-stock corporations
shall not be less than five (5) nor more than fifteen (15): Provided, however, That the number of trustees
shall be in multiples of five (5).
Unless otherwise provided in the articles of incorporation on the by-laws, the board of trustees of
incorporated schools, colleges, or other institutions of learning shall, as soon as organized, so classify
themselves that the term of office of one-fifth (1/5) of their number shall expire every year. Trustees
thereafter elected to fill vacancies, occurring before the expiration of a particular term, shall hold office
only for the unexpired period. Trustees elected thereafter to fill vacancies caused by expiration of term
shall hold office for five (5) years. A majority of the trustees shall constitute a quorum for the transaction
of business. The powers and authority of trustees shall be defined in the by-laws.
For institutions organized as stock corporations, the number and term of directors shall be governed by
the provisions on stock corporations. (169a)
(d) Charitable, Scientific or Vocational Corporations
(e) Business Corporation
4. As to Number of Members:
(a) Aggregate Corporation
An aggregate corporation is one with more than one member.
(b) Corporation Sole (Secs. 110 to 115; Roman Catholic Apostolic Administrator of
Davao, Inc. v. LRC and the Register of Deeds of Davao City, 102 Phil. 596 [1957]).
A corporation sole is a corporation made up on only one member.
As it stands, corporations sole can only be established in favor of religious denominations,
sects, or churches.
Section 110. Corporation sole. - For the purpose of administering and managing, as trustee, the affairs,
property and temporalities of any religious denomination, sect or church, a corporation sole may be
formed by the chief archbishop, bishop, priest, minister, rabbi or other presiding elder of such religious
denomination, sect or church. (154a)
Section 111. Articles of incorporation. - In order to become a corporation sole, the chief archbishop,
bishop, priest, minister, rabbi or presiding elder of any religious denomination, sect or church must file
with the Securities and Exchange Commission articles of incorporation setting forth the following:
1. That he is the chief archbishop, bishop, priest, minister, rabbi or presiding elder of his religious
denomination, sect or church and that he desires to become a corporation sole;
2. That the rules, regulations and discipline of his religious denomination, sect or church are not
inconsistent with his becoming a corporation sole and do not forbid it;
3. That as such chief archbishop, bishop, priest, minister, rabbi or presiding elder, he is charged with the
administration of the temporalities and the management of the affairs, estate and properties of his

13
religious denomination, sect or church within his territorial jurisdiction, describing such territorial
jurisdiction;
4. The manner in which any vacancy occurring in the office of chief archbishop, bishop, priest, minister,
rabbi of presiding elder is required to be filled, according to the rules, regulations or discipline of the
religious denomination, sect or church to which he belongs; and
5. The place where the principal office of the corporation sole is to be established and located, which
place must be within the Philippines.
The articles of incorporation may include any other provision not contrary to law for the regulation of the
affairs of the corporation. (n)
Section 112. Submission of the articles of incorporation. - The articles of incorporation must be verified,
before filing, by affidavit or affirmation of the chief archbishop, bishop, priest, minister, rabbi or presiding
elder, as the case may be, and accompanied by a copy of the commission, certificate of election or letter
of appointment of such chief archbishop, bishop, priest, minister, rabbi or presiding elder, duly certified
to be correct by any notary public.
From and after the filing with the Securities and Exchange Commission of the said articles of
incorporation, verified by affidavit or affirmation, and accompanied by the documents mentioned in the
preceding paragraph, such chief archbishop, bishop, priest, minister, rabbi or presiding elder shall
become a corporation sole and all temporalities, estate and properties of the religious denomination, sect
or church theretofore administered or managed by him as such chief archbishop, bishop, priest, minister,
rabbi or presiding elder shall be held in trust by him as a corporation sole, for the use, purpose, behalf
and sole benefit of his religious denomination, sect or church, including hospitals, schools, colleges,
orphan asylums, parsonages and cemeteries thereof. (n)
Section 113. Acquisition and alienation of property. - Any corporation sole may purchase and hold real
estate and personal property for its church, charitable, benevolent or educational purposes, and may
receive bequests or gifts for such purposes. Such corporation may sell or mortgage real property held by
it by obtaining an order for that purpose from the Court of First Instance of the province where the
property is situated upon proof made to the satisfaction of the court that notice of the application for
leave to sell or mortgage has been given by publication or otherwise in such manner and for such time as
said court may have directed, and that it is to the interest of the corporation that leave to sell or
mortgage should be granted. The application for leave to sell or mortgage must be made by petition, duly
verified, by the chief archbishop, bishop, priest, minister, rabbi or presiding elder acting as corporation
sole, and may be opposed by any member of the religious denomination, sect or church represented by
the corporation sole: Provided, That in cases where the rules, regulations and discipline of the religious
denomination, sect or church, religious society or order concerned represented by such corporation sole
regulate the method of acquiring, holding, selling and mortgaging real estate and personal property, such
rules, regulations and discipline shall control, and the intervention of the courts shall not be necessary.
(159a)
Section 114. Filling of vacancies. - The successors in office of any chief archbishop, bishop, priest,
minister, rabbi or presiding elder in a corporation sole shall become the corporation sole on their
accession to office and shall be permitted to transact business as such on the filing with the Securities
and Exchange Commission of a copy of their commission, certificate of election, or letters of
appointment, duly certified by any notary public.
During any vacancy in the office of chief archbishop, bishop, priest, minister, rabbi or presiding elder of
any religious denomination, sect or church incorporated as a corporation sole, the person or persons
authorized and empowered by the rules, regulations or discipline of the religious denomination, sect or
church represented by the corporation sole to administer the temporalities and manage the affairs, estate
and properties of the corporation sole during the vacancy shall exercise all the powers and authority of
the corporation sole during such vacancy. (158a)
Section 115. Dissolution. - A corporation sole may be dissolved and its affairs settled voluntarily by
submitting to the Securities and Exchange Commission a verified declaration of dissolution.
The declaration of dissolution shall set forth:
1. The name of the corporation;
2. The reason for dissolution and winding up;
3. The authorization for the dissolution of the corporation by the particular religious denomination, sect
or church;
14
4. The names and addresses of the persons who are to supervise the winding up of the affairs of the
corporation.
Upon approval of such declaration of dissolution by the Securities and Exchange Commission, the
corporation shall cease to carry on its operations except for the purpose of winding up its affairs.
The doctrine in Republic v. Villanueva, 114 SCRA 875 (1982) and Republic v. Iglesia ni Cristo,
127 SCRA 687 (1984), that a corporation sole is disqualified to acquire/hold alienable lands of
the public domain, because of the constitutional prohibition qualifying only individuals to
acquire land and the provision under the Public Land Act which applied only to Filipino citizens
or natural persons, has been expressly overturned in Director of Land v. IAC, 146 SCRA 509
(1986).1
5. As to Legal Status:
(a) De Jure Corporation
Those formed by issuance of certificate of incorporation and in strict or substantial conformity
with the mandatory statutory requirements for incorporation.
Existence cannot be collaterally attacked.
(b) De Facto Corporation (Sec. 20)
Section 20. De facto corporations. - The due incorporation of any corporation claiming in good faith to be
a corporation under this Code, and its right to exercise corporate powers, shall not be inquired into
collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by
the Solicitor General in a quo warranto proceeding.
De facto corporations are formed by colorable compliance with the requirements of a valid law.
Cannot be collaterally attacked.
See infra.
(c) Corporation by Estoppel (Sec. 21)
Section 21. Corporation by estoppel. - All persons who assume to act as a corporation knowing it to be
without authority to do so shall be liable as general partners for all debts, liabilities and damages
incurred or arising as a result thereof: Provided, however, That when any such ostensible corporation is
sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not
be allowed to use as a defense its lack of corporate personality.
On who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on
the ground that there was in fact no corporation.
Under the doctrine of corporation by estoppel, those who assume to act as a corporation,
knowing it to be without authority to do so are liable as general partners for all debts. They are
estopped from claiming lack of corporate personality as a defense.
(c)Corporation by Prescription
The Roman Catholic Church is a corporation by prescription, with acknowledged juridical
personality inasmuch as it is an institution which antedated almost a thousand years any other
personality in Europe, and which existed when Grecian eloquence still flourished in Antioch and
when idiots were still worshipped in the temple of Mecca. Since it is a corporation by
prescription, it has no nationality, and hence, the nationality test does not apply. See infra.
6. As to Existence of Shares (Secs. 3 and 5):
Sec. 3 Classes of Corporation Corporations formed or organized under this Code may be stock or non-
stock corporations. Corporations which have capital stock divided into shares and are authorized to
distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the
shares held are stock corporations. All other corporations are non-stock corporations.
Sec. 5 Corporations and incorporators, stockholders and members Corporators are those who compose
a corporation, whether as stockholders or as members. Incorporators are those stockholders or members

Overturning affirmed in Republic v. Iglesia ni Cristo, 127 SCRA 687 (1984); Republic v. IAC, 168
1

SCRA 165 (1988).

15
mentioned in the articles of incorporation as originally forming and composing the corporation and who
are signatories thereof.
Corporators in a non-stock corporation are called stockholders or shareholders. Corporators in a non-
stock corporation are called members.
(a) Stock Corporation
Stock corporations have capital stock divided into shares, and are authorized to distribute
dividends on the basis thereof.
(b) Non-Stock Corporation
Non-stock corporations are all other corporations, which do not have shares and dividends.
viii. As to openness to the public
(a)Openone which is open to any person who may wish to become a stockholder or member
thereof.
(b) Closedone whose articles of incorporation limit the number of people who may hold
shares to a specified number, which is not more than 20. See portion on closed corporations,
infra.
ix. As to relationship of management and control
(a) Holding Corporationone which controls another has a subsidiary by the power to
elect the management of the latter. It is one that holds stocks in other companies for
purposes of control rather than mere investment.
(b) Parent Corporationwhen a corporation owns more than 50% of the voting stock of
another corporation, it becomes its parent corporation.
(c) Subsidiaryone which is so related to another corporation that the majority of its
directors can be directed either directly or indirectly by the holding corporation. A
corporation more than 50% of whose voting stock is owned or controlled directly or
indirectly through one or more intermediaries is a subsidiary
(d) Affiliatea corporation that, directly or indirectly, through one or more intermediaries,
is controlled by, or is under the common control of a parent corporation alongside
another subsidiary.
x. As to whether religious or not
Ecclesiastical, which is religious, or lay, which is not.
xi. As to whether charitable or not.
Eleemosynary, which is charitable, or civil, which is organized for profit.

16
 b. Corporate Nationality, how determined.
Section 123: Definition and rights of foreign corporations For the purposes of this Code, a foreign
corporation is one formed, organized or existing under any laws other than those of the Philippines and
whose laws allow Filipino citizens and corporations to do business in the Philippines after it shall have
obtained a license to transact business in this country in accordance with this Code and a certificate of
authority from the appropriate government agency.
There are three tests to determine the nationality of the corporation, namely:
1.) Place of incorporation test that a corporation is of the nationality of the country under
whose laws it has been organized and registered, embodied in Sec. 123 of the Corporation
Code.
2.) Control test nationality determined by the nationality of the majority stockholders,
wherein control is vested.
Because it is generally used during wartime, it is also called the wartime test.
Nowadays, it is also used for determining compliance with citizenship requirements
under the FIA.
3) Grandfather Rule
Supposedly introduced in the case of Palting v. San Jose, although Ive read that like a billion
times and dont see it, under the grandfather rule, when the ownership of a corporation
cannot be determined by the control test, the corporate stockholders of a corporation must
be grandfathered, that is, their ownership will also be determined.
1. Place of Incorporation Test
Sec. 123 Definition and rights of foreign corporations For the purposes of this Code, a foreign
corporation is one formed, organized or existing under any laws other than those of the
Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or
state. It shall have the right to do business in its own country or state. It shall have the right to transact
business in the Philippines after it shall have obtained a license to transact business in this country in
accordance with this Code and a certificate of authority from the appropriate government authority.
Again, under this article, and thus the place of incorporation test, the place where the
corporation is formed, organized, and existing, and under which laws the corporation was
formed shall determine its nationality.
This rule is the general rule. The other rules only apply in specific situations
ii. Wartime Test
Under the wartime or control test, the nationality of a private corporation is determined by
the character or citizenship of its controlling stockholders. (Filipinas Compania de Seguros v.
Christern, Huenefeld & Co., Inc., 89 Phil. 54 [1951]; Davis Winship v. Philippine Trust Co., 90
Phil. 744 [1952]; Haw Pia v. China Banking Corp., 80 Phil. 604 [1948]).
It is so-called because the old rule was that this test only applied during war-time, in order
to determine if a corporation is an enemy corporation.
Nowadays, however, it is also applied to nationalized industries, although the provisions
are a bit different under the FIA. On that
a. Rule on nationality under the Foreign Investments Act
Under the FIA, as amended, to be considered a Philippine national, a corporation must be either
i. A domestic corporation whose outstanding voting stock is at least 60% Filipino owned,
and at least 60% represented by Filipinos on the Board of Directors, (double 60%
rule) or
ii. A foreign corporation that is 100% Filipino owned.

17
 Note, however, that the corporations are still domestic and foreign respectively. It is just
that, for the purposes of the FIA, the foreign corporation that is wholly-Filipino-owned is
granted the same status as a domestic corporation.
b. Capital for the purposes of nationalized industries
For the purposes of fulfilling equity ownership requirements under the Constitution, the key
phrase is 60% of capital.
Under the case of Gamboa v. Teves, capital was taken to mean only stocks with voting
privileges, in order to guarantee effective control of such corporations by Filipinos.
The second case of Heirs of Gamboa v. Teves added a requirement that if there are various
classes, including non-voting shares, each class must also be 60% Filipino-owned. This is
because there are certain situations, infra, where all shareholders must vote. Effective
control requires that even in these sitautions
c. Nationality of Religious Corporations
Generally, the nationality of the person constituting a corporation sole is irrelevant.
However, for the purposes of ownership of land, which is subject to a constitutional
limitation., the fact that the religious association has no capital stock does not suffice to
escape the constitutional inhibition, since it is admitted that its members are of foreign
nationality. . . and the spirit of the Constitution demands that in the absence of capital stock,
the controlling membership should be composed of Filipino citizens. Register of Deeds of
Rizal v. Ung Sui Si Temple, 97 Phil. 58 (1955).
iii. Grandfather Rule
The grandfather rule is a method by which the percentage of Filipino equity in corporations
engaged in nationalized or partly nationalized areas of activity provided for under the
Constitution and other national laws is accurately computed, in cases where corporate
shareholders are part of the ownership structure by considering the nationality of the second or
even subsequent tier of ownership to determine the nationality of the corporate shareholder.
It should be applied when two requisites are met: (1) when there is involved a nationalized
or partly nationalized sector of Philippine economy and (2) when there is tiering, meaning
the corporation is partly-owned by another corporation.
It was supposedly based on Palting v. San Jose, where it was ruled that for a corporation to
comply to the nationalization requirements of the Constitution, the equity requirements
establishing the nationality of the controlling interest in the corporation should not be
stretched to absurdity. The application of the GFR to determine the nationality of the
ultimate controller of a subject corporation cannot go beyond the level of what is reasonable.
I really dont see that. Ive read that case a billion times, and what it says is exactly that
you should not look beyond the capital structure as it is, but whatever. Thats the basis
now.
Until 2015, this was only applied where the corporation had less than the required, usually
60%, Filipino ownership. Lets illustrate.
Control Test Grandfather Rule
Stock ownership Foreign Corporation owns 60% of a corporation engaged in a
nationalized industry.
Foreign corporation is itself 60% Filipino-owned.
Remaining 40% owned by foreigners.
Application of test As foreign corporation is 60% The Filipino corporation is
Filipino, all of its shares in the grandfathered. 60% of 60% is
nationalized corp are Filipino. 36%. Thus, the corporation is
Thus, the latter is Filipino 64% Foreign and 36% Filipino
18
 Nationality of Filipino Foreign.
corporation engaged in
nationalized industry.
As you can see, if a corporation is grandfathered, its probably going to be a foreign corp.
Which is contrary to the state policy of attracting foreign investment.
And then Narra v. Redmont came along. After the MR, the rules on the grandfather rule are
as follows:
(1) The control test is still the test generally applied in nationalized industries.
(2) However, when the alien ownership exceeds constitutional or statutory limits, or, and
heres the new bit, when such ownership appears to be of doubtful
constitutionality, the grandfather rule must be applied.
See more discussions under the portion on Capital and Foreign corporations, infra.

19

c. Separate Juridical Personality And Doctrine Of Piercing The
Veil Of Corporate Fiction
1. MAIN DOCTRINE: A Corporation Has A Personality Separate and Distinct from
its Stockholders or Members
Sec. 2 Corporation defined A corporation is an artificial being created by operation of law, having the
right of succession, and the powers, attributes, and properties expressly authorized by law or incident to
its existence.
Article 44 The following are juridical persons:
(2) other corporations, institutions and entities for public interest or purpose, created by law, their
personality begins as soon as they have been constituted according to law;
(3) corporations, partnerships and associations for private interest or purpose to which the law grants a
juridical personality, separate and distinct from that of each shareholder, partner or member.
ii. Importance of Protecting Main Doctrine:
The separate juridical personality includes the right of succession, limited liability, centralized
management, and generally free transferability of shares of stock. Therefore, an undermining of
the separate juridical personality of the corporation such as the application of the piercing
doctrine, necessarily dilutes any or all of those attributes.
A corporation, upon coming into existence, is invested by law with a personality separate
and distinct from those persons composing it as well as from any other legal entity to which
it may be related. This separate and distinct personality is, however, merely a fiction created
by law for conveyance and to promote the ends of justice. LBP v. Court of Appeals, 364 SCRA
375 (2001).
One of the advantages of a corporate form of business organization is the limitation of an
investors liability to the amount of the investment. This feature flows from the legal theory
that a corporate entity is separate and distinct from its stockholders. However, the
statutorily granted privilege of a corporate veil may be used only for legitimate purposes. On
equitable considerations, the veil can be disregarded when it is utilized as a shield to commit
fraud, illegality or inequity; defeat public convenience; confuse legitimate issues; or serve as
a mere alter ego or business conduit of a person or an instrumentality, agency or adjunct of
another corporation. San Juan Structural v. Court of Appeals, 296 SCRA 631 (1998).
3. Applications:
a. Majority Equity Ownership and Interlocking Directorship is not sufficient to
pierce the corporate veil
Ownership of a majority of capital stock and the fact that majority of directors of a corporation
are the directors of another corporation creates no employer-employee relationship with the
latter's employees. (DBP v. NLRC)
Mere ownership by a single stockholder or by another corporation of all or nearly all of the
capital stock of a corporation is not of itself sufficient ground for disregarding the separate
corporate personality. (Manila Hotel Corp. v. NLRC, 343 SCRA 1 (2000).
Mere substantial identity of incorporators of two corporations does not necessarily imply
fraud, nor warrant the piercing of the veil of corporate fiction. In the absence of clear and
convincing evidence to show that the corporate personalities were used to perpetuate fraud,
or circumvent the law, the corporations are to be rightly treated as distinct and separate
from each other. Laguio v. NLRC, 262 SCRA 715 (1996).
Having interlocking directors, corporate officers and shareholders is not enough justification
to pierce the veil of corporate fiction in the absence of fraud or other public policy
considerations. Velarde v. Lopez, 419 SCRA 422 (2004); Sesbreno v. Court of Appeals, 222
SCRA 466 (1993).
20
 b. Being Corporate Officer:
Being an officer or stockholder of a corporation does not by itself make one's property also
of the corporation, and vice-versa, for they are separate entities, and that shareholders are
in no legal sense the owners of corporate property which is owned by the corporation as a
distinct legal person. Good Earth Emporium, Inc. v. CA,
The mere fact that one is president of the corporation does not render the property he owns
or possesses the property of the corporation, since that president, as an individual, and the
corporation are separate entities. Cruz v. Dalisay,
Corporate personality is a shield against personal liability of its officersa corporate officer
and his spouse cannot be made personally liable under a trust receipt where he entered into
and signed the contract clearly in his official capacity. Consolidated Bank and Trust Corp. v.
Court of Appeals, 356 SCRA 671 (2001).
c. Dealings Between Corporation and Stockholders:
The fact that the majority stockholder had used his own money to pay part of the loan of the
corporation cannot be used as the basis to pierce. LBP v. Court of Appeals, 364 SCRA 375
(2001).
Use of a controlling stockholders initials in the corporate name is not sufficient reason to
pierce the corporate veil, since by that practice alone does it mean that the said corporation
is merely a dummy of the individual stockholder. A corporation may assume any name
provided it is lawful, and there is nothing illegal in a corporation acquiring the name or as in
this case, the initials of one of its shareholders. LBP v. Court of Appeals, 364 SCRA 375
(2001).
The mere fact that a stockholder sells his shares of stock in the corporation during the
pendency of a collection case against the corporation does not make such stockholder
personally liable for the corporate debt, since the disposing stockholder has no personal
obligation to the creditor, and it is the inherent right of the stockholder to dispose of his
shares of stock anytime he so desires. PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001).
Just because two foreign companies came from the same country and closely worked
together on certain projects would the conclusion arise that one was the conduit of the
other, thus piercing the veil of corporate fiction. Marubeni Corp. v. Lirag, 362 SCRA 620
(2001).
The creation by DBP as the mother company of the three mining corporations to manage and
operate the assets acquired in the foreclosure sale lest they deteriorate from non-use and
lose their value, does not indicate fraud or wrongdoing and will not constitute application of
the piercing doctrine. DBP v. Court of Appeals,
The facts that two corporations may be sister companies, and that they may be sharing
personnel and resources, without more, is insufficient to prove that their separate corporate
personalities are being used to defeat public convenience, justify wrong, protect fraud, or
defend crime. Padilla v. Court of Appeals, 370 SCRA 208 (2001).
d. On Privileges Enjoyed:
The tax exemption clause in the charter of a corporation cannot be extended to nor enjoyed
by even its controlling stockholders. Manila Gas Corp. v. Collector of Internal Revenue, 62
Phil. 895 (1936).
e. Obligations and Debts:
Corporate debt or credit is not the debt or credit of the stockholder nor is the stockholder's
debt or credit that of the corporation. Traders Royal Bank v. Court of Appeals, 177 SCRA 789
(1989).

21
 A corporation has no legal standing to file a suit for recovery of certain parcels of land
owned by its members in their individual capacity, even when the corporation is organized
for the benefit of the members. Sulo ng Bayan v. Araneta, Inc., 72 SCRA 347 (1976).
Stockholders have no personality to intervene in a collection case covering the loans of the
corporation since the interest of shareholders in corporate property is purely inchoate. Saw
v. CA, 195 SCRA 740 (1991); and vice-versa Francisco Motors Corp. v. Court of Appeals, 309
SCRA 72 (1999).
The majority stockholder cannot be held personality liable for the attorneys fees charged by
a lawyer for representing the corporation. Laperal Dev. Corp. v. Court of Appeals, 223 SCRA
261 (1993).
Even when the foreclosure on the corporate assets was wrongfully done, stockholders have
no standing to recover for themselves moral damages; otherwise, it would amount to the
appropriation by, and the distribution to, such stockholders of part of the corporations
assets before the dissolution of the corporation and the liquidation of its debts and liabilities.
APT v. Court of Appeals, 300 SCRA 579 (1998).
The obligations of a stockholder in one corporation cannot be offset from the obligation of
the stockholder in a second corporation, since the corporation has a separate juridical
personality. CKH Industrial and Dev. Corp v. Court of Appeals, 272 SCRA 333 (1997).
f. Property
A corporation has a personality distinct from that of its stockholders. Properties registered
in the name of the corporation are owned by it as an entity separate and distinct from its
members. (Ricardo S. Silverio, jr., Esses Development Corporation, and Tri-Star
Farms, Inc. vs. Filipino Business Consultants, Inc., G.R. No. 143312, August 12,
2005)
g. Personality to file a case.
A corporation by estoppel may be impleaded as a party defendant considering that it possesses
attributes of a juridical person, otherwise, it can not be held liable for damages and injuries it
may inflict to other persons. Macasaet vs. Francisco, GR No. 156759, June 5, 2013
The personality of a corporation is distinct and separate from the personalities of its
stockholders. Hence, its stockholders are not themselves the real parties in interest to claim
and recover compensation for the damages arising from the wrongful attachment of its
assets. Only the corporation is the real party in interest for that purpose. (Stronghold
Insurance Company, Inc. vs. Tomas Cuenca, et. al., G.R. No. 173297, March 6, 2013)
iii. Piercing the Veil of Corporate Fiction:
The notion of corporate entity will be pierced or disregarded and the individuals composing it
will be treated as identical if the corporate entity is being used as a cloak or cover for fraud
or illegality; as a justification for a wrong; or as an alter ego, an adjunct, or a business
conduit for the sole benefit of the stockholders. Gochan v. Young, 354 SCRA 207 (2001);
a. Nature of Doctrine (Traders Royal Bank v. Court of Appeals, 269 SCRA 15
[1997])
The doctrine of piecing the corporate veil is an equitable remedy which may only be awarded in
cases when the corporate fiction is used to defeat public convenience, justify wrong, protect
fraud or defend crime or where a corporation is a mere alter ego or business conduit of a
person.
It requires the court to see through the protective shroud which exempts its stockholders
from liabilities that ordinarily, they could be subject to or distinguishes one corporation from

22
 a seemingly separate one, were it not for the existing corporate fiction. The court must be
sure that the corporate fiction was misused..
It is the protection of innocent 3rd parties dealing with corporate entity that the law seeks to
protect by this doctrine.
When the legal fiction of separate corporate personality is abused, such as when the same is
used for fraudulent or wrongful ends, the courts have not hesitated to pierce the corporate
veil. Francisco v. Mejia, 362 SCRA 738 (2001).
Piercing the veil of corporation fiction is warranted only in cases when the separate legal
entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime,
such that in the case of two corporations, the law will regard the corporation as merged into
one. Velarde v. Lopez, 419 SCRA 422 (2004).
The legal fiction of separate corporate existence is not at all times invincible and the same
may be pierced when employed as a means to perpetrate a fraud, confuse legitimate issues,
or used as a vehicle to promote unfair objectives or to shield an otherwise blatant violation
of the prohibition against forum-shopping. While it is settled that the piercing of the
corporate veil has to be done with caution, this corporate fiction may be disregarded when
necessary in the interest of justice. Rovels Enterprises, Inc. v. Ocampo, 391 SCRA 176
(2002).
The doctrine of piercing the veil of corporate fiction is applicable not only to corporations
but also to a single proprietorships. Prince Transport, Inc. vs. Garcia, GR No. 167291,
January 12, 2011
b. Rules on Piercing
(1) It has no res judicata effect. It only applies to a particular case
(2) It is applied to prevent fraud or wrong and not for other purposes. Thus, it cannot
be employed to complete claims against the corporation.
(3) Essentially a judicial prerogative only.
(4) Must be shown to be necessary and with factual basis. Thus, it must be done with
caution, and the wrongdoing must be clearly and convincingly established.
c. Procedural rules on piercing the veil
The court must first acquire jurisdiction over the corporation or corporations involved before its
or their separate personalities are disregarded; and the doctrine of piercing the veil of
corporate entity can only be raised during a full-blown trial over a cause of action duly
commenced involving parties duly brought under the authority of the court by way of service of
summons or what passes as such service. Kukan International Corporation vs. Hon.
Judge Amor Reyes, G.R. No. 182729, 29 September 2010
However, if the RTC had sufficient factual basis to conclude that the two corporations are
one and the same entity as when they have the same President and controlling shareholder
and it is generally known in the place where they do business that both transportation
companies are one, the third party claim filed by the other corporation was set aside and the
levy on its property held valid even though the latter was not made a party to the case . The
judgment may be enforced against the other corporation to prevent multiplicity of suits
and save the parties unnecessary expenses and delay. Gold Line Tours vs. Heirs of Maria
Concepcion Lacsa, GR No. 159108, 18 June 2012
d. Classification of piercing cases
The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely:
1) Defeat of public convenience as when the corporate fiction is used as a vehicle for the
evasion of an existing obligation, also known as equity cases;

23
 2) Fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or
defend a crime; or
3) Alter ego cases, where a corporation is merely a farce since it is a mere alter ego or
business conduit of a person, or where the corporation is so organized and controlled and
its affairs are so conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation.
Point of Distinction
In fraud cases, it is necessary that the petitioners seek to enforce the claim against the
stockholders or corporate officers, unlike in alter ego cases.
Further, in fraud cases only one act of fraud is necessary to hold them liable whereas in an
alter ego case, a series of transaction has to proven before they may be held liable.
a. Fraud
In the cases of fraud, the piercing is done because there is a wrong committed.
When the legal fiction of the separate corporate personality is abused, such as when the
same is used for fraudulent or wrongful ends, the courts have not hesitated to pierce the
corporate veil. Francisco v. Mejia, 362 SCRA 738 (2001).
Elements of fraud cases
(1) There must have been fraud or an evil motive in the affected transaction. Mere proof of
control by itself would not authorize piercing.
(2) The main action should seek for the enforcement of pecuniary claims pertaining to the
corporation against corporate officers or stockholders, or vice versa, and
(3) The corporate entity has been used in the perpetration of the fraud, or in justification of a
wrong, or to escape personal liability.
Examples of piercing the veil due to fraud
(1) Acts by Controlling Shareholder: Where a stockholder, who has absolute
control over the business and affairs of the corporation, entered into a contract with
another corporation through fraud and false representations, such stockholder shall be
liable soidarily with co-defendant corporation even when the contract sued upon was
entered into on behalf of the corporation. Namarco v. Associated Finance Co., 19 SCRA
962 (1967).
Where the corporation is used as a means to appropriate a property by fraud which property
was later resold to the controlling stockholders, then piercing should be allowed. Heirs of
Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000).
(2) Avoidance or Cotnractual of Civil Liabilities
One cannot evade civil liability by incorporating properties or the business. Palacio v. Fely
Transportation Co
When used to avoid a contractual commitment against non-competition, the separate
corporate personality may be pierced. Villa Rey Transit, Inc. v. Ferrer, 25 SCRA 845 (1968).
(3) Avoiding Legal Restrictions:
The corporate veil cannot be used to shield an otherwise blatant violation of the prohibition
against forum-shopping. Shareholders, whether suing as the majority in direct actions or as the
minority in a derivative suit, cannot be allowed to trifle with court processes, particularly where
the corporation itself has not been remiss in vigorously prosecuting or defending corporate
causes and in using and applying remedies available to it. First Philippine International Bank v.
Court of Appeals, 252 SCRA 259 (1996).
(4) In Parent-Subsidiary Relations; Affiliates
In cases of parent-subsidiary relations, it is necessary that the factual circumstances be
considered in order to distinguish between a case of fraud or alter ego. There may be an

24
inordinate showing of alter ego elements but that does not necessarily make it an alter ego
case. Therefore, alter ego in fraud cases must be distinguished from pure alter ego. In fraud
cases, the alter ego concept pertains to employing the corporation even for a single transaction
to do evil while in pure alter ego cases, the courts go into systematic findings of utter disregard
and disrespect of the separate juridical personality of the corporation.
Guiding Principles in Fraud Cases:
There must have been fraud or an evil motive in the affected transaction, and the mere
proof of control of the corporation by itself would not authorize piercing; and
The main action should seek for the enforcement of pecuniary claims pertaining
to the corporation against corporate officers or stockholders.
b. Alter Ego Cases
In alter ego cases, the allegation does not go into fraud or malicious intent but a disrespect for
the corporate fiction.
Here, the corporation is being used as a conduit or front for the activities of a person,
whether natural or juridical, in order to avoid liability or gain advantage over another
without really employing fraud.
Here, if piercing is allowed then the corporate existence of the conduit corporation is
disregarded and the person or corporation behind the corporation shall be considered as one
and the liability of one is the liability of the other.
The main intent here is not to make the board of directors of the conduit corporation liable
but to make the corporation behind the existence of the conduit liable.
The creation of a corporation cannot be used as a means or private convenience where it is
to be used by other corporations or individuals as a means to circumvent liability or cause a
disruption of normal business practice in dealing with corporations.
Factual Basis:
The question of whether a corporation is a mere alter ego is a purely one of fact, and the
burden is on the party who alleges it. PNB v. Andrada Electric & Engineering Co., 381 SCRA
244 (2002); MR Holdings,Ltd. V. Bajar, 380 SCRA 617 (2002); Heirs of Ramon Durano, Sr. v. Uy,
344 SCRA 238 (2000); Concept Builders, Inc. v. NLRC, 257 SCRA 149 (1996).
Elements; Instrumentality Test
Jurisprudentially, the corporate veil may be pierced under the alter ego doctrine if it passes a
three-pronged test to determine the application of the alter ego theory, which is also known
as the instrumentality theory, namely:
1) Control, not mere majority or complete stock control, but complete domination, not only of
finances but of policy and business practice in respect to the transaction attacked so
that the corporate entity as to this transaction had at the time no separate mind, will or
existence of its own
2) Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and
unjust act in contravention of plaintiffs legal right; and
3) The aforesaid control and breach of duty must have proximately caused the injury or
unjust loss complained of. (Concept Builders v. NLRC)
The first prong is the "instrumentality" or "control" test. This test requires that the
subsidiary be completely under the control and domination of the parent. It inquires whether
a subsidiary corporation is so organized and controlled and its affairs are so conducted as to
make it a mere instrumentality or agent of the parent corporation such that its separate
existence as a distinct corporate entity will be ignored. In addition, the control must be
shown to have been exercised at the time the acts complained of took place.

25
 The second prong is the "fraud" test. This test requires that the parent corporations
conduct in using the subsidiary corporation be unjust, fraudulent or wrongful. It examines
the relationship of the plaintiff to the corporation. It recognizes that piercing is appropriate
only if the parent corporation uses the subsidiary in a way that harms the plaintiff creditor.
As such, it requires a showing of "an element of injustice or fundamental unfairness."
The third prong is the "harm" test. This test requires the plaintiff to show that the
defendants control, exerted in a fraudulent, illegal or otherwise unfair manner toward it,
caused the harm suffered. A causal connection between the fraudulent conduct committed
through the instrumentality of the subsidiary and the injury suffered or the damage incurred
by the plaintiff should be established. The plaintiff must prove that, unless the corporate veil
is pierced, it will have been treated unjustly by the defendants exercise of control and
improper use of the corporate form and, thereby, suffer damages. DBP v. Hydro, GR. No.
167603, March 13, 2013
Examples
(1) Using Corporation as Conduit or Alter Ego:
Where the capital stock is owned by one person and it functions only for the benefit of such
individual owner, the corporation and the individual should be deemed the same. Arnold v.
Willets and Patterson, Ltd.,
When corporation is merely an adjunct, business conduit or alter ego of another corporation,
the fiction of separate and distinct corporation entities should be disregarded. Tan Boon
Bee & Co. v. Jarencio, 163 SCRA 205 (1988).
Where a debtor registers his residence to a family corporation in exchange of shares of stock
and continues to live therein, then the separate juridical personality may be disregarded.
PBCom v. CA, 195 SCRA 567 (1991).
Use of nominees to man the corporation for the benefit of the controlling stockholder.
Marvel Building v. David
(2) Mixing-up Operations; Disrespect to the Corporate Entity:
Employment of same workers; single place of business, etc., may indicate alter ego situation.
La Campana Coffee Factory v. Kaisahan ng Manggagawa, 93 Phil. 160 (1953); Shoemart v.
NLRC, 225 SCRA 311 (1993).
Where two business enterprises are owned, conducted, and controlled by the same parties,
both law and equity will, when necessary to protect the rights of third persons, disregard the
legal fiction that two corporations are distinct entities and treat them as identical. Sibagat
Timber Corp. v. Garcia, 216 SCRA 70 (1992).
Where corporate fiction was used to perpetrate social injustice or as a vehicle to evade
obligations or confuse the legitimate issues (as in this case where the actions of
management of the two corporations created confusion as to the proper employer of
claimants), it would be discarded and the two corporations would be merged as one. Azcor
Manufacturing, Inc. v. NLRC, 303 SCRA 26 (1999).
Mixing of personal accounts with corporate bank deposit accounts. Ramirez Telephone Corp.
v. Bank of America,
(3) Parent-Subsidiary relationships
The Alter ego doctrine may be invoked in parent-subsidiary relationship.
However, the general rule remains that if used for legitimate functions, a subsidiarys
separate existence will be respected.
That being said, when the subsidiary is used to evade payment of taxes, the veil may be
pierced. (Koppel v. Yatco)
An alias writ of execution against a subsidiary cannot be enforced against its parent
company because the court has not acquired jurisdiction over the latter and while the parent
26
 company owns and controls the subsidiary, there is no showing that the control was used to
violate the rights of the plaintiff. Pacific Rehouse Corporation vs. CA
The defense of separateness will be disregarded where the business affairs of a subsidiary
corporation are so controlled by the mother corporation to the extent that it becomes an
instrument or agent of its parent. But even when there is dominance over the affairs of the
subsidiary, the doctrine of piercing the veil of corporate fiction applies only when such
fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime.
(Bibiano O. Reynoso, IV vs. Hon. Court of Appeals and General Credit Corporation,
G.R. Nos. 116124-25, November 22, 2000)
Proof Required; Burden on Proof
The person who invokes the doctrine must always be the injured party.
Absence of proof that control over a corporation is being used by a mother company to
commit fraud or wrong, there would be no basis to disregard their separate juridical
personalities. Ramoso v. Court of Appeals, 347 SCRA 463 (2000); Guatson Intl Travel and
Tours, Inc. v. NLRC, 230 SCRA 815 (1990).
If used to perform legitimate functions, a subsidiarys separate existence shall be respected,
and the liability of the parent corporation as well as the subsidiary will be confined to those
arising in their respective businesses. Even when the parent corporation agreed to the terms
to support a standby credit agreement in favor of the subsidiary, does not mean that its
personality has merged with that of the subsidiary. MR. Holdings, Ltd. V. Bajar, 380 SCRA
617 (2002).
Summary of Probative Factors:
The conditions under which the juridical entity may be disregarded vary according to the
peculiar facts and circumstances of each case. No hard and fast rule can be laid down, but
there are some probative factors of identity that will justify the application of the doctrine.
Summary probative factors:
(1) stock membership by one or common ownership of both
(2) identity of directors and officers (management)
(3) manner of keeping corporate books and records (management)
(4) methods of conducting business (management). (PNB v. Ritratto)
Guiding Principles in Alter-Ego Cases:
Doctrine applies even in the absence of evil intent, because of the direct violation of a
central corporate law principle of separating ownership from management;
Doctrine in such cases is based on estoppel: if stockholders do not respect the separate
entity, others cannot also be expected to be bound by the separate juridical entity;
Piercing in alter ego cases may prevail even when no monetary claims are sought to be
enforced against the stockholders or officers of the corporation.
c. Equity Cases/Defeat of Public Convenience
Equity subdivision is the catch-all subdivision. If not fraud or alter ego, the court may grant
piercing as an equitable remedy, but such is usually resorted to as a reason in consonance
with fraud or alter ego cases. As such it is of purely judicial discretion.
The three cases may appear together in one application:
The application of the doctrine to a particular case does not deny the corporation of legal
personality for any and all purposes, but only for the particular transaction or instance for
which such doctrine was applied.
Equitable Remedy: The doctrine of piercing the corporate veil is an equitable doctrine
developed to address situations where the separate corporate personality of a corporation is
abused or used for wrongful purposes. PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001).

27
 Remedy of Last Resort: Piercing the corporate veil is remedy of last resort and is not
available when other remedies are still available. Umali v. Court of Appeals, 189 SCRA 529
(1990).
Thus, piercing is not allowed unless the remedy sought is to make the officer or another
corporation pecuniary liable for corporate debts, and there are other remedies available to
enforce them. (id)
e. Corporation may not invoke separate corporate identity
The rationale behind piercing a corporations identity in a given case is to remove the barrier
between the corporation from the persons comprising it to thwart the fraudulent and illegal
schemes of those who use the corporate personality as a shield for undertaking certain
proscribed activities.
It cannot be used the corporation to avoid being ordered to answer for the personal liability
of certain individual directors, officers and incorporators concerned. Francisco Motors Corp.
v Court of Appeals, 309 SCRA 72 (1999).
The piercing doctrine is meant to prevent fraud, and cannot be employed when the net
result would be to perpetrate fraud or a wrong. Gregorio Araneta, Inc. v. Tuason de Paterno
and Vidal, 91 Phil. 786 (1952).
f. Evidence Required
To disregard the separate juridical personality of a corporation, it is elementary that the
wrongdoing cannot be presumed and must be clearly and convincingly established. Luxuria
Homes, Inc. v. Court of Appeals, 302 SCRA 315 (1999).
The mere assertion by a Filipino litigant against the existence of a tandem between two
Japanese corporations cannot be the basis for piercing, which can only be applied by
showing wrongdoing by clear and convincing evidence. Marubeni Corp. v. Lirag, 362 SCRA
620 (2001).
The party seeking for the piercing of the corporate veil has the burden of presenting clear
and convincing evidence to justify the setting aside of the separate corporate personality
rule. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002).
Application of the doctrine of piercing the corporate veil should be done with caution. A
court should be mindful of the milieu where it is to be applied. It must be certain that the
corporate fiction was misused to such an extent that injustice, fraud, or crime was
committed against another, in disregard of its rights. The wrongdoing must be clearly and
convincingly established; it cannot be presumed. Otherwise, an injustice that was never
unintended may result from an erroneous application. PNB v. Andrada Electric &
Engineering Co., 381 SCRA 244 (2002).
g. Ownership of stock
While ownership by one corporation of all or a great majority of stocks of another corporation
and their interlocking directorates may serve as indicia of control, by themselves and without
more, however, these circumstances are insufficient to establish an alter ego relationship or
connection between the two banks and the new mining company on the other hand, that will
justify the puncturing of the latters corporate cover. Mere ownership by a single stockholder or
by another corporation of all or nearly all of the capital stock of a corporation is not of itself
sufficient ground for disregarding the separate corporate personality. Likewise, the existence
of interlocking directors, corporate officers and shareholders is not enough justification to
pierce the veil of corporate fiction in the absence of fraud or other public policy considerations.
Development Bank of the Philippines vs. Hydro Resources Contractors Corporation,
GR. No. 167603, March 13, 2013

28
 Other than mere ownership of capital stock, circumstances showing that the corporation is
being used to commit fraud or proof of existence of absolute control over the corporation
has to be proven. In short, before the corporate fiction can be disregarded, alter-ego
elements must first be sufficiently established. The mere fact that the same controlling
stockholder/officer signed the loan document on behalf of the corporation does not prove
that he exercised control over the finances of the corporation. Neither is the absence of a
board resolution authorizing him to contract the loan nor the Corporations failure to object
thereto support this conclusion. That the business plan did not materialize is also not a
sufficient proof to justify a piercing, in the absence of proof that the business plan was a
fraudulent scheme geared to secure funds from the lender. Nuccio Saverios vs. Puyat,

h. When not applicable

Piercing of the veil of corporate fiction is not allowed when it is resorted under a theory of
co-ownership to justify continued use and possession by stockholders of corporate
properties. Boyer-Roxas v. Court of Appeals, 211 SCRA 470 (1992).
The piercing doctrine is an equitable remedy available only to persons outside the
corporation. It cannot be availed of stockholders within the corporation forming part of the
corporation
The piercing doctrine cannot be availed of to dislodge from SECs jurisdiction a petition for
suspension of payments filed under P.D. 902-A, on the ground that the petitioning individuals
should be treated as the real petitioners to the exclusion of the petitioning corporate debtor.
Union Bank v. Court of Appeals, 290 SCRA 198 (1998).
i. When applicable to Third-Parties:
Generally, piercing the veil only binds the parties to a transaction. It does not bind third
parties.
However, when it is exactly the fact that a supposed third party is a mere alter-ego of the
corporation, the doctrine can apply to the third party. The notion of corporate entity will be
pierced and the individuals composing it will be treated as identical if the corporate entity is
being used as a cloak or cover for fraud or illegality; as a justification for a wrong; or as an
alter ego, an adjunct, or a business conduit for the sole benefit of the stockholders. Gochan
v. Young,
j. Due Process Clause; Suits against corporations, stockholders and officers
A suit against a corporation is generally not a suit against a corporate officer.
Unless already impleaded, a new case must be filed against the officer aside from the
corporation. Padilla v. CA.
A suit against individual shareholders in a corporation is not a suit against the corporation.
Failure to implead the corporations as defendants and merely annexing a list of such
corporations to the complaints is a violation of due process for it would in effect be
disregarding their distinct and separate personality without a hearing. PCGG v.
Sandiganbayan, 365 SCRA 538 (2001).
The general principle is that no person shall be affected by any proceedings to which he is a
stranger, and strangers to a case are not bound by the judgment rendered by the court.
Padilla v. Court of Appeals, 370 SCRA 208 (2001).
However, when corporate officers are sued in their official capacity when the corporation
was not made a party, the corporation is not denied due process. Emilio Cano Enterprises v.
CIR, 13 SCRA 291 (1965).

29
 This applies only when evidential basis has been adduced during trial to apply the piercing
doctrine. Jacinto v. Court of Appeals, 198 SCRA 211 (1991); Arcilla v. Court of Appeals, 215
SCRA 120 (1992).
Although the corporate veil between two corporations can not be pierced for lack of legal
basis, it does not necessarily mean that the corporate officers of such corporations are
exempt from liability. Section 31 of the Corporation Code makes a director or officer
personally liable if he is guilty of bad faith or gross negligence in directing the affairs of the
corporation. Park Hotel vs. Soriano, GR No. 171118, September 10, 2012
k. In labor cases
Corporate directors and officers may be held solidarily liable with the corporation for the
termination of employment only if done with malice or in bad faith.(Rolando DS. Torres v.
Rural Bank of San Juan, Inc. et al., G.R. No. 184520, March 13, 2013)
The fact that an employee of the corporation was made to resign and not allowed to enter
the workplace does not necessarily indicate bad faith on the part of the employer
corporation if a sufficient ground existed for the latter to actually proceed with the
termination. Abbot Laboratories vs. Alcaraz, G.R. No. 192571, July 23, 2013
The organization of a "run-away corporation," at the time the unfair labor practice case was
pending before the CIR by the same persons who were the officers and stockholders of
RANSOM, engaged in the same line of business as RANSOM, producing the same line of
products, occupying the same compound, using the same machineries, buildings, laboratory,
bodega and sales and accounts departments used by RANSOM, and which is still in
existence. This is another instance where the fiction of separate and distinct corporate
entities should be disregarded as the second corporation seeks the protective shield of a
corporate fiction whose veil in the present case could, and should, be pierced as it was
deliberately and maliciously designed to evade its financial obligation to its employees. (A.C.
Ransom Labor Union-CCLU vs. National Labor Relations Commission, et al., G.R.
No. L-69494, May 29, 1987)
The fact that the businesses of private respondent and Acrylic are related, that some of the
employees of the private respondent are the same persons manning and providing for
auxilliary services to the units of Acrylic, and that the physical plants, offices and facilities
are situated in the same compound, it is the Courts considered opinion that these facts are
not sufficient to justify the piercing of the corporate veil of Acrylic. Hence, the Acrylic not
being an extension or expansion of private respondent, the rank-and-file employees working
at Acrylic should not be recognized as part of, and/or within the scope of the petitioner, as
the bargaining representative of private respondent. (Indophil Textile Mill Workers
Union-PTGWO vs. Voluntary Arbitrator Teodorico P. Calica and Indophil Textile
Mills, Inc.)
The sale of Times franchise as well as most of its bus units to a company owned by
Rondaris daughter and family members, right in the middle of a labor dispute, is highly
suspicious. It is evident that the transaction was made in order to remove Times remaining
assets from the reach of any judgment that may be rendered in the unfair labor practice
cases filed against it. (Times Transportation Company, inc. vs. Santos Sotelo, et al.,
G.R. No. 163786, February 16, 2005)
Piercing the veil of corporate fiction is warranted when a corporation ceased to exist only in
name as it re-emerged in the person of another corporation, for the purpose of evading its
unfulfilled financial obligation under a compromise agreement. Thus, if the judgment for
money claim could not be enforced against the employer corporation, an alias writ may be
obtained against the other corporation considering the indubitable link between the closure
30
 of the first corporation and incorporation of the other. Livesey vs. Binswanger
Philippines, GR No. 177493, March 19, 2014
l. Liability for Torts and Crimes.
A corporation is civilly liable in the same manner as natural persons for torts, because the
rules governing the liability of a principal or master for a tort committed by an agent or
servant are the same whether the principal or master be a natural person or a corporation,
and whether the servant or agent be a natural or artificial person. A corporation is liable,
therefore, whenever a tortious act is committed by an officer or agent under express
direction or authority from the stockholders or members acting as a body, or, generally, from
the directors as the governing body. (Philippine National Bank vs. Court of Appeals, et
al., G.R. No. L-27155, May 18, 1978)
The powers to increase capitalization and to offer or give collateral to secure indebtedness
are lodged with the corporations board of directors. However, this does not mean that the
officers of the corporation other than the board of directors cannot be made criminally liable
for their criminal acts if it can be proven that they participated therein. (Gregorio Singian,
Jr. vs. the Honorable Sandiganbayan and the Presidential Commission on Good
Government, G.R. Nos. 160577-94, December 16, 2005)
An employee of a company or corporation engaged in illegal recruitment may be held liable
as principal, together with his employer, if it is shown that he actively and consciously
participated in illegal recruitment, because the existence of the corporate entity does not
shield from prosecution the corporate agent who knowingly and intentionally causes the
corporation to commit a crime. The corporation obviously acts, and can act, only by and
through its human agents, and it is their conduct which the law must deter. (The Executive
Secretary, et al. vs. Court of Appeals, et al., G.R. No. 131719, May 25, 2004)
The Trust Receipts Law recognizes the impossibility of imposing the penalty of
imprisonment on a corporation. Hence, if the entrustee is a corporation, the law makes the
directors, officers or employees or other persons responsible for the offense liable to suffer
the penalty of imprisonment. (Edward C. Ong, vs. the Court of Appeals and the People
of the Philippines, G.R. No. 119858, April 29, 2003)
Though the entrustee is a corporation, nevertheless, the law specifically makes the officers,
employees or other officers or persons responsible for the offense, without prejudice to the
civil liabilities of such corporation and/or board of directors, officers, or other officials or
employees responsible for the offense. The rationale is that such officers or employees are
vested with the authority and responsibility to devise means necessary to ensure compliance
with the law and, if they fail to do so, are held criminally accountable; thus, they have a
responsible share in the violations of the law. (Alfredo Ching vs. the Secretary of Justice,
et al., G. R. No. 164317, February 6, 2006)

31
 d. Incorporation And Organization
1. Stages of Incorporation
e. Promotionactivities done by a promoter for the founding and organization of
the business or enterprise of the issuer. It includes discovery, investigation, and
assembly.
Technically speaking, promotion is not part of the formal organization of the
corporation, which is called
f. Incorporationwhich is the formal organization of a corporation
a. Overview of the life of a corporation
PROMOTERS CONTRACT CORP. BY ESTOPPEL DE FACTO or DE JURE
DISSOLUTION
0. Before incorporation, a promoter may do acts in founding and organizing the business
or enterprise, subject to the rules on promoters contracts.
a. During this stage, the prospective incorporators may be held liable as general
partners under the doctrine of corporation by estoppel.
1. The process of incorporation involves the formal organization of the corporation
2. At the end of the process, there will be either a corporation de facto or de jure.
3. The corporation will subsist until dissolution.
2. Pre-Incorporation Contracts
a. Corporate Contract Law
In the levels of the legal relationship, corporate contract law is used to resolve issues between
the different levels between the juridical entity level, the contract relationship level and the
business entity level.
Corporate contract law can sometimes differ from general contract law principles.
This is primarily true (both things) for promoters contracts and corporations by
estoppel.
When the President of a non-existent principal entered into a contract and failed to pay its
obligation, he shall be the one liable to the aggrieved party. A person acting as a
representative of a non-existent principal is the real party to the contract sued upon, being
the one who reaped the benefits resulting from it.(Mariano A. Albert vs. University
Publishing Co., Inc., G.R. No. L-19118, January 30, 1965)
Where a national sports association which is not created by a special law or a general
enabling act, through its president, secured airline tickets for the trips of its athletes and
officials to the South East Asian Games and later on failed to pay the obligation, the
president shall be personally liable. It is a settled principle in corporation law that any
person acting or purporting to act on behalf of a corporation which has no valid existence
assumes such privileges and becomes personally liable for contract entered into or for other
acts performed as such agent.(International Express Travel & Tour Services, Inc. vs.
Hon. Court of Appeals, Henri Kahn, Philippine Football Federation, G.R. No.
119002, October 19, 2000)
b. Promoters
Promoter is a person who, acting alone or with others, takes initiative in founding and organizing the
business or enterprise of the issuer and receives consideration therefor. (Sec. 3.10, Securities Regulation
Code [R.A. 8799])
A promoter is a person who, acting alone or with others, takes initiative in founding and
organizing the business or enterprise of the issuer and receives consideration therefor.
The promoter does work at the state of proceedings before the corporation is incorporated.
32
 He must be the one who takes initiative on the founding and organization of the business
venture which eventually ends up as the corporation being organized.
There is not even a de facto corporation yet.
c. Relation with promotees
Not every person, who participates in a venture that will later become a corporation is a
promoter.
Only those who actively found and organize the corporation are considered promoters.
In contrast, mere passive investors are promotees.
Only promoters are liable on promoters contracts. (Caram v. CA)
d. Validity of Promoters Contracts
Prior to incorporation, contracts entered into by a promoter for and in behalf of the person or
agent who had undertaken the transaction are unenforceable.
It is not binding upon the corporation because it has not given consent to the authority of
the person or agent who had undertaken the transaction, since, you know, it doesnt exist
yet.
That being the case, theres a bit of a problem as regards contract law in general
Because theres no corporation, it cant be a party to the contract, being, you know,
inexistent.
Rather, the promoter enters into the contract. While binding on him, absolutely, it
cannot be enforced against the corporation.
This requires the application of the
e. Theories on Liabilities for Promoter's Contracts
Theory #1: The Real Contract Theory
Since a promoters contract is really the promoters own, the only reason why the corporation,
once it is organized becomes liable is when the corporation adopts it as its own.
Theory #2: Continuing Offer Theory
Under this theory, the contract entered into the contract is a continuing offer to the
corporation.
The continuing offer that exists as to the time of the issuance of the certificate of
incorporation. And if it is accepted, then the offer means the acceptance, and there arises a
contract.
Theory #3: Agency
Once the promoter enters into a contract for and in behalf of a non-existent principal, the
promoter becomes personally liable like an agent who acts without authority from the
principal.
The contract entered into then is valid unless the agent acted without authority.
In such a case, the ff. rules apply:
(a)If the promoter was authorized by the incorporator, and later the corporation, the
promoters contract is valid and binding.
(b) If he was not so authorized, then the contract is unenforceable on the corporation,
having been entered into without authority.
However, like all other unenforceable contracts, the contract may be adopted by the
principal by accepting it.
In all three instances, there is deemed to be a valid offer to the corporation followed by valid
acceptance. As such, there is a valid contract.
That is the basis of the promoters contract, so that the people will be willing to risk
without much fear, investing their money into a venture prior to the incorporation of a
company or a corporation.

33
 f. Ratification.
Although a corporation has no life until organized, it does not mean that under no
circumstances may the act of promoters of a corporation be ratified by the corporation if and
when subsequently organized.
Ratification can be either express or implied.
(1) Express ratification can be done through a board resolution making the corporation
liable by accepting the contract, while
(2) Implied ratification occurs when the corporation accepts the benefits under the
promoters contract.
The promoters contract must be adopted and ratified by the corporation, in order for it to
be binding on the corporation. (Cagayan v. Sandiko)
g. Continuing offer theory.
A grant of the franchise according to the SC, prior to the time that the corporation actually
existed is like a conditional grant that will be effective upon the corporations becoming a legal
entity. Prior to that, it is merely a continuing offer on the part of the government.
The fact that Morong Electric at the moment of the application and grant of franchise was
granted does not render the franchise invalid because Morong later obtained its certificate
of incorporation and accepted the franchise in accordance with the terms and conditions
thereof. While a franchise cannot take effect until the grantee corporation is organized, the
franchise, may, nevertheless be applied for before the company is fully organized. (Morong
Electric v. CA)
iii. Corporation by Estoppel
Sec. 21 Corporation by estoppel All persons who assume to act as a corporation knowing it to be
without authority to do shall be liable as general partners for all debts, liabilities and damages incurred
or arising as a result thereof: Provided, however, that when any such ostensible corporation is sued on
any transaction entered by it as a corporation or any tort committed by it as such, it shall not be allowed
to use as a defense its lack of corporate personality.
Under the doctrine of corporation by estoppel, a group of persons who assume to act as a
corporation, knowing it to be without authority, assume to act as a corporation, may be held
liable as general partners for all debts, liabilities and damages.
So to be clear, there is no corporation formed. The persons are made de facto partners.
Thus, there is no separate corporate personality to speak of.
As such, the liability of the would-be incorporators is not limited to their investments in
the corporation. (Salvatierra . Garlitos)
However, these partners are precluded or estopped from claiming that they are free from
liability because no corporation actually exists.
The essential element of this doctrine is that there is a representation that a corporation
exists when in fact there is none and at least one party thought that there was a corporation.
Under this rule, then, there can be no corporation by estoppel if there is no third person
involved, and the conflict only arises among those forming the corporation.
Note, however, that this rule does not work inversely. The partners cannot enforce liability
on a corporate contract when they knew themselves not to be a corporation.
a. Nature of Doctrine
Founded on principles of equity and designed to prevent injustice and unfairness, the
doctrine applies when persons assume to form a corporation and exercise corporate
functions and enter into business relations with third persons. Where no third person is
involved in the conflict, there is no corporation by estoppel. A failed consolidation therefore

34
 cannot result in a consolidated corporation by estoppel. Lozano v. De Los Santos, 274 SCRA
452 (1997)
In contrast, one who deals with an unincorporated corporation may raise lack of
juridical personality, so long as the effect is not to avoid liability therefor. The doctrine
only applies to the would-be incorporators trying to avoid liability. Intl Express Travel v.
Court of Appeals, 343 SCRA 674 (2000).
Under the law on estoppel including that under Sec. 21 of Corporation Code, those acting on
behalf of an ostensible corporation and those benefited by it, knowing it to be without valid
existence, are held liable as general partners. Lim Tong Lim v. Philippine Fishing Gear
Industries, Inc., 317 SCRA 728 (1999).
Thus, under that case, even passive investors are liable if they benefited from the
transactions of the corporation.
Persons who illegally recruited workers for overseas employment by representing
themselves to be officers of a corporation which they knew had not been incorporated are
liable as general partners for all debts, liabilities and damages incurred or arising as a result
thereof. (People of the Philippines vs. Engr. Carlos Garcia y Pineda, Patricio Botero y
Vales, Luisa Miraples (at large) & Patricio Botero y Vales, G.R. No. 117010, 18 April
1997)
A corporation by estoppel may be impleaded as a party defendant considering that it
possesses attributes of a juridical person, otherwise, it can not be held liable for damages
and injuries it may inflict to other persons. Macasaet vs. Francisco, GR No. 156759,
June 5, 2013
iv. De Facto Corporation (Sec. 20)
Sec. 20 De Facto Corporations The due incorporation of any corporation claiming in good faith to be a
corporation under this Code, and its right to exercise corporate powers, shall not be inquired into
collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by
the Solicitor General in a quo warranto proceeding.
A de facto corporation is a corporation which exists for all practical purposes of a
corporation, but which does not have the right to corporate existence as against the state.
It is one which has not complied with all the requirements necessary to be a de jure
corporation but has sufficiently complied to be accorded corporate status as against 3 rd
parties although not against the state.
However, every corporation is deemed de jure until proven otherwise.
a. Point of De Facto Corporation Doctrine
The purpose of the de facto doctrine is to leave the de facto corporations dealings with the
public valid until the its existence is held invalid by the state.
Despite the fact that there is no valid corporation in the eyes of the law, in order to promote
the security of business transacions and eliminate quibbling over irregularities, transactions
with de facto corporations are valid.
b. Elements of a de facto corporation.
(1) Valid law under which it is incorporated:
(2) Attempt in good faith to incorporate under the law, and colorable compliance therewith
(3) Acts done in good faith.
i. Valid Law under which the corporation is incorporated
This means the Corporation code.
Thats because the only other laws that can form corporations are charters, and the only
time corporations are not fully incorporated by their charters are when they ar void. In that
case, theres no valid law, and no de facto corporation.
35
 However, this only applies after the statute is declared unconstitutional, at least under the
qualified view.
A corporation formed under what was then a valid statute, seeing as all statutes are
presumed constitutional, may be accorded de facto status in the interim, presuming all
the other elements of a de facto corporation are present, since it was organized under
color of law.
b. Colorable compliance with the law.
At the very least, the corporation must have filed its Articles of Incorporation and the SEC
must have duly issued a Certificate of Incorporation.
This is because, as well see later, a corporation only has personality from the time the
certificate of incorporation is issued.
Before that point, even if the incorporators honestly believed that they incorporated , there
was no colorable compliance with the law for third persons to believe that a corporation
exists. (Arnold v. Piccio)
c. Assumption of corporate powers in good faith
Continuing good faith in acting as a corporation is a continued requirement for the status of
a de facto corporation.
Some sources take this to mean that, at the very least, a board of directors must have been
elected, because good faith acts through a corporation would have to be exercised through a
good faith BOD.
c. How existence of de facto corporation challenged
It may only be done through a suit for quo warranto. It may not be challenged collaterally.
d. Examples of de facto corporations
Failure to state all matters required by the Corpo Code in the AOI
Name closely resembles that of a pre-existing corporation
Incorporators are not residents
Acknowledgement not made before proper officer
Percentage of Filipino ownership not met
Minimum paid up capital stock has not been paid to and received by the treasurer.
Failure to submit by-laws. (Sawadjaan v. CA)
However, failure to submit by laws does not in of itself cause dissolution. (LGVHAI v. CA)
e. When De facto corporation doctrine does not apply.
Intra-corporate disputes, because as between parties, there is no corporation to speak of.
Where the other party knows of the non-existence of the corporation.
One who takes no part except to subscribe for stock in a proposed corporation which is
never legally formed does not become a partner with other subscribers who engage in
business under the name of the pretended corporation, so as to be liable as such in an action
for settlement of the alleged partnership and contribution. (Pioneer Insurance v. CA)
The plan of the parties to consolidate their respective jeepney drivers' and operators'
associations into a single common association, if not yet approved by the SEC, neither had
its officers and members submitted their articles of consolidation in accordance with
Sections 78 and 79 of the Corporation Code, is a mere proposal to form a unified association.
Any dispute arising out of the election of officers of said unified association is therefore not
an intra-corporate dispute. (Lozano v. De los Santos)
Where there is no third person involved and the conflict arises only among those
assuming the form of a corporation, who therefore know that it has not been registered,
there is no corporation by estoppel

36

g. Incorporation And Organization
Incorporation is the act or process of forming a corporation.
1. Steps of Incorporation
Preliminary: Promotion, supra., including soliciting the required minimum starting capital.
(a)Drafting and Execution of the Articles of Incorporation by the incorporators, as well as
other documents required for registration of the corporation, particularly the
treasurers affidavit certifying compliance with the subscription and paid-up
capital requirements.
(b) Filing with the SEC of:
(c)Payment of filing and publication fees, and
(d) Issuance of certificate of incorporation, at which point the corporation is
deemed to exist.
These steps, after promotion, are done by the incorporators
ii. The Articles of Incorporation
The Articles of Incorporation are the basic contract document in corporate law, which
defines the charter of the corporation.
a. Nature and Purpose of the Articles of Incorporation
The charter of a corporation is a contract between three parties:
(1) it is a contract between the state and the corporation to which the charter is granted
(2) it is a contract between stockholders and the state, and
(3) it is a contract between the corporation and its stockholders.(Govt. of Manila v. MRR)
Aside from this, the Articles of Incorporation have the ff. purposes:
1.) It is a public document, which binds any person entering into a contract or any
transaction with a corporation whether or not he has checked with the SEC the terms
and conditions of the AI. Such a party cannot claim ignorance of the charter of the
corporation.
2.) Its issuance signals the birth of the corporations juridical personality, and
3.) It is an essential requirement for the existence of a corporation, even a de facto
one.
i. Who bound by the Articles of Incorporation
The Articles of incorporation are binding not only on the corporation, but also on its
shareholders. It is the constitution of the corporation. (Lanuza v. CA)
b. Limitation on AOI
The Articles of Incorporation cannot prevail over statutory provisions.
b. Procedure and Documentary Requirements (Sec. 14 and 15)
Sec. 14 Contents of the Articles of Incorporation All corporations organized under this code shall file
with the SEC articles of incorporation in any of the official languages duly signed and acknowledged by
all of the incorporators, containing substantially the following matters, except as otherwise prescribed by
this Code or by special law.
1) The name of the corporation;
2) The specific purpose or purposes for which the corporation is being incorporated. Where a
corporation has more than one stated purpose, the articles of incorporation shall state which is the
primary purpose and which is/are the secondary purpose or purposes: Provided, that a non-stock
corporation may not include a purpose which would change or contradict its nature as such;
3) The place where the principal office of the corporation is to be located, which must be within the
Philippines;
4) The term for which the corporation is to exist;
5) The names, nationalities and residences of the incorporators;
6) The number of directors and trustees which shall not be less than five nor more than fifteen;
37
7) The 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 in accordance with this Code;
8) If it be a stock corporation, the amount of its authorized capital stock in lawful money of the
Philippines, the number of shares to which it is divided, and in case the share are par value shares,
the par value of each, the names, nationalities and residences of the original subscribers, and the
amount subscribed and paid by each on his subscription, and if some or all of the shares are without
par value, such fact must be stated;
9) If it be a 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.
The SEC shall not accept the articles of incorporation of any stock corporation unless accompanied by a
sworn statement of the Treasurer elected by the subscribers showing that at least twenty-five percent
(25%) of the authorized capital stock of the corporation has been subscribed and at least twenty-five
percent (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 percent (25%) of said subscription, such paid-up
capital being not less than P5,000.
Sec. 15 Forms of Articles of Incorporation Unless otherwise prescribed by special law, articles of
incorporation of all domestic corporations shall comply substantially with the following form:
NOTE: The form goes into the validity and enforceability of the Articles of Incorporation.
Mnemonic: FAN POTION (T)
F irst set of officers P urpose (T) reasurers affidavit
A uthorized capital O ffice
stock or Amount of T erm
capital I ncorporators
N ame O thers
N umber of directors
Well be taking up each of those things at this point, in the sequence of the codal, starting
with
c. As to Number and Residency of Incorporators (Sec. 10);
Sec. 10 Number and Qualifications of Incorporators Any number of natural person not less than five but
not more than fifteen, all of legal age and a majority of whom are residents of the Philippines, may form a
private corporation for any lawful purpose or purposes. Each of the incorporators of a stock corporation
must own or be a subcriber to at least one share of the capital stock of the corporation.
The incorporators must comply with the ff. requirements:
(1) They must be not less than 5 but not more than 15
(2) Of legal age
(3) Majority of them must be residents of the Philippines
(4) They must each own at least one share of the capital stock of the corporation, and
(5) The must be natural persons not suffering from any legal incapacity.
It is possible for a business to be wholly owned by one individual because the validity of its
incorporation is not affected when such individual gives nominal ownership of only one
share of stock to each of the other four incorporators. As between the corporation on the one
hand, and its shareholders and third persons on the other, the corporation looks only to its
books for the purpose of determining who its shareholders are. (Nautica Canning
Corporation, et al. vs. Roberto C. Yumul,G.R. No. 164588, October 19, 2005)
i. Residence
For the purposes of the Corporation Law, residence means domicile.
b. Ownership of Share
This is a continuing requirement. If a director transfers all his shares, he loses his directors
seat.
c. Natural persons
38
Thus, partnerships or corporations cannot be incorporators.
However, they can be stockholders. They just cant be the initial stockholders.
d. Corporate Name
Sec. 18 Corporate Name No corporate name may be allowed by the SEC if the proposed name is
identical or deceptively confusing or similar to that of any existing corporation or to any other name
already protected by law or is patently deceptive, confusing or contrary to existing laws. When a change
in the corporate name is approved, the Commission shall issue an amended certificate of incorporation
under the amended name.
Generally, the corporation may be named whatever the incorporators want it to be.
Subject to the requirement of the SEC that it have the suffix Corporation, Incorporated,
or Inc.
However, the ff. names cannot be used:
i. Statutory prohibitions
No corporate name may be allowed if it is:
(1) Identical
(2) Deceptively Confusing or similar to any existing corporation or to any other name already
protected by law, or
(3) Patently deceptive, confusing, or contrary to existing laws.
To fall within the prohibition under Section 18 of the Corporation Code, two requisites must
be proven, to wit:
1.) that the complainant corporation acquired a prior right over the use of such corporate name;
and
2.) the proposed name is either: (a) identical, or (b) deceptively or confusingly similar to that of
any existing corporation or to any other name already protected by law; or (c) patently
deceptive, confusing or contrary to existing law. (Industrial Refractories Corporation of the
Philippines vs. Court of Appeals, Securities and Exchange Commission and
Refractories Corporation of the Philippines, G.R. No. 122174, October 3, 2002)
b. SEC prohibitions
The SEC has issued the ff. guidelines on Corporate names
1.) Name must contain Corp. or Inc.
2.) Name must not tend to mislead or confuse the public and must not contain such descriptive
words as excellent fair good, etc.
3.) Name must not be similar to a name already used by another partnership or corporation.
4.) If proposed name contains a word similar to a word already used as a part of the firm name
of a registered corporation, proposed name must contain two other words different from the
name of the company already registered.
5.) If name or surname used as part of corporate name, the incorporators must have a basis for
such surname; it being one of the incorporators: Otherwise, consent of the person whose name
is being used must be submitted.
6.) If it contains initials, it must contain an explanation of the meaning and relevance or reason
thereof.
7.) The use of the words State Maharlika and Baranggay are prohibited and reserved for
the government.
8.) The following words when used must at least relate to the line of business namely: Financing
and Investment. The following words are prohibited from being used namely: National,
Engineer, Architect.
It is the SECs duty to prevent confusion in the use of corporate names not only for the
protection of the corporations involved but more so for the protection of the public, and it
has authority to de-register at all times and under all circumstances corporate names which

39
 in its estimation are likely to generate confusion. Clearly therefore, the present case falls
within the ambit of the SECs regulatory powers.(Id.)
c. Nature and Purpose of Coproate name.
The name of a corporation is
(1) essential to its existence
(2) it cannot change its name except in the manner provided by the statute
(3) by that name alone is it authorized to transact business and
(4) it is through its name that a corporation can sue and be sued and perform all other legal
acts.
Parties organizing a corporation must choose a name at their peril; and the use of a name
similar to one adopted by another corporation, whether a business or a nonprofit
organization, if misleading or likely to injure the exercise of its corporate functions,
regardless of intent, may be prevented by the corporation having a prior right. Ang Mga
Kaanib sa Iglesia ng Dios Kay Kristo Hesus v. Iglesia ng Dios Kay Dristo Jesus, 372 SCRA
171 (2001).
Similarity in corporate names between two corporations would cause confusion to the public
especially when the purposes stated in their charter are also the same type of business.
Universal Mills Corp. v. Universal Textile Mills Inc..
A corporation has no right to intervene in a suit using a name, not even its acronym, other
than its registered name, as the law requires and not another name which it had not
registered. Laureano Investment and Dev. Corp. v. Court of Appeals,
d. How name requirement complied with
At incorporation, one of the documents required by the SEC is a name verification slip
acquired from the SEC website, accompanied by an undertaking to change name if it is later
found to be similar.
e. Change of Corporate Name
A corporation may change its name by the amendment of its articles of incorporation, but the
same is not effective until approved by the SEC. Philippine First Insurance Co. v. Hartigan, 34
SCRA 252 (1970).
A change in the corporate name does not make a new corporation, and has no effect on the
identity of the corporation, or on its property, rights, or liabilities. Republic Planters Bank v.
Court of Appeals, 216 SCRA 738 (1992).
The Court cannot impose on a bank that changes its corporate name the obligation to notify
a debtor of such change absent any law, circular or regulation requiring it as such act would
be judicial legislation. Unless there is a law, regulation or circular from the SEC or BSP
requiring the formal notification of all debtors of banks of any change in corporate name,
such notification remains to be a mere internal policy that banks may or may not adopt.
(P.C. Javier & Sons, Inc., et al. vs.Paic Savings & Mortgage Bank, Inc., et al., G.R.
No. 129552, June 29, 2005)
A change in the corporate name does not make a new corporation, whether effected by a
special act or under a general law. It has no effect on the identity of the corporation, or on
its property, rights, or liabilities because the corporation upon such change in its name, is in
no sense a new corporation, nor the successor of the original corporation.(P.C. Javier &
Sons, Inc., et al. vs.Paic Savings & Mortgage Bank, Inc., et al., G.R. No. 129552,
June 29, 2005)
The mere change in the corporate name is not considered under the law as the creation of a
new corporation; hence, the renamed corporation remains liable for the illegal dismissal of
its employee separated under that guise.. (Zuellig Freight and Cargo Systemsvs.
National Labor Relations Commission, et al., G.R. No. 157900, July 22, 2013)
40
 f. Doctrine of Secondary Meaning
The doctrine of secondary meaning under IPL applies to corporate names, in that a name not
originally capable of exclusive appropriation may be used as a name if it has been used so long
and so exclusively by one producer by reference to his article that, itn the trade and to the
public, the word or phrase has come to mean that the article was his product. (Lyceum of the
Philippines v. CA)
e. Purpose Clause (Secs. 14(2) and 42; Uy Siuliong v. Director of Commerce and
Industry, 40 Phil. 541 [1919])
Sec. 14. 2) The specific purpose or purposes for which the corporation is being incorporated. Where a
corporation has more than one stated purpose, the articles of incorporation shall state which is the
primary purpose and which is/are the secondary purpose or purposes: Provided, that a non-stock
corporation may not include a purpose which would change or contradict its nature as such;
A corporation can have more than one purpose, but the primary purpose must be indicated.
There may only be one primary purpose.
In contrast, there can be as many secondary purposes as the incorporators want.
i. Significance of purpose
The AOI must state the purpose of the corporation so that:
A person who intends to invest his money will know in what kind of business or activity his
money will be invested
The directors and officers will know within what scope of business they are authorized to
act, and
Third persons who have dealings with the corporation may know if the dealings of the
corporation are within the authority of the corporation or not. Otherwise, the acts are ultra
vires. See infra.
b. Limitations on purpose
Purposes may not be:
For objects of which a corporation is not capable, such as the exercise of profession
Contrary to law, morals, or public policy
2 incompatible purposes, and
Contrary to their nature, e.g. a business purpose for a non-profit corporation
c. Stretching the purpose clause
It is legal to stretch the meaning of the purpose clause to cover new and unexpected situations.
d. Proof of purpose
The best proof of the purpose of a corporation is its articles of incorporation and by-laws.
The articles of incorporation must state the primary and secondary purposes of the
corporation, while the by-laws outline the administrative organization of the corporation,
which, in turn, is supposed to insure or facilitate the accomplishment of said purpose. Gala
v. Ellice Agro-Industrial Corp., 418 SCRA 431 (2003).
f. Corporate Term (Sec. 11)
Sec. 11 Corporate Term A corporation shall exist for a period not exceeding fifty years (50) from the
date of incorporation unless sooner dissolved or unless said period is extended. The corporate term as
originally stated in the articles of incorporation may be extended for periods not exceeding fifty years
(50) in any single instance by an amendment of the articles of incorporation in accordance with this
Code; Provided, that no extension can be made earlier than five years (5) prior to the original or
subsequent expiry dates unless there are justifiable reasons for an earlier extension as may be
determined by the SEC.
The term of a corporation is generally that which is specified in its AOI.

41
 In turn, generally, thats 50 years, which is the maximum term, but a shorter term may be
provided for.
i. Extension of Term
Generally, a corporate term may be extended by up to 50 years in a single instance, no earlier
than 5 years before the original expiry date.
However, for justifiable reasons, an earlier extension may be allowed by the SEC.
Note that a later extension is not allowed, in line with the rules on
b. Effect of Expiration of term
The expiration of a corporate term ipso facto terminates a corporation, without need for a
petition for quo warranto. (PNB v. CFI)
No extension of term can be effected once dissolution stage has been reached, as it
constitutes new business. Alhambra Cigar v. SEC, 24 SCRA 269 (1968).
g. Principal Place of Business (Sec. 51)
Sec. 14 (3) The place where the principal office of the corporation is to be located, which must be
within the Philippines;
The place where the principal office of the corporation is to be located must be within the
Philippines.
Note that under current SEC rules, Metro Manila is no longer an acceptable principal
place of business. Now a street name and barangay must be specified
i. Importance of Place of Business
The principal place of business is important because it fixes the residence of the corporation.
Clavecilla Radio System v. Antillon
In turn, this sets the venue for cases by or against the corporation.
It is also generally the place where the stockholders or members meetings are to be held
Finally, it determines the place where the books of the corporation will be kept.
The residence of its president is not the residence of the corporation because a corporation has
a personality separate and distinct from that of its officers and stockholders. Sy v. Tyson
Enterprises, Inc., 119 SCRA 367 (1982).
h. Amount of Authorized Capital Stock; Amount of Capital
8) If it be a stock corporation, the amount of its authorized capital stock in lawful money of the
Philippines, the number of shares to which it is divided, and in case the share are par value shares,
the par value of each, the names, nationalities and residences of the original subscribers, and the
amount subscribed and paid by each on his subscription, and if some or all of the shares are without
par value, such fact must be stated;
9) If it be a non-stock corporation, the amount of its capital, the names, nationalities and residences of
the contributors and the amount contributed by each;
The AOI must indicate the amount of authorized capital stock of stock corporations or the
amount of capital or non-stock corporations
i. What must be indicated in AOI of Stock Corporations
(1) Amount of Authorized Capital Stock
(2) Number of shares in which it is divided
(3) If par value shares, infra, par value of each
(4) Names, nationalities, and residences of the original subscribers
(5) Amount subscribed to and paid for by each
(6) Existence of shares without par value.
b. Minimum Capitalization (Sec. 12)
Sec. 12 Minimum capital stock required of stock corporation Stock corporations incorporated under
this Code shall not be required to have any minimum authorized capital stock except as otherwise
specifically provided for by special law, and subject to the provisions of the following section.
42
Generally, but not really, there is no minimum capital stock required of stock corporations.
I say sort of, because as Ill explain in a bit it cant go below P5,000.
However, under special laws, such as the ff., there are minimum capital stock requirements:
Kind of Corporation Minimum Capital Stock
Bank In accordance with BSP circular. Sorry
mahaba yun.
Insurance Corporation P10,000,000,000
Pawnshop P100,000
Financial Intermediary P50,000,000.
Not all funds or assets received by the corporation can be considered paid-up capital, for
this term has a technical signification in Corporation Law which is the portion of the
authorized capital stock of the corporation, subscribed and then actually paid up. (MSCI-
NACUSIP Local Chapter vs. National Wages and Productivity Commission and
Monomer Sugar Central, Inc., G.R. No. 125198, March 3, 1997)
c. Cf. Minimum Subscription for purposes of incorporation
Sec. 13 Amount of capital stock to be subscribed and paid for the purposes of incorporation At least
twenty-five percent (25%) of the authorized capital stock as stated in the articles of incorporation must
be subscribed at the time of incorporation and at least twenty-five percent (25%) of the total subscription
must be paid upon subscription, the balance to be payable on a date or dates fixed in the contract of
subscription without need of call, or in the absence of a fixed date or dates, upon call for payment by the
Board of Directors: Provided however, that in no case shall the paid-up capital be less than five thousand
pesos (P5,000).
Despite what Sec. 12 says, it appears that the minimum capital stock of a corporation is P5,000.
I know I know 25%-25%, but you can have 100% subscribed, 100% paid up capital of P5,000.
Which is pitiful, but legally possible.
See subscription and paid-up capital requirements, up next.
d. Equity Requirements
The capital stock of a corporation, even at the outset, must comply with the foreign equity
requirements as laid down by law. See FIA, infra.
e. What AOI of Non-stock Corporation must state
(1) Amount of its capital
(2) Names, nationalities, and residences of the residences of the contributors, and
(3) The amount contributed by each.
i. First Set of officers, treasurers affidavit, number of directors
See relevant provisions, infra.
j. Others
The AOI may contain whatever other provisions the incorporators see fit, including
Right of first refusal
Those that would make the corporation a close corporation
Conversion of shares
iii. Subscription and Paid-up Capital Requirements (Sec. 13)
Sec. 13 Amount of capital stock to be subscribed and paid for the purposes of incorporation At least
twenty-five percent (25%) of the authorized capital stock as stated in the articles of incorporation must
be subscribed at the time of incorporation and at least twenty-five percent (25%) of the total subscription
must be paid upon subscription, the balance to be payable on a date or dates fixed in the contract of
subscription without need of call, or in the absence of a fixed date or dates, upon call for payment by the
Board of Directors: Provided however, that in no case shall the paid-up capital be less than five thousand
pesos (P5,000).

43
Under this provision, also known as the 25%-25% rule, of the maximum authorized capital
stock as provided for, 25% thereof must be subscribed. Of the 25% subscribed thereof must be
paid up.
The purpose of such a requisition is that the State may be assured of the successful
prosecution of the work and that creditors of the company may have to the extent, at least,
of the required subscription, the means of obtaining satisfaction for their claims.
Note, however, that the subscribers need not all pay 25%. These are overall requirements
a. If shares have no par value
Note that subscriptions to no par value shares must be fully paid. That being the case, there is
no 25% paid up requirement. The only one left is the 25% subscription requirement, which will
be based on total number of shares.
iv. Treasurers affidavit
The SEC shall not accept the articles of incorporation of any stock corporation unless accompanied by a
sworn statement of the Treasurer elected by the subscribers showing that at least twenty-five percent
(25%) of the authorized capital stock of the corporation has been subscribed and at least twenty-five
percent (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 percent (25%) of said subscription, such paid-up
capital being not less than P5,000.
The AOI must be accompanied by a sworn statement of the Treasurer that at least 25% of
the capital stock authorized is subscribed and at least 25% of such have been fully paid in cash
or property fair valuation of which is equal at least to 25% of the said subscription, such paid-
up capital not being less than P5,000.
v. Grounds for Disapproval (Sec. 17)
Sec. 17 Grounds when articles of incorporation or amendment may be rejected or disapproved The SEC
may reject the articles of incorporation or disapprove any amendment thereto if the same is not in
compliance with the requirements of this Code: Provided, that the Commission shall give the
incorporators a reasonable time within which to correct or modify the objectionable portions of the
articles or amendment. The following are grounds for such rejection or approval
1.) That the articles of incorporation or any amendment thereto is not substantially in accordance with
the form prescribed herein;
2.) That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral or
contrary to government rules and regulations;
3.) That the Treasurers Affidavit concerning the amount of capital stock subscribed and/or paid is false.
4.) That the percentage of ownership of the capital stock to be owned by the citizens of the Philippines
has not been complied with as required by existing laws or the Constitution.
No articles of incorporation or amendment to articles of incorporation of banks, banking and quasi-
banking institutions, building and loan associations, trust companies and other financial intermediaries,
insurance companies, public utilities, educational institutions and other corporations governed by special
laws shall be accepted or approved by the Commission unless accompanied by a favorable
recommendation of the appropriate government agency to the effect that such articles or amendment is
in accordance with law.
The SEC may reject the articles of incorporation or disapprove any amendments thereto if:
(1) They are not substantially in accordance with the prescribed form
(2) The purposes of the corporation is patently unconstitutional, illegal, immoral or contrary
to government rules or regulations
(3) The Treasurers affidavit is false
(4) The equity requirements have not been left.
These grounds are not exclusive. Under PD 902-A, the ff. additional grounds for rejection of
the AOI are provided for:
(5) Fraud
(6) Misrepresentation
44
 (7) Non-compliance with SEC Rules and Regulation
(8) Failure to report to SEC
(9) No by-laws
(10) Failure to organize in 2 years
(11) Non-use for 5 years
(12) Non-payment of filing fees.
If a corporations purpose, as stated in the Articles of Incorporation, is lawful, then the SEC
has no authority to inquire whether the corporation has purposes other than those stated,
and mandamus will lie to compel it to issue the certificate of incorporation. Gala v. Ellice
Agro-Industrial Corp., 418 SCRA 431 (2003).
SECs duty is not merely ministerial It has been granted by PD 902-A the powers to
examine and approve or disapprove the articles of incorporation and registration of a
corporation.
vi. Other documents that must be submitted
(1) Recommendation of government agency if required by special law
(2) Certificate of authority from BSP, if necessary
(3) Name verification slip and undertaking to change name, supra.
(4) Bank certificate ast to paid up capital
(5) Letter authorizing SEC or BSP Monetary board to examine the bank records,
Registration sheet
4. Amendments to the Articles of Incorporation (Sec. 16).
Sec. 16 Amendment of Articles of Incorporation Unless otherwise prescribed by this Code or by special
law and for legitimate purposes, any provision or matter stated in the articles of incorporation may be
amended by a majority vote of the board of directors or trustees and the vote or written assent of the
stockholders representing at least 2/3 of the outstanding capital stock, without prejudice to the appraisal
right of dissenting stockholders in accordance with the provisions of this Code, or the vote or written
assent of at least 2/3 of the members if it be a non-stock corporation.
The original and amended articles together shall contain all provisions required by law to set out in the
articles of incorporation. Such articles, as amended shall be indicated by underscoring the change or
changes made, and a copy thereof duly certified under oath by the corporate secretary and a majority of
the directors or trustees stating the fact that said amendment or amendments have been duly approved
by the required vote of the stockholders or members shall be submitted to the SEC.
The amendments shall take effect upon their approval by the SEC or from the date of the filing with the
said Commission if not acted upon within six (6) months from the date of filing for a cause not
attributable to the corporation.
The AOI may be amended upon
(1) Majority vote of the Board of Directors, and
(2) 2/3 vote of the outstanding capital stock, or of the members.
Dissenting stockholders may exercise their appraisal right, infra.
(3) However, the amendments only take effect upon approval by the SEC.
a. Tot that end, the original and amended articles must be submitted to the SEC,
indicating the amendments proposed, together with
b. A copy thereof certified under oath by the Corporate Secretary and the majority of
the directors who approved it, stating that the required vote of stockholders or
members was made, and
c. A favorable recommendation of the appropriate government agency.
That being said, if the amendments are not acted upon within 6 months for a cause not
attributable to the corporation, the amendments are deemed approved.
b. Limitations to Amendments
(1) Must comply with procedure
(2) May not be contrary to the Code or other laws

45
 (3) Must be for legitimate purposes
(4) Original and amended articles must together contain all the articles required by law to be
in an AOI
(5) Changes are indicated
c. Non-amendable items
The ff. cannot be amended, since, well, you cant change them:
Names, nationalities, and residences of incorporators
First set of officers.
Everything else can be amended.
d. In case of foreign corporations
Need only file a duly authenticated copy of the amended AOI with the SEC within 60 days.
vii. Commencement of Corporate Existence (Sec. 19).
Sec. 19 Commencement of corporate existence A private corporation formed or organized under this
Code commences to have corporate existence and juridical personality and is deemed incorporated from
the date the SEC issues a certificate of incorporation under its official seal and thereupon the
incorporators, stockholders/members and their successors shall constitute a body politic and corporate
under the name stated in the articles of incorporation for the period of time mentioned therein, unless
said period is extended or the corporation is sooner dissolved in accordance with law.
The corporate existence of a corporation only commences from the date the SEC issues a
certificate of incorporation.
a. Matters that must be accomplished after issuance of certificate
(1) Adoption of By-Laws, if not already done
(2) Election of Board of Directors/Trustees and Officres
(3) Collection on subscriptions
(4) See appropriate sections, infra.
viii. By-Laws
By-Laws are rules of action adopted by a corporation for its internal government and for the
regulation of conduct and provision for the rights and duties of its stockholders or members
towards itself and among themselves in reference tot eh management of its affairs.
a. Functions
b. Requisites of Valid By-Laws
(i) By-Laws Cannot Be Contrary to Law and Charter
(5) A by-law provision granting to a stockholder permanent seat in the Board of
Directors is contrary to the provision in Corporation Code requiring all members of the
Board to be elected by the stockholders. Even when the members of the association may
have formally adopted the provision, their action would be of no avail because no
provision of the by-laws can be adopted if it is contrary to law. Grace Christian High
School v. Court of Appeals, 281 SCRA 133 (1997).
(ii) By-Law Provisions Cannot Be Unreasonable or Be Contrary to the Nature
of By-laws. Government of P.I. v. El Hogar Filipino, 50 Phil. 399 (1927).
(6) Authority granted to a corporation to regulate the transfer of its stock does not
empower the corporation to restrict the right of a stockholder to transfer his shares, but
merely authorizes the adoption of regulations as to the formalities and procedure to be
followed in effecting transfer. Thomson v. Court of Appeals, 298 SCRA 280 (1998).
(7) By-laws are intended merely for the protection of the corporation, and prescribe
regulation, not restriction; they are always subject to the charter of the corporation.
Rural Bank of Salinas, Inc. v. CA, 210 SCRA 510 (1992).

46
 (iii) Must be uniform and general in their operation; must not be directed
against particular individuals
Every corp. has the inherent right to adopt by-laws for its internal government & to regulate
the conduct & prescribe the rights and duties of its members towards itself & among
themselves in reference to the management of its affairs.
Thus, the by-laws of a corporation may prescribe that a person who owns a competitor may
not be elected director. (Gokongwei v. SEC)
(iv) May not be contrary to morals and public policy
For example, they may not cause the removal of any employee from his employment by the
simple expediency of amending its by-laws and providing that his/her position shall cease to
exist upon the occurrence of a specified event. Salafranca v. Philamlife (Pamplona) Village
Homeowners, 300 SCRA 469 (1998).
(v) Must not impair obligation and contracts
(vi) Must be reasonable, not arbitrary or oppressive.
In the case of banks, building and loan association, trust company, insurance company,
public utility, educational institution or other special corporations governed by special laws,
must be accompanied by certificate of the proper governmental agency that the by-laws or
amendments are in accordance with law.
c. How adopted
TITLE V
BY LAWS
Section 46. Adoption of by-laws. Every corporation formed under this Code must, within one (1) month
after receipt of official notice of the issuance of its certificate of incorporation by the Securities and
Exchange Commission, adopt a code of by-laws for its government not inconsistent with this Code. For
the adoption of by-laws by the corporation the affirmative vote of the stockholders representing at least a
majority of the outstanding capital stock, or of at least a majority of the members in case of non-stock
corporations, shall be necessary. The by-laws shall be signed by the stockholders or members voting for
them and shall be kept in the principal office of the corporation, subject to the inspection of the
stockholders or members during office hours. A copy thereof, duly certified to by a majority of the
directors or trustees countersigned by the secretary of the corporation, shall be filed with the Securities
and Exchange Commission which shall be attached to the original articles of incorporation.
Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed prior to
incorporation; in such case, such by-laws shall be approved and signed by all the incorporators and
submitted to the Securities and Exchange Commission, together with the articles of incorporation.
In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange Commission
of a certification that the by-laws are not inconsistent with this Code.
The Securities and Exchange Commission shall not accept for filing the by-laws or any amendment
thereto of any bank, banking institution, building and loan association, trust company, insurance
company, public utility, educational institution or other special corporations governed by special laws,
unless accompanied by a certificate of the appropriate government agency to the effect that such by-laws
or amendments are in accordance with law. (20a)
There are 2 ways to adopt by-laws:
i. Prior to Incorporation
Must be approved and signed by all incorporators
They will then be filed with the SEC together with the by-laws.
b. After Incorporation
Need to be approved by a majority of the capital stock at a meeting called for that purpose.
Should be filed with the SEC within 30 1 month of receipt of official notice of the issuance of
its certificate of incorporation by the Securities and Exchange Commission
d. Effectivity of By-Laws

47
They are only effective upon certification by the SEC that they are not inconsistent with
the Corporation Code.
e. Contents of By-Laws
Section 47. Contents of by-laws. Subject to the provisions of the Constitution, this Code, other special
laws, and the articles of incorporation, a private corporation may provide in its by-laws for:
1. The time, place and manner of calling and conducting regular or special meetings of the directors or
trustees;
2. The time and manner of calling and conducting regular or special meetings of the stockholders or
members;
3. The required quorum in meetings of stockholders or members and the manner of voting therein;
4. The form for proxies of stockholders and members and the manner of voting them;
5. The qualifications, duties and compensation of directors or trustees, officers and employees;
6. The time for holding the annual election of directors of trustees and the mode or manner of giving
notice thereof;
7. The manner of election or appointment and the term of office of all officers other than directors or
trustees;
8. The penalties for violation of the by-laws;
9. In the case of stock corporations, the manner of issuing stock certificates; and
10. Such other matters as may be necessary for the proper or convenient transaction of its corporate
business and affairs. (21a)
f. Binding Effects
Generally, by-laws are only binding upon:
(1) The members and shareholders, as the by-laws have the force of contract between them,
and they are charged with notice of such by-laws, and
(2) The officers and directors of the corporation.
As a rule, 3rd persons are not bound by the by-laws.
However, if they have actual or constructive notice of the by-laws, they are bound thereby.
(Chinabank v. CA)
In order to be bound, the 3 rd party must have acquired knowledge of the pertinent by-
laws at the time the transaction or agreement between said 3 rd party and the
shareholder was entered into.
Knowledge of the by-laws must be present at the time of the perfection of the
contract.
Since by-laws operate merely as internal rules among the stockholders, they cannot
affect or prejudice third persons who deal with the corporation, unless they have
knowledge of the same. PMI Colleges v. NLRC, 277 SCRA 462 (1997).
g. Effect of failure to file by laws within 30 day period.
There can be no automatic dissolution simply because the incorporators failed to file the
required by-laws under Sec. 46 of Corporation Code. Loyola Grand Villas Homeowners v. CA,
276 SCRA 681 (1997).
As such, the one-month period is merely directory.
3. Amendments (Sec. 48)
Section 48. Amendments to by-laws. - The board of directors or trustees, by a majority vote thereof, and
the owners of at least a majority of the outstanding capital stock, or at least a majority of the members of
a non-stock corporation, at a regular or special meeting duly called for the purpose, may amend or repeal
any by-laws or adopt new by-laws. The owners of two-thirds (2/3) of the outstanding capital stock or two-
thirds (2/3) of the members in a non-stock corporation may delegate to the board of directors or trustees
the power to amend or repeal any by-laws or adopt new by-laws: Provided, That any power delegated to
the board of directors or trustees to amend or repeal any by-laws or adopt new by-laws shall be
considered as revoked whenever stockholders owning or representing a majority of the outstanding

48
capital stock or a majority of the members in non-stock corporations, shall so vote at a regular or special
meeting.
Whenever any amendment or new by-laws are adopted, such amendment or new by-laws shall be
attached to the original by-laws in the office of the corporation, and a copy thereof, duly certified under
oath by the corporate secretary and a majority of the directors or trustees, shall be filed with the
Securities and Exchange Commission the same to be attached to the original articles of incorporation and
original by-laws.
The amended or new by-laws shall only be effective upon the issuance by the Securities and Exchange
Commission of a certification that the same are not inconsistent with this Code. (22a and 23a)
Generally, the amendment of by-laws may be done by:
(1) Majority vote of the Board, and
(2) Majority vote of the outstanding capital stock or members.
However, 2/3 of the outstanding capital stock, or the members, may delegate the authority
to amend or repeal by-laws, or adopt new by laws to the Board of Directors.
That being said, this delegated authority may be revoked by a majority vote of the
outstanding capital stock or members at a meeting called for that purpose.
When an amendment to a provision in the Amended By-Laws requiring the unanimous vote
of the directors present at a special or regular meeting was not printed on the application
form for proprietory membership, and what was printed thereon was the original provision
which was silent on the required number of votes needed for admission of an applicant as a
proprietary member, the Board of Directors committed fraud and evident bad faith in
disapproving respondents application under Article 31 of the Corporation Code. The
explanation given by the petitioner that the amendment was not printed on the application
form due to economic reasons is flimsy and unconvincing because such amendment, aside
from being extremely significant, was introduced way back in 1978 or almost twenty (20)
years before respondent filed his application. (Cebu Country Club, Inc., et al. vs. Ricardo
F. Elizagaque, G.R. No. 160273, January 18, 2008)
h. By-laws of a foreign corporation
Since the SEC will grant a license only when the foreign corporation has complied with all the
requirements of law, it follows that when it decides to issue such license, it is satisfied that the
applicant's by-laws, among the other documents, meet the legal requirements. Therefore,
petitioner bank's by-laws, though originating from a foreign jurisdiction, are valid and effective
in the Philippines. (Citibank, N.A. vs. Hon. Segundino G. Chua, et al., G.R. No. 102300,
March 17, 1993)

49
 h. Corporate Powers, Authority And Activities
1. Corporate Power and Capacity
Civil Code, Art. 46 Juridical persons may acquire and possess property of all kinds, as well as incur
obligations and bring civil or criminal actions, in conformity with the laws and regulations of their
organization.
a. Classification of Corporate Powers: Express; Implied; and Incidental
EXPRESS IMPLIED INCIDENTAL
These powers given to a Those powers that exist as Those powers that:
corporation either: a necessary consequence a.) attach to a
a.) By clear or express provision of of: corporation at the
the law. a.) the exercise of moment of its
Some of the other powers express powers of creation
expressly granted under the corporation or b.) without regard to its
Sec. 36 are considered to b.) the pursuit of its express powers or
be inherent or incidental purpose as provided particular primary
powers which even if not for in the article of purposes and
given by express grant are incorporation c.) is said to be inherent
nevertheless deemed to be the in it as a legal entity
within the capacity of the management or a legal
foreign entities (such as the of a organization.
power to adopt by-laws) corporation, in Powers that go into
b.) By the charter or articles of the absence of the very nature and
incorporation. express extent of a
Express grant of authority restrictions, corporations
from the board of directors has juridical entity
needed to validly bind the discretionary cannot be presumed
corporation. authority to to be incidental or
Thus the SC held that enter into inherent powers.
absent any board resolution contracts or This juridical entity
authorizing an officer or transactions is State-grant and
any person to exercise which may be cannot be altered or
express powers given to a deemed amended without
corporation such as filing a reasonably State authority (egs.
suit on its behalf, such an necessary or right of succession,
action is invalid. incidental to right to merger)
The power of a corporation its business
to sue and be sued in any purpose.
court is lodged with the
board of directors that
exercise its corporate
powers.
By-laws are not a source of
powers.
Art. 46 of the Civil Code Sub-paragraph 11 of Sec. 2 of the Corp.
expressly provides for the Sec. 36 provide that Code provides the
powers of a corporation as a corporation has the corporation as
a juridical personality power and capacity having the powers,
50
 possesses. to exercise such attributes and
Sec. 36 of the Corporation powers as may be properties expressly
Code expressly enumerates essential or authorized by law or
the ten powers which a necessary to carry incident to its
corporation may exercise. out its purpose or existence.
Sec. 45 of the Corporation purposes as stated in
Code recognizes other its articles of
powers provided in the incorporation.
Article of Incorporation.
Generally exercised by the Generally, purely Generally, purely
Board of Directors with members of the members of the
exception to certain Board of Directors Board of Directors
instances where exercise this. exercise this.
shareholders assent are
needed.
A corporation has only such powers as are expressly granted to it by law and by its
articles of incorporation, those which may be incidental to such conferred powers, those
reasonably necessary to accomplish its purposes and those which may be incident to its
existence. Pilipinas Loan Company v. SEC, 356 SCRA 193 (2001).
General Powers, Theory of General Capacity Sec. 36 Corporate powers and capacity Every corporation
incorporated under this Code has the power and capacity:
1) To sue and be sued in its corporate name;
2) Of succession by its corporate name for the period of time stated in the articles of incorporation and
the certificate of incorporation;
3) To adopt and use a corporate seal;
4) To amend its articles of incorporations in accordance with the provisions of this Code;
5) To adopt by-laws, not contrary to law, morals or public policy, and to amend or repeal the same in
accordance with this Code;
6) In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury stocks in
accordance with the provisions of this Code; and to admit members to the corporation if it be a non-
stock corporation;
7) To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal
with such real and personal property, including securities and bonds of other corporations, as the
transactions of the lawful business of the corporation may reasonably and necessary require, subject
to the limitations prescribed by law and the Constitution;
8) To enter into merger or consolidation with other corporations as provided in this Code;
9) To make reasonable donations, including those for the public welfare or hospital or charitable,
cultural, scientific, civic or similar purposes: Provided, That no corporation, domestic or foreign shall
give donations in aid of any political party or candidate or for purposes of partisan political activity;
10) To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and
employees; and
11) To exercise such other powers as may be essential or necessary to carry out its purpose or purposes
as stated in the articles of incorporation.
Under the theory of general capacity, a corporation may exercise any and all powers that
may be exercised by persons
The test to be applied, then, is whether the act of the corporation is in the direct and
immediate furtherance of its business, fairly incidental to the express powers and reasonably
necessary to their exercise. If so, the corporation has the power to do it.
Judging by jurisprudence, this seems to be the prevailing doctrine in the Philippines.
b. Specific Powers, Theory of Specific Capacity

51
Sec. 45 Ultra vires acts of corporations No corporation under this Code shall possess or exercise any
corporate powers except those conferred by this Code or by its articles of incorporation and except such
as necessary or incidental to the exercise of the powers so conferred.
In contrast, under the theory of specific capacity, a corporation may only possess or exercise
the powers conferred on it by law, its AOI, those implied from express powers, and those that
are necessary or incidental to the exercise of powers.
This theory is embodied as Sec. 45, which gives the exception to the general grant of power
to corporations.
c. Where Corporate Power Lodged
Generally, in the Board of Directors, under the Doctrine of Centralized Management,
infra., under the section on the Board of Directors.
ii. Express Powers
a. Enumerated Powers (Secs. 36)
Sec. 36 Corporate powers and capacity Every corporation incorporated under this Code has the power
and capacity:
1) To sue and be sued in its corporate name;
2) Of succession by its corporate name for the period of time stated in the articles of incorporation and
the certificate of incorporation;
3) To adopt and use a corporate seal;
4) To amend its articles of incorporations in accordance with the provisions of this Code;
5) To adopt by-laws, not contrary to law, morals or public policy, and to amend or repeal the same in
accordance with this Code;
6) In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury stocks in
accordance with the provisions of this Code; and to admit members to the corporation if it be a non-
stock corporation;
7) To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal
with such real and personal property, including securities and bonds of other corporations, as the
transactions of the lawful business of the corporation may reasonably and necessary require, subject
to the limitations prescribed by law and the Constitution;
8) To enter into merger or consolidation with other corporations as provided in this Code;
9) To make reasonable donations, including those for the public welfare or hospital or charitable,
cultural, scientific, civic or similar purposes: Provided, That no corporation, domestic or foreign shall
give donations in aid of any political party or candidate or for purposes of partisan political activity;
10) To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and
employees; and
11) To exercise such other powers as may be essential or necessary to carry out its purpose or purposes
as stated in the articles of incorporation.
Mnemonic: MISS POP DABS
M erger and Consolidation P roperty D onations
I ssue stocks O thers A rticles of Incorporation
S ue and be Sued P ensions B y-laws
S uccession S eal
b. Notes on some of the General powers
i. Power to Sue and Be Sued
The power of a corporation to sue and be sued is exercised by the board of directors. The
physical acts of the corporation, like the signing of documents, can be performed only by
natural persons duly authorized for the purpose by corporate bylaws or by a specific act of the
board. Absent the said board resolution, a petition may not be given due course.
(LigayaEsguerra, et al. vs. Holcim Philippines, Inc., G.R. No. 182571, September 2,
2013)

52
 The lawyer who signed the pleading, verification and certification against non-forum
shopping must be specifically authorized by the Board of Directors of the Corporation to
make his actions binding on his principal. Maranaw Hotels and Resort Corporation v.
Court of Appeals, 576 SCRA 463 (2009)
As to CNFS
If the real party in interest is a corporate body, an officer of the corporation can sign the
certification against forum shopping so long as he has been duly authorized by a
resolution of its board of directors. The court did not commit grave abuse of discretion in
dismissing the petition for lack of authority of authority of the officer who signed the
certification of non-forum shopping in representation of petitioner corporation. San Miguel
Bukid Homeowners Association, Inc. vs City of Mandaluyong, et al, GR no.153653,
October 2, 2009; Republic of the Philippines vs. Coalbrine International Philippines,
et al GR No. 161838, April 7, 2010
The following officers may sign the verification and certification against non-forum shopping
on behalf of the corporation even in the absence of board resolution,
a)Chairperson of the Board of Directors;
b)President,
c)General Manager,
d) Personnel Officer,
e) Employment Specialist in labor case.
These officers are in the position to verify the truthfulness and correctness of the allegations in
the petition. Mid Pasig Land and Development Corporation v. Tablante, G.R. No. 162924,
February 4, 2010; PNCC Skyway Traffic Management and Security Division Workers
Organization vs PNCC Skyway Corporation, GR No. 171231, February 17, 2010
In a complaint for nullification of mortgage and foreclosure with damages against the
mortgagee-bank, the plaintiff can not compel the officers of the bank to appear and testify as
plaintiffs initial witnesses unless written interrogatories are first served upon the bank
officers. This is in line with the Rules of Court provision that calling the adverse party to the
witness stand is not allowed unless written interrogatories are first served upon the latter.
This is because the officers of a corporation are considered adverse parties as well in a case
against the corporation itself based on the principle that corporations act only through their
officers and duly authorized agents. Spouses Afulugencia vs. Metropolitan Bank and
Trust Co. G.R. No. 185145, February 05, 2014
ii. Sell Land and Other Properties
When the corporations primary purpose is to market, distribute, export and import
merchandise, the sale of land is not within the actual or apparent authority of the corporation
acting through its officers, much less when acting through the treasurer. Likewise Articles 1874
and 1878 of Civil Code requires that when land is sold through an agent, the agents authority
must be in writing, otherwise the sale is void. AF Realty & Dev., Inc. v. Dieselman
c. Borrow Funds
The power to borrow money is one of those cases where even a special power of attorney is
required under Art. 1878 of Civil Code. There is invariably a need of an enabling act of the
corporation to be approved by its Board of Directors. The argument that the obtaining of loan
was in accordance with the ordinary course of business usages and practices of the corporation
is devoid of merit because the prevailing practice in the corporation was to explicitly authorize
an officer to contract loans in behalf of the corporation. China Banking Corp. v. Court of
Appeals, 270 SCRA 503 (1997).
d. Power to Sue
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Under Sec. 36 of Corporation Code, in relation to Sec. 23, where a corporation is an injured
party, its power to sue is lodged with its Board of Directors. A minority stockholder who is a
member of the Board has no such power or authority to sue on the corporations behalf. Tam
Wing Tak v. Makasiar, 350 SCRA 475 (2001); Shipside Inc. v. Court of Appeals, 352 SCRA 334
(2001); SSS v. COA, 384 SCRA 548 (2002).
Where the corporation is real party-in-interest, neither administrator or a project manager
could sign the certificate against forum-shopping without being duly authorized by
resolution of the Board of Directors (Esteban, Jr. v. Vda. De Onorio, 360 SCRA 230 [2001]),
nor the General Manager who has no authority to institute a suit on behalf of the corporation
even when the purpose is to protect corporate assets. (Central Cooperative Exchange Inc. v.
Enciso, 162 SCRA 706 [1988]).
When the power to sue is delegated by the by-laws to a particular officer, such officer may
appoint counsel to represent the corporation in a pre-trial hearing without need of a formal
board resolution. Citibank, N.A. v. Chua, 220 SCRA 75 (1993).
For counsel to sign the certification for the corporation, he must specifically be authorized
by the Board of Directors. BPI Leasing Corp. v. CA, 416 SCRA 4 (2003); Mariveles Shipyard
Corp. v. CA, 415 SCRA 573 (2003).
e. Provide Gratuity Pay for Employees
Providing gratuity pay for employees is an express power of a corporation under the
Corporation Code, and cannot be considered to be ultra vires to avoid any liability arising
from the issuance of resolution granting such gratuity pay. Lopez Realty v. Fontecha, 247
SCRA 183, 192 (1995).
f. Enter Partnership or Joint Venture.
While the rules on partnership prohibit corporations from entering into partnerships,
corporations may enter into joint ventures. See partnership for more on that if you want.
It would seem that under Philippine law, a joint venture is a form of partnership and should
thus be governed by the law of partnerships. The Supreme Court has however recognized a
distinction between these two business forms, and has held that although a corporation
cannot enter into a partnership contract, it may however engage in a joint venture with
others. (WolrgangAurbach, John Griffin, David P. Whittinghamand Charles Chamsay
vs. Sanitary Wares Manufacturing Corporatoin, Ernesto V. Lagdameo, Ernesto R.
Lagdameo, Jr., Enrique R. Lagdameo, George F. Lee, Raul A. Boncan, Baldwin Young
and Avelino V. Cruz, G.R. No. 75875, December 15, 1989)
c. Other Specific Powers Granted by the Corporation code
1. Power to Extend or Shorten Corporate Term
2. Power to Increase or Decrease Capital Stock or Incur, Create, Increase Bonded
Indebtedness
3. Power to Deny Pre-Emptive Rights
4. Power to Sell or Dispose of Corporate Assets
5. Power to Acquire Own Shares
6. Power to Invest Corporate Funds in Another Corporation or Business
7. Power to Declare Dividends
8. Power to Enter Into Management Contract
The difference is that these powers require the approval not only of the board, but also the
stockholders or members of the corporation.
Discussions on each follow.
i. Extend or Shorten Corporate Term (Secs. 37 and 81 [1])
Sec. 37 Power to extend or shorten corporate term A private corporation may extend or shorten its term
as stated in the articles of incorporation when approved by majority vote of the board of director or
54
trustees and ratified at a meeting by the stockholders representing at least 2/3 of the outstanding capital
stock or by at least 2/3 of the members in case of non-stock corporation. Written notice of the proposed
action and of the time and place of the meeting shall be addressed to each stockholder or member at his
place of residence as shown on the books of the corporation and deposited to the addressee in the post
office with postage prepaid or served personally. Provided, that in case of extension of corporate term,
any dissenting stockholder may exercise his appraisal right under the conditions provided in this code.
Sec. 81[1] Instances of appraisal right Any stockholder of a corporation shall have the right to dissent
and demand payment of all the fair value of his shares in the following instances: In case any amendment
to the articles of incorporation has the effect of changing or restricting the rights of any stockholders or
rights of any stockholder class of shares, or of authorizing preferences in any respect superior to those
outstanding shares of any class, or of extending or shortening the term of the corporate existence.
The corporate term may be extended or shortened by:
(a)Majority vote of the Board, and
(b) 2/3 vote of the outstanding capital stock of members at a meeting.
(c)Subject to appraisal right.
This is essentially an amendment to the AOI, which affects the stockholders interests, and
so their consent must be sought.
b. Increase or Decrease Capital Stock (Sec. 38)
Sec. 38 Power to increase or decrease capital stock; incur, create or increase bonded indebtedness No
corporation shall increase or decrease its capital stock or incur, create or increase any bonded
indebtedness unless approved by a majority vote of the board of directors and, at a stockholders meeting
duly called for the purpose, 2/3 of the outstanding capital stock shall favor the increase or diminution of
the capital stock, or the incurring, creating, or increasing ant bonded indebtedness. Written notice of the
proposed increase or diminution of the capital stock or of the incurring, creating, or increasing of any
bonded indebtedness and of the time and place of the stockholders meeting at which the proposed
increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to
be considered, must be addressed to each stockholder at his place of residence as shown on the books of
the corporation and deposited to the addressee in the post office with postage prepaid, or served
personally.
A certificate in duplicate must be signed by a majority of directors of the corporation and countersigned
by the chairman and the secretary of the stockholders meeting, setting forth:
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, 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 stockholder if such increase is for the purpose of making effective stock
dividend thereof authorized;
4) Any bonded indebtedness to be incurred, created or increased;
5) The actual indebtedness of the corporation on the day of 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.
Any increase or decrease in the capital stock or the incurring, creating or increasing any bonded
indebtedness shall require prior approval of the Securities and Exchange Commission.
One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be
filed with the Securities and Exchange Commission and attached to the original articles of incorporation.
From and after approval by the Securities and Exchange Commission and the issuance by the
Commission of its certificate of filing, the capital stock shall stand increased or decreased and the
incurring, creating or increasing any bonded indebtedness authorized, as the certificate of filing may
declare Provided, That the Securities and Exchange Commission shall not accept for filing any certificate
of increase of capital stock unless accompanied by the sworn statement of the treasurer of the
corporation lawfully holding office at the time of the filing of the certificate, showing that at least 25% of
55
such increased capital stock has been subscribed and that at least 25% of the amount subscribed has
been paid either in actual cash to the corporation or that there has been transferred to the corporation
property the valuation of which is equal to 25% of the subscription: Provided further, that no decrease of
the capital stock shall be approved by the Commission if its effect shall prejudice the rights of corporate
creditors.
Non-stock corporations may incur or create bonded indebtedness or increase the same with the approval
by a majority vote of the board of trustees and of at least 2/3 of the members in a meeting duly called for
that purpose.
Bonds issued by a corporation shall be registered with the Securities and Exchange Commission, which
shall have the authority to determine the sufficiency of the terms thereof.
For now, an increase or decrease in capital stock may be done through:
(1) Majority vote of the Board
(2) 2/3 vote of the outstanding capital stock or the members at a meeting
(3) A certificate must be signed by the majority of the directors, countersigned
by the chairman of the secretary of the stockholders meeting, setting forth:
a. That the requirements of this section have been complied with;
b. The amount of the increase or diminution of the capital stock;
c. 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,
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 stockholder if such increase is for the purpose of making effective
stock dividend thereof authorized;
d. Any bonded indebtedness to be incurred, created or increased;
e. The actual indebtedness of the corporation on the day of meeting;
f. The amount of stock represented at the meeting; and
g. The vote authorizing the increase or diminution of the capital stock, or the
incurring, creating, or increasing of any bonded indebtedness.
(4) Any increase or decrease in the capital stock or the incurring, creating or
increasing any bonded indebtedness shall require prior approval of the Securities and
Exchange Commission.
a. In increases of capital stock, like the original subscription of capital stock, the
25%-25% rule applies, and the treasurer must make a statement to that effect.
i. The 25%-25% rule applies to the amount of the increase, and not on total
capital stock as increeaed.
ii. The limitation to the increase of the capital stock cannot exceed that
authorized by the AOI.
b. In contrast, in decreases of capital stock, the limitation is that no decrease of
the capital stock shall be approved by the Commission if its effect shall
prejudice the rights of corporate creditors.
NB. No appraisal right.
This is because every stockholder should come into the corporation setting aware that the
expediencies of corporate life may require that eventually the corporation may need to
increase capitalization to fund its operations or expansions, and needs to look primarily into
its equity investors to fund the same.
Moreover, such appraisal right may defeat the purpose of the corporation in increasing
the funds; by increasing the funds for survival, granting an appraisal right may result in
return of capital to dissenting stockholders, thus defeating the capital.

56
 In the increase, a stockholder may always sell his stock if he dissents to the increase of
the capital stock.
In the decrease of capital stock, there is no point. Capital will be returned anyway.
Despite the board resolution approving the increase in capital stock and the receipt of
payment on the future issues of the shares from the increased capital stock, such funds do
not constitute part of the capital stock of the corporation until approval of the increase
by SEC. Central Textile Mills, Inc. v. National Wages and Productivity Commission,
A reduction of capital to justify the mass layoff of employees, especially of union members,
amounts to nothing but a premature and plain distribution of corporate assets to obviate a
just sharing to labor of the vast profits obtained by its joint efforts with capital through the
years, and would constitute unfair labor practice. Madrigal & Co. v. Zamora,
Methods of increasing or decreasing capital stock
(1) Cancelling or retiring shares, including treasury shares
(2) Redeeming redeemable shares
(3) Accepting a surrender of shares, exchanging therefor a proportionate amount of the
assets
(4) Cancelling unissued shares
(5) Increasing or decreasing the par value of shares without increasing or decreasing their
numbers.
(6) Increasing or decreasing the number of shares without changing par value
(7) Increasing or decreasing the number of shares and changing par value.
Note that, obviously, a non-stock corporation cannot increase its nonexistent capital stock.
c. Incur, Create or Increase Bonded Indebtedness (Sec. 38)
Sec. 38 Power to increase or decrease capital stock; incur, create or increase bonded indebtedness No
corporation shall increase or decrease its capital stock or incur, create or increase any bonded
indebtedness xxx
Note that this power only refers to incurring of bonded indebtedness.
Bonded indebtedness refers to a loan:
(1) Covered by a bond registered with the SEC, and
A bond is a long-term investment, usually with a large indebtedness.
(2) Secured by corporate assets.
Requirements for stock corporation
(1) Majority vote of board
(2) 2/3 vote of the outstanding capital stock or the members at a meeting
(3) A certificate must be signed by the majority of the directors, countersigned by the
chairman of the secretary of the stockholders meeting, setting forth:
a. That the requirements of this section have been complied with;
b. Any bonded indebtedness to be incurred, created or increased;
c. The actual indebtedness of the corporation on the day of meeting;
d. The amount of stock represented at the meeting; and
e. The vote authorizing the incurring, creating, or increasing of any bonded
indebtedness.
For non-stock corporations
(1) Non-stock corporations may incur or create bonded indebtedness or increase the same
with the approval by a majority vote of the board of trustees and of at least 2/3 of the
members in a meeting duly called for that purpose.
(2) Bonds issued by a corporation shall be registered with the Securities and Exchange
Commission, which shall have the authority to determine the sufficiency of the terms
thereof.
d. Power to Deny Pre-Emptive Right
57
Section 39. Power to deny pre-emptive right. All stockholders of a stock corporation shall enjoy pre-
emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their
respective shareholdings, unless such right is denied by the articles of incorporation or an amendment
thereto: Provided, That such pre-emptive right shall not extend to shares to be issued in compliance with
laws requiring stock offerings or minimum stock ownership by the public; or to shares to be issued in
good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital
stock, in exchange for property needed for corporate purposes or in payment of a previously contracted
debt.
The pre-emptive right is the preferential right of shareholders to subscribe to all issues or
dispositions of shares in any class in proportion to their present shareholdings
It may be waived and may be denied in an amendment thereto.
All it means is that when there is an issuance of stocks, they must be first offered to existing
shareholders in the same proportion as their current shareholdings.
Note that it applies to all issuances. The old rule that it does not apply to issuances of
previously offered stock has been overturned.
When pre-emptive right can be denied
(1) Those issued in compliance with laws requiring stock offering or minimum stock
ownership by the public, like the SRC
(2) Those issued in exchange for property needed for corporate purpose or in payment of a
previously contracted debt, if approved by 2/3 of the capital stock or members.
e. Sell or Dispose of all or substantially all Assets (Sec. 40)
Sec. 40 Sale or other disposition of assets Subject to the provisions of existing law on illegal
combination and monopolies, a corporation may by a majority vote of its board of directors or trustees,
sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and
assets including its goodwill, upon such terms and conditions and for such consideration, which may be
money, stocks, bonds or other instruments for the payment of money or other property or consideration
as its board of directors or trustees deem expedient, when authorized by the vote of stockholders
representing at least 2/3 of the outstanding capital stock, or in the case of non-stock corporation, by the
vote of at least 2/3 of the members, in a stockholders or members meeting duly called for that purpose.
Written notice of the proposed action and of the time and place of the meeting shall be addressed to
each stockholder or members at his place of residence as shown on the books of the corporation and
deposited to the addressee in the post office with postage prepaid paid, or served personally: Provided,
that any dissenting stockholder may exercise his appraisal right under the conditions provided for in the
Code.
A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if
thereby the corporation would be rendered incapable of continuing the business or accomplishing the
purpose for which it was organized.
After such authorization or approval by the stockholders or members, the board of directors or trustees,
may nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge or other
disposition of property and assets subject to the rights of third parties under any contracting relating
thereto without further action or approval by the stockholders or members.
Nothing in this section is intended to restrict the power of any corporation, without the authorization by
the stockholders or members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its
property and assets if the same is necessary in the usual and regular course of business of said
corporation or if the proceeds of the sale or other disposition of such property and assets be appropriated
for the conduct of its remaining business.
In non-stock corporations where there are no members with voting rights, the vote of at least a majority
of the trustees in office will be sufficient authorization for the corporation to enter into any transaction
authorized by this section.
These requirements only apply to sales of all or substantially all the assets of a
corporation.

58
 When the transaction is in the normal course of business, it only needs the majority of the
quorum of the Board of Director to approve such transaction.
However, when such is in the extraordinary course of the business as in the disposition of all
or substantially all of the assets of the corporation, such needs:
(1) the vote of the absolute majority of the Board of Directors plus
(2) Tthe ratification of 2/3 vote of stockholders representing at least 2/3 of the outstanding
capital stock of the corporation in case it is a stock corporation, or in the case of a non-
stock corporation, 2/3 of the members.
(3) Subject to appraisal right.
(4) The sale must comply with the requirements of the Bulk Sales Law, viz:
a. Must file notice with the DTI at least 10 days before the sale, with a verified list
of creditors and an inventory of the property to be sold, including the acquisition
price and the amount for which it is to be sold.
b. If not complied with, the buyer will have to hold the property in trust for the
creditors.
This case is one of the exceptions to the rule where the stockholders have proprietary
interests in the business enterprise. This is also an exception to the rule that generally the
Board of Directors have the power to bind the, and transact for the corporation.
If transactions are entered into relating to this section without the ratification of the
stockholders, such transaction is void for it is illegal per se as it runs contrary to Sec. 40 of
the Corporation Code.
Sale by Board of Trustees of the only corporate property without compliance with Sec. 40 of
Corporation Code requiring ratification of members representing at least two-thirds of the
membership, would make the sale null and void. Islamic Directorate v. Court of Appeals, 272
SCRA 454 (1997); Pea v. CA, 193 SCRA 717 (1991).
f. Power to acquire own shares
Section 41. Power to acquire own shares. A stock corporation shall have the power to purchase or
acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the
following cases: Provided, That the corporation has unrestricted retained earnings in its books to cover
the shares to be purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent shares sold during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the
provisions of this Code. (a)
A stock corporation may acquire its own shares in the ff. cases:
(1) To eliminate fractional shares arising out of stock dividends , but that must be indicated
in the board reso where the issuance of such dividends was provided for.
(2) To collect or compromise indebtedness to the corporation, arising out of unpaid
subscription, in a delinquency sale, and to purchase delinquent shares sold during the
sale, and
(3) To pay dissenting or withdrawing stockholders under the exercise of appraisal rights.
Aside from these, the code is sprinkled with other cases where the corporation can acquire its
own shares, including
(4) To acquire treasury shares
(5) Redeeming redeemable shares
(6) To effect a decrease of capital stock, and
(7) In close corporations, when there is a deadlock in the management of the business
(8) Dacion en pago
(9) Execution sales
(10) Donations, and

59
 (11) To buy back shares at elss than book value
However, the general limitation for all these instances is that the acquisition must be made
out of unrestricted retained earnings.
The requirement of unrestricted retained earnings to cover the shares is based on the trust
fund doctrine which means that the capital stock, property and other assets of a corporation
are regarded as equity in trust for the payment of corporate creditors. The reason is that
creditors of a corporation are preferred over the stockholders in the distribution of
corporate assets. (Boman Environmental Development Corporation vs. Hon. Court of
Appeals and Nilcar Y. Fajilan, G.R. No. 77860, November 22, 1988)
Unrestricted retained earnings
Are earnings that have not been reserved for use in other purposes.
The amount of URE may be calculated by adding business profits and non-recurrent profits
However, URE does not include reappraisal surplus or other paper gains.
g. Invest Corporate Funds for Non-Primary Purpose
Endeavor (Sec. 42; De la Rama v. Ma-ao Sugar Central
Co., 27 SCRA 247 [1969])
Sec. 42 Power to invest corporate funds in another corporation or business or for any other business
purpose Subject to the provisions of this Code, a private corporation may invest its funds in any other
corporation or business or for any purpose other than the primary purpose for which it was organized
when approved by a majority of the board of directors or trustees and ratified by the stockholders
representing at least 2/3 of the outstanding capital stock, or at least by 2/3 of the members in the case of
non-stock corporations, at a stockholders or members meeting duly called for that purpose. Written
notice of the proposed investment and the time and place of the meeting shall be addressed to each
stockholder or member at his place of residence as shown on the books of the corporation and deposited
to the addressee in the post office with postage prepaid or served personally: Provided, That any
dissenting stockholder shall have appraisal right as provided in this Code: Provided however, That where
the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in
the articles of incorporation, the approval of the stockholders or members shall not be necessary.
Generally, a corporation may only pursue acts in furtherance of its primary purpose.
This is done by the board of directos acting in its day to day functions.
However, the corporation may pursue its secondary purposes subject to:
(1) Majority approval of the Board
(2) 2/3 vote of the capital stock or members, and
(3) The appraisal right.
That being said, the corporation is not allowed to pursue purposes aside from those
enumerated in its AOI, as that would be ultra vites, see infra.
Investment of corporate funds in another corporation if done in pursuance of the corporate
purpose, does not need the approval of the stockholders, but where the purchase of the
shares of another corporation is done solely for investment and not to accomplish the
purpose of its incorporation, the vote of approval of the stockholders is necessary. (dela
Rama v. Ma-Ao)
h. Declare Dividends (Sec. 43;
Sec. 43 Power to declare dividends The board of directors of a stock corporation, may declare
dividends out of the unrestricted retained earnings which shall be payable in cash, in property or in stock
to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividend due
on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and
expenses, while stock dividends shall be withheld from the delinquent stockholder until his paid
subscription is fully paid: Provided further, that no stock dividend shall be issued without the approval of
stockholders representing not less than 2/3 of the outstanding capital stock at a regular or special
meeting duly called for that purpose.

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Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in capital
stock, except: (1) when justified by definite corporate expansion projects or programs approved by the
board of directors; or (2) when the corporation is prohibited under any loan agreement with any financial
institution or creditor whether local or foreign, from declaring dividends without its/his consent, and such
consent has not yet been secured; or (3) when it can be clearly shown that such retention is necessary
under special circumstances obtaining in the corporation, such when there is need for special reserve for
probable contingencies.
The corporation may declare dividends out of its unrestricted retained earnings.
Definitions
Retained earnings are the accumulated profits realized out of the normal and continuous
operations of the business after deducting therefrom distributions to stockholders and transfers
to capital or other accounts
Unrestricted retained earnings are retained earnings which have not been reserved or
set aside by the board or directors for some corporate purpose.
Calculated by
Dividends are corporate profits set aside, declared, and ordered to be paid by the directors
for distribution among shareholders at a fixed time
Kinds of dividends
(1) Cash dividends, which are payable in cash.
(2) Property dividends, which are payable in property.
(3) Stock dividends, which are payable in unissued or increased or additional shares
of the corporation.
Those are the main ones. However, there are also:
(4) Bond dividends, which are payable in bonds.
(5) Composite dividends, which are payable partly in cash and partyly in stocks
(6) Optional dividends, which give the stockholder the option to receive cash or
stocks
(7) Cumulative dividends, which are contracted to be paid at stated times, and if net
earnings are insufficient to be paid, may be paid out of subsequent net earnings.
(8) Preferred or preferential dividends, which are those that must be paid to one
class of stockholders in priority over those paid to another class,
(9) Scrip dividends, which are those given to a stockholder at some future time,
because at the time they are declared the corporation has no sufficient cash to pay
dividends, and
(10) Liquidating dividends, whicha re those paid out of the assets of a corporation
upon its dissolution or winding up.
When dividends may be declared:
(1) Existence of URE, and
(2) Compliance with Sec. 43, namely
Requisites for issuance of CASH dividends; Limitations
(1) Majority vote of Board
(2) Cash dividends must be first applied to unpaid balance on delinquent, not
merely unpaid, stock.
Cf. Requisites for issuance of STOCK dividends
(1) Majority vote of Board
(2) 2/3 vote of capital stock or members at a meeting for that purpose.
When dividends MUST be declared
Generally, the declaration of dividends is left to the discretion of the board.
However, if the corporation has surplus profits in excess of 100% of their paid-in capital
stock, it must declared dividends.
That being said, in the ff. cases, the corporation is entitled to retain such excess profits.:
61
(1) when justified by definite corporate expansion projects or programs approved by the board
of directors; or
(2) when the corporation is prohibited under any loan agreement with any financial institution
or creditor whether local or foreign, from declaring dividends without its/his consent, and such
consent has not yet been secured; or
(3) when it can be clearly shown that such retention is necessary under special circumstances
obtaining in the corporation, such when there is need for special reserve for probable
contingencies.
Since its so broadly phrased, usually corporations will invoke special contingencies in order
to retain surplus profits.
In such cases, however, stockholders can compel the declaration of dividends through a
petition for mandamus.
Out of what funds dividends must be paid
Generally, must be paid out of URE, and not capital.
However, dividends may be paid out of capital in the ff. cases:
(1) From wasting assets, as return of capital with reduction surplus
(2) To utilize a lease or patent, and
(3) Liquidating dividends.
Dividends cannot be declared for preferred shares which were guaranteed a quarterly
dividend if there are no unrestricted retained earnings. "Interest bearing stocks", on which
the corporation agrees absolutely to pay interest before dividends are paid to common
stockholders, is legal only when construed as requiring payment of interest as dividends
from net earnings or surplus only. (Republic Planters Bank vs. Hon. Enrique A. Agana, )
i. Enter into Management Contracts (Sec. 44; Nielson &
Co., Inc. v. Lepanto Consolidated Mining, 26 SCRA 540
[1968]; Ricafort v. Moya, 195 SCRA 247 [1991]). Why the
difference in rule between entity and individual?
Sec. 44 Power to enter into management contracts No corporation shall conclude a management
contract with another corporation unless such contract shall have been approved by the board of
directors and by stockholders owning at least the majority of the outstanding capital stock, or by at least
a majority of the members in the case of a non-stock corporation of both managing and the managed
corporation at a meeting duly called for that purpose: Provided, That (1) where a stockholder or
stockholders representing the same interest of both the managing and 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, then the
management contract must be approved by the stockholders of the managed corporation owning at least
2/3 of the total outstanding capital stock entitled to vote, or by at least 2/3 of the members in the case of
a non-stock corporation. No management contract shall be entered into for a longer period than five
years for any one term.
The provisions of the next preceding paragraph shall apply to any contract whereby a corporation
undertakes to mange or operate all or substantially all of the business of another corporation, whether
such contracts are called service contracts, operating agreements or otherwise: Provided however, That
such service contracts or operating agreements which relate to exploration, development, exploitation or
utilization of natural resources may be entered into for such periods as may be provided by the pertinent
laws or regulation
Under this provision, a corporation may enter into a management contract with another
corporation.

62
 A management contract is an agreement whereby a corporation delegates the
management of its affairs to another corporation for a certain period of time, not exceeding
5 years.
Under the Corporation Code, any contract whereby a corporation undertakes to manage
or operate all or substantially all of the business of another corporation is a management
contract, whether such contracts are called service contracts, operating agreements or
otherwise.
Requirements to enter into management contract
(1) Majority vote of Board
(2) Required vote of the stockholders, which is:
a. Generally, a majority vote of both corporations involved.
b. However, if the corporations:
i. Have common stockholders who own or control more than 1/3 of the
managing corporation, or
ii. Have common directors who make up a majority of both corporations,
The vote of 2/3 of the managed corporations capital stock or membership
must be given.
As to the managing corporation, only a majority vote is still required.
Limitation
The management contract may only be for a term of 5 years.
That is, except for service contracts or operating agreements which relate to exploration,
development, exploitation or utilization of natural resources, which may be entered into for
such periods as may be provided by the pertinent laws or regulation.
NB. the foregoing only apply to management contracts entered into with another
corporation.
They do not apply to management contracts with individuals.
iii. Implied Powers
As previously discussed, aside from the powers expressly granted above, the corporation has
powers that can be implied therefrom, i.e. those that can be inferred from or are necessary
for the exercise of the express powers.
The test for whether the powers can be implied is reference to the AOI and the By-Laws. If
the power cannot be implied therefrom, it is ultra vires.
Examples:
When the articles expressly provide that the purpose of the corporation was to engage in
the transportation of person by water, such corporation cannot engage in the business of
land transportation, which is an entirely different line of business, and, for which reason,
may not acquire any certificate of public convenience to operate a taxicab service. Luneta
Motor Co. v. A.D. Santos, Inc., 5 SCRA 809 (1962).
A corporation whose primary purpose is to generate electric power has the authority to
undertake stevedoring services to unload coal into its pier since it is reasonably necessary
for the operation of its power plant. NPC v. Vera
A corporation organized to engage as a lending investor cannot engage in pawn broker.
Philipinas Loan Co. v. SEC, 356 SCRA 193 (2001).
A mining company has no power to engage in real estate development. Heirs of Antonio Pael
v. CA.
An officer who is authorized to purchase the stock of another corporation has implied power
to perform all other obligations arising therefrom such as payment of the shares of stock.
Inter-Asia Investments Industries v. CA.

63
 There are certain corporate acts that may be performed outside of the scope of the powers
expressly conferred if they are necessary to promote the interest or welfare of the
corporation such as the establishment of the local post office which is a vital improvement in
the living condition of the employees and laborers who came to settle in a mining camp
which is far removed from the postal facilities. (Republic of the Philippines vs. Acoje
Mining Company, Inc)
iv. Incidental Powers
Aside from implied powers, a corporation may exercise all powers that are incidental to a
corporate existence.
The act of issuing checks is within the ambit of a valid corporate act, for it as for securing a
loan to finance the activities of the corporation, hence, not an ultra vires act. Atrium
Management Corp. v. CA, 353 SCRA 23 (2001).
v. Ultra Vires Doctrine
Sec. 45 Ultra vires acts of corporations No corporation under this Code shall possess or exercise any
corporate powers except those conferred by this Code or by its articles of incorporation and except such
as necessary or incidental to the exercise of the powers so conferred.
a. Concept and Types (Sec. 45)
Sec. 45 of the Corporation Code is the statutory embodiment of the Ultra Vires Doctrine that
provides that the corporation cannot exercise powers beyond what had been granted to it by
statute or by its articles of incorporation except such as necessary or incidental to the exercise
of powers so conferred. It was meant to control and regulate the actions of corporations.
b. Basis Of Ultra Vires Doctrine (Two Corporate Principles)
1. A corporation is a creature of the law and has only such powers and privileges as are granted
by the State the ultra vires doctrine is a product of the theory of concession as provided in
Sec. 2.
2. The doctrine upholds the fiduciary duty of directors and officers to the stockholders or
members such duty dictates that the corporation engage only in transactions to which the
stockholders and members bind themselves by way of the provisions of the purposes clause.
This is also necessarily include an obligation not to enter into transactions which violate the
law.
c. Test To Determine Ultra Vires
Whether the act in question is in direct and immediate furtherance of the corporations
business, fairly incident to the express powers and reasonably necessary to their exercise.
The strict terms direct and immediate refers to the business of the corporation while the
liberal terms fairly incident and reasonably necessary with reference to the powers of
the corporation.
With regard to the business of the corporation as the reference point, much latitude is given
to the corporation to enter into various contracts as long as they have logical relation to the
pursuit of such business. On the other hand, when the purpose clause used limiting words
that Court will hold such corporation to such limited business.
d. Kinds of Ultra vires acts
(1) Those that are beyong the authority of the corporation, and
(2) Those that are illegal per se and contrary to the law.
The point of distinction is that the former can be ratified, while the latter cannot. Thus
e. Consequence of ultra vires
Ultra vires acts which are not illegal per se are voidable, and so may be ratified.

64
 An ultra vires act is one committed outside the object for which a corporation is crated as
defined by the law of its organization and therefore beyond the power conferred upon it by
law. The term ultra vires is distinguished from an illegal act for the former is merely
voidable which may be enforced by performance, ratification, or estoppel, while the latter is
void and cannot be validated. Atrium Management Corp. v. Court of Appeals,
f. Ratification of Ultra Vires Acts
Ultra vires acts may be ratified by express vote of the stockholders. (Pirovana v. De La Rama)
g. Remedy against Ultra Vires Acts
i. By the state
Judgment of forfeiture
Quo warranto proceedings
Revocation of certificate of registration
b. Stockholders
Injunction
Derivative suit
c. Creditors
Nullification of contract in fraud of creditor.
In any case, until thus assailed in a direct proceeding, the contract by which the interest was
acquired will be treated as valid as between the parties.
Even where corporate contracts are illegal per se, when only public or government policy is
at stake and no private wrong is committed, the courts will leave the parties as they are in
accordance with their original contractual expectations. (The only contracts that the courts
will touch are contracts which are void for being illegal per se.) (Harden v. Benguet)

65
 vi. Quick Reference On The Powers Of The Corporation
POWER STATUTORY REQUIREMENT PROCEDURE WITH OR WITHOUT
APPRAISAL RIGHT
Power to Approved by a majority vote of the Board of Written notice to each Extension Yes, such
shorten or Directors (majority of the quorum) stockholder constitutes a novation of
extend Ratified by at least 2/3 of the OCS or 2/3 of the contract.
corporate members in a non-stock corporation. Shortening No, but
term (Sec. 37) not because such is
inherent, because such
is not inherent as it
constitutes an alteration
of the powers granted it
by the State.
Power to Approved by a majority vote of the Board of Written notice to each Increase None,
increase Directors (majority of quorum) stockholders dilutes the worth of the
capital stock Ratified by at least 2/3 of the OCS Special documentary stock, defeats the
and also the requirements purpose of the increase.
power to Prior approval of the Decrease None,
decrease SEC; SEC shall not because in effect there is
capital stock accept for filing unless a return of part of
(Sec. 38) with a sworn statement investments of the
by treasurer that 25-25 stockholders
rule complied with
SEC approval triggers
effectivity
Power to Approved by a majority vote of the Board of Written notice None drains the
incur, create Directors (majority of quorum) Prior approval of the corporation of financial
or increase Ratified by at least 2/3 of the OCS SEC resources contrary to the
indebtedness SEC INTERIM GUIDELINES Corporation Supporting documents purpose for which the
(Sec. 38) must have: required: power is exercised.
Minimum net worth of P25 M at the time of (1) trust indenture with
the filing of the application a trustee bank
Have been in operation for at least 3 years (2) underwriting
Must fulfill financial ratio mandated by SEC agreement
in interim guidelines Bonds registered with
the SEC
Power to sell, (1) Of all or substantially all of its property (1) Must comply Yes, such a sale does not
dispose, Majority vote of Board of Directors (majority with the Bulk Sales necessarily leas to a
lease, of quorum) Law dissolution of the
encumber Ratified or approved by 2/3 of the OCS or 2/3 Listing the corporate corporation and return of
(Sec. 40) of the members creditors and the the residual value of the
ALL Relates to the primary purpose. amount and nature of corporation. Such is
Quantitative (2) Exception to Sec. 40 if the sale is necessary their claims afforded as a matter of
Test in the usual and regular course of business Failure renders equity and fairness.
SUBSTANTIA transaction void
or if proceeds of the sale or other disposition
LLY ALL (2) If no ratificatory vote of
of such property and assets be appropriated
Qualitative for the conduct of its remaining businesses stockholders, it is an utra
Test (purpose Majority vote of Board of Directors (business vires act of the third kind
for which it judgment rule
was Does not relate to primary or secondary
incorporated)
purpose
Power to Must be for a legitimate purpose example: None
purchase own (1) eliminate fractional shares arising out
shares (Sec. of stock dividends
41) (2) collect or compromise an indebtedness
Buy back of to the corporation arising out of
shares (i) unpaid subscription in a delinquency
decrease the sale, and to purchase delinquent
cost of doing shares during said sale and
business (ii) (3) to pay dissenting or withdrawing
perpetuate stockholders exercising their appraisal
control of the right
enterprise. Taken from URE only except redeemable
shares
Power to Approved by a majority vote of the Board of Written notice of the Yes, because minus the
invest Directors (majority of quorum) proposed investment ratificatory vote the
corporate Ratified by at least 2/3 of the OCS and the time and place contract or transaction falls
funds in As a general rule, section 42 applies if the of meeting shall be under the realm of ultra
another investment is for secondary or other than the addressed to each vires transactions of the
corporation primary purpose. stockholder or member third type.
or business or Except if the investment is reasonably at his place of residence
for any other necessary to accomplish its primary purpose as shown in the books of
purpose (Sec. as stated in the Articles of Incorporation, the corporation and
42) approval of the stockholders is not necessary deposited to the
as it is included in the Business Judgment of addressee in the Post
Board of Directors Office with postage
prepaid or served
personally.
Power to Cash dividends Sec. 43 prohibits stock Yes.
declare (1) Absolute majority of Board of corporation from
dividends Directors in accordance with the retaining surplus profits
(Sec. 43) Business Judgment Rule in excess of 100% of
(2) Only declared out of the URE which shall be their paid-up capital
payable in cash, in property or in stock stock, EXCEPT:
(3) However, cash dividends due on delinquent (1) When justified
shares shall be first applied to the unpaid by definite corporate
balance while stock dividends shall be withheld expansion projects or
until fully paid programs as
Stock dividends approval of 2/3 of the OCS approved by the
at a regular or special meeting called for that Board of Directors
purpose. (2) When corporation is
prohibited under any loan
agreement from declaring
dividends without its
consent and such consent
has not yet been secured or
(3) When it can be clearly
shown that such retention
is necessary under special
circumstances obtaining in
the corporation such as
when there is need for
special reserve for
profitable contingencies.
Power to Approved by absolute majority of the Board
enter into of Directors
management Approved by stockholders owning majority of
contracts the OCS
(Sec. 44)
HOWEVER where:
(1) Stockholders representing the same interest
of both managing and the managed corporation
own or control more than 1/3 of the total OCS
entitled to vote of the managing corporation OR
(2) Where a majority of the members of the
Board of Directors of the managing corporation
also constitute a majority of the members of the
Board of Directors of the managed corporation.
Then it must be approved by the stockholders of
the managed corporation owning at least 2/3 of
the OCS
EXCEPT if the corporation is organized primarily
as management company.
Not for a period longer than five years for
any one term.
 i. How Corporate Powers Exercised
1. General Rule; Board of Directors
a. Doctrine of centralized management
TITLE III
BOARD OF DIRECTORS/TRUSTEES AND OFFICERS
Section 23. The board of directors or trustees. Unless otherwise provided in this Code, the corporate
powers of all corporations formed under this Code shall be exercised, all business conducted and all
property of such corporations controlled and held by the board of directors or trustees to be elected from
among the holders of stocks, or where there is no stock, from among the members of the corporation,
who shall hold office for one (1) year until their successors are elected and qualified. (28a)
Under the Doctrine of Centralized management, generally, the corporate powers of a
corporation are exercised by the Board of Directors or trustees.
This is necessary for the efficiency in the large organization of a corporation. (Filipinas Port
v. Go)
A corporation has no power except those expressly conferred on it by the Corporation
Code and those that are implied or incidental to its existence. In turn, a corporation
exercises said powers through its board of directors and/or its duly authorized officers
and agents. . . In turn, physical acts of the corporation, like the signing of documents, can
be performed only by natural persons duly authorized for the purpose by corporate by-
laws or by a specific act of the board of directors. Shipside Inc. v. Court of Appeals, 352
SCRA 334 (2001).
Unless otherwise provided by the Corporation Code, corporate powers are exercised by
the Board of Directors, which they may delegate to either an executive committee,
officers or contracted managers. The delegation, except for the executive committee,
must be for specific purposes, which makes the officers the agents of the corporation,
and accordingly the general rules of agency as to the binding effects of their acts would
apply. For such officers to be deemed fully clothed by the corporation to exercise a power
of the Board, the latter must specially authorize them to do so. ABS-CBN Broadcasting
Corp. v. Court of Appeals, 301 SCRA 572 (1999).
i. When business need not be approved by BOD
(1) In case of an executive committee, infra.
(2) In case of a contracted manager.
(3) In case of close corporations, infra, where the stockholders may directly manage
the affairs of the corporation.
b. Powers exercised by the shareholders alone
(1) Election of directors during regular stockholders meeting
(2) Removal of directors
(3) Filling up vacancy of directors
(4) Payment of compensation.
(5) Delegation of authority to amend by laws
c. Powers that must be exercised jointly with the
stockholders
(1) Amendment of AOI
(2) Extension or shortening of term
(3) Increase or decrease of capital stock
(4) Incur bonded indebtedness
(5) Sale of all or essentially all assets
(6) Investment in secondary purposes
(7) Declaration of stock dividends
(8) Entering into management contract with another corporation
 (9) Adoption of by-laws
(10) Merger and consolidation
(11) Dissolution
b. Business Judgment Rule
Under the business judgment rule, courts will not control the discretion of the Board of
Directors about administrative matters as to which they have the legitimate power of action,
and contracts intra vires entered into by the Board are binding upon the corporation. The
courts will not interfere unless the contracts are so unconscionable as to amount to a wanton
destruction of rights of the minority. (Gamboa v. Victoriano)
Questions of policy or management are left solely to the honest discretion of officers and
directors of the corporation, and the court is without authority to substitute its judgment for
that of the Board. (Montelibano v. Bacolod-Murcia)
There are 2 branches to the rule:
(1) Resolutions and transactions entered into by the board intra vires cannot be reversed by
the courts even on the behalf of the stockholders, and
(2) Directors and officers acting within business judgment cannot be held personally liable
for such acts.
c. Who may be director
Section 23, cont. Every director must own at least one (1) share of the capital stock of the corporation
of which he is a director, which share shall stand in his name on the books of the corporation. Any
director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of
which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be
members thereof. A majority of the directors or trustees of all corporations organized under this Code
must be residents of the Philippines.
Section 27. Disqualification of directors, trustees or officers. No person convicted by final judgment of
an offense punishable by imprisonment for a period exceeding six (6) years, or a violation of this Code
committed within five (5) years prior to the date of his election or appointment, shall qualify as a director,
trustee or officer of any corporation. (n)
Directors must:
(1) Be natural persons.
(2) Of legal age.
(3) Own at least one share of the corporation, which shall stand in his name on the books of
the corporation.
(4) A majority of the directors must be residents of the Philippines, unless laws, like the FIA,
provide for a greater majority.
(5) Not have been convicted by final judgment of an offense punishable by imprisonment
exceeding 6 years, or a violation of the Corpo Code 5 years prior to the date of the
election.
(6) Qualify under any other rules provided in the AOI or the Bylaws.
i. Ownership of stock as a requirement
The ownership of at least 1 stock is a continuing requirement. If a director ceases to own such a
stock, he ceases to be a director.
d. Term of director
A director holds his term for one year, until their directors are elected and qualified.
Note the 2nd part of that sentence. That embodies the hold-over principle, under which,
even after the expiration of a one-year term remains a director in a holdover capacity until
his successor is elected and qualified.
However, a hold-over director is not an elected director, and a vacancy caused by his death
cannot be filled by the directors.
e. Special Facts doctrine
While a director does not stand in a fiduciary relation with a stockholder, he has the legal
obligation to make fair and full disclosure of pertinent official information where special
information exists, giving rise to dispose.
f. Number of directors
Kind of corporation Number of Directors
Stock 5-15
Non-stock At least 5
Non-stock educational 5-15, in multiples of 5
Corporation Sole No directors
Merger of Banks Up to 21.
g. How elected
Section 24. Election of directors or trustees. At all elections of directors or trustees, there must be
present, either in person or by representative authorized to act by written proxy, the owners of a majority
of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to
vote. The election must be by ballot if requested by any voting stockholder or member. In stock
corporations, every stockholder entitled to vote shall have the right to vote in person or by proxy the
number of shares of stock standing, at the time fixed in the by-laws, in his own name on the stock books
of the corporation, or where the by-laws are silent, at the time of the election; and said stockholder may
vote such number of shares for as many persons as there are directors to be elected or he may cumulate
said shares and give one candidate as many votes as the number of directors to be elected multiplied by
the number of his shares shall equal, or he may distribute them on the same principle among as many
candidates as he shall see fit: Provided, That the total number of votes cast by him shall not exceed the
number of shares owned by him as shown in the books of the corporation multiplied by the whole number
of directors to be elected: Provided, however, That no delinquent stock shall be voted. Unless otherwise
provided in the articles of incorporation or in the by-laws, members of corporations which have no capital
stock may cast as many votes as there are trustees to be elected but may not cast more than one vote for
one candidate. Candidates receiving the highest number of votes shall be declared elected. Any meeting
of the stockholders or members called for an election may adjourn from day to day or from time to time
but not sine die or indefinitely if, for any reason, no election is held, or if there are not present or
represented by proxy, at the meeting, the owners of a majority of the outstanding capital stock, or if there
be no capital stock, a majority of the members entitled to vote. (31a)
Section 26. Report of election of directors, trustees and officers. Within thirty (30) days after the
election of the directors, trustees and officers of the corporation, the secretary, or any other officer of the
corporation, shall submit to the Securities and Exchange Commission, the names, nationalities and
residences of the directors, trustees, and officers elected. Should a director, trustee or officer die, resign
or in any manner cease to hold office, his heirs in case of his death, the secretary, or any other officer of
the corporation, or the director, trustee or officer himself, shall immediately report such fact to the
Securities and Exchange Commission. (n)
The manner of election of directors depends on the kind of corporation.
Before that, though, lets do
i. Methods of Voting
(1) Straight votingwhere every stockholder has many votes as he has shares. Thus, one
share is one vote, and can only be used to vote for one candidate each.
(2) Cumulative votingwhere every stockholder has as many votes as he has shares for
each position. So the number of votes for each stockholder is (number of shares held x
number of directorship slots up for election).
b. Methods of voting for different kinds of corporation
Hell, lets throw in the requirements for presence to constitute quorum.
Stock Corporation Non-stock Corporation
Method of Cumulative voting mandatory Generally, cumulative voting not
voting available unless provided for in the
 articles and by laws.
Quorum Majority of outstanding capital must Majority of members must vote, but
be present either in person or by need not be physically present at the
proxy election, unless otherwise provided
by by-laws.
c. How director elected
By plurality. Theres no need to have majority. However many votes is the most wins.
By math, the minimum number of votes needed to elect a single director is:

d. Requirements of valid election

(1) A majority of the stockholders or members must be present in person or by proxy.
(2) Election must be by ballot if requested
(3) A stockholder may not be deprived in the AOI or the by-laws of his statutory right to use
any of the methods of voting in the election of directors
(4) No delinquent stock shall be voted
(5) The candidates receiving highest number of votes shall be declared elected. A majority
vote is not necessary
(6) In case of failure to hold an election for any reason, the meting may be adjourned from
day to day but not indefinitely.
(7) Notice of the election must be given.
(8) Staggered election of directors is not allowed. At least in stock corporations. See
nonstock corporations, infra.
e. Who may vote
All stockholders may vote.
However, the stockholders must hold the stock in the stock and transfer book at the time set
in the by-laws.
If the by-laws are silent, at the time of election.
The ff. cannot vote:
(1) Delinquent shares
(2) Fractional shares
(3) Treasury shares.
(4) Transferees not registered in the stock and transfer book
f. Report on election
By the express mandate of the Corporation Code (Section 26), all corporations duly organized
pursuant thereto are required to submit within the period therein stated (30 days) to the
Securities and Exchange Commission the names, nationalities and residences of the directors,
trustees and officers elected. In determining whether the filing of a suit was authorized by the
board of directors, the list of directors in the latest general information sheet filed with the
Securities and Exchange Commission is controlling.(Premium Marble Resources, Inc.vs. the
Court of Appeals, G.R. No. 96551. November 4, 1996)
h. Corporate Officers
Section 25. Corporate officers, quorum. Immediately after their election, the directors of a corporation
must formally organize by the election of a president, who shall be a director, a treasurer who may or
may not be a director, a secretary who shall be a resident and citizen of the Philippines, and such other
officers as may be provided for in the by-laws. Any two (2) or more positions may be held concurrently by
the same person, except that no one shall act as president and secretary or as president and treasurer at
the same time.
The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and
the by-laws of the corporation. xxx
The ff. are the corporate officers:
(1) President
(2) Secretary, and
(3) Treasurer.
And these are the qualifications and restrictions:
Qualifications Restrictions
President Must be director Cannot be concurrently the
secretary or treasurer
Secretary Resident and citizen of the Cannot be President
Philippines
Treasurer Must be resident of the
Philippines
i. Other corporate officers
A corporate officer is an officer whose position is provided for in the AOI or the By-Laws.
The president, secretary, treasurer are the only mandatory corporate officers, but others
may be provided for, such as VP or Assistant secretary.
b. Cf. Other officers
However, to be a corporate officer, the position must be in the by-laws
An officer whose position is not in the by-laws is not a corporate officer, but a mere
corporate employee.
Conformably with Section 25 of the Corporation Code, a position must be expressly
mentioned in the By-Laws in order to be considered as a corporate office. Thus, the creation
of an office pursuant to or under a By-Law enabling provision is not enough to make a
position a corporate office. (Matling Industrial and Commercial Corporation, et al. vs.
Ricardo R. Coros, G.R. No. 157802, October 13, 2010)
The point of the distinction is jurisdiction over the employees dismissal.
If its a corporate employee, jurisdiction is with the NLRC.
If its a corporate officer, jurisdiction is with the RTC acting as a Special Commercial
Court.
c. Authority of Officers
The authority of officers is set by the law, the by-laws, and authorizations of the BOD
The corporate officer only has the ff. authorities:
(1) Authority which he has by virtue of his office
(2) Those expressly conferred upon him or incidental to the effectiveness of express
authority
(3) Under the Doctrine of Apparent Authority, coming up next, whatever authority the
corporation holds the officer out to have.
The nature of the corporate business must also be taken into consideration.
d. Ratification
The personal act of an officer, though originally unauthorized, may be ratified by the
corporation.
Implied ratification takes various forms (1) silence or acquiescence (2) by acts showing
approval or adoption of the contract or (3) by acceptance and retention of the benefits
flowing therefrom. (Prime White v. CA)
The silence taken together with the unconditional acceptance of 3 other substantial
remittances of the original agreement constitute a binding ratification of the original
agreement. Ratification may be effected expressly or tacitly. There is tacit ratification if with
knowledge of the reason which renders it voidable and such reason having ceased, to a
 person who has a right to invoke it should execute an act which necessarily implies an
intention to waive his right. (Francisco v. GSIS)
e. Doctrine of Apparent Authority
Under the doctrine of apparent authority, if a corporation knowingly permits one of tis
officers, or any other agent, to act within the scope of an apparent authority, it holds him out
to the public as possessing the power to do those acts, and thus the corporation will, as
against anyone who has in good faith dealt with it through that agent, be estopped from
denying the agents authority. (Lapulapu Foundation v. CA)
The third person dealing with the corporation is not given the burden of discovering whether
the agent has authority or not. It is also therefore reasonable in a case where an officer of a
corporation has made a contract in its name, that the corporation should be required, if it
denies the authority of the officer, to state such defense in its answer, since it allows the
plaintiff to be appraised of the fact that the agents authority is contested; and he is given an
opportunity to adduce evidence showing either that the authority existed or that the
contract was ratified and approved.
Even in the absence of express or implied authority by ratification, the President as a
general rule may bind the corporation by a contract in the ordinary course of business,
provided the same is reasonable under the circumstances. These rules are basic but
general and flexible. However, this only true insofar as the President deals with third
persons, not with his own corporation.
The President as the highest office of the corporation, by practice and jurisprudence
embodies apparent authority. On the other hand, the general manager on its own may or
may not embody such authority depending on the circumstances that go with it. The
corporate secretary and lawyer enjoy no such presumption because their positions do
entail much commercial significance.
Knowledge of facts acquired or possessed by an officer or agent of a corporation in the
course of his employment and in relation to matters within the scope of his authority is
notice to the corporation, whether he communicates such knowledge or not. (Francisco v.
GSIS)
If a corporation knowingly permits one of its officers to act within the scope of an apparent
authority, it holds him out to the public as possessing the power to do those acts, the
corporation will, as against anyone who has in good faith dealt with it through such agent,
be estopped from denying the agents authority. Soler v. Court of Appeals.
The authority of a corporate officer dealing with third persons may be actual or apparent . . .
the principal is liable for the obligations contracted by the agent. The agent apparent
representation yields to the principal's true representation and the contract is considered as
entered into between the principal and the third person. First Philipine International Bank v.
Court of Appeals, 252 SCRA 259 (1996).
Persons who deal with corporate agents within circumstances showing that the agents are
acting in excess of corporate authority, may not hold the corporation liable. Traders Royal
Bank v. Court of Appeals, 269 SCRA 601 (1997).
Apparent authority 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 is clothes them; 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. Inter-Asia Investment Industries v. Court of
Appeals, 403 SCRA 452 (2003).
When a banking corporation, when an officer arranges a credit line agreement and forwards
the same to the legal department at its head officer, and the bank did no disaffirm the
 contract, then it is bound by it. Premier Dev. Bank v. Court of Appeals, G.R. No. 159352, 14
April 2004.
A corporation cannot disown its Presidents act of applying to the bank for credit
accommodation, simply on the ground that it never authorized the President by the lack of
any formal board resolution. The following placed the corporation and its Board of Directors
in estoppel in pais: Firstly, the by-laws provides for the powers of the President, which
includes, executing contracts and agreements, borrowing money, signing, indorsing and
delivering checks; secondly, there were already previous transaction of discounting the
checks involving the same personalities wherein any enabling resolution from the Board was
dispensed with and yet the bank was able to collect from the corporation. Nyco Sales Corp.
v. BA Finance Corp., 200 SCRA 637 (1991).
When the practice of the corporation has been to allow its general manager to negotiate and
execute contracts in its copra trading activities for and in behalf of the corporation without
prior board approval, the board itself, by its acts and through acquiescence, practically laid
aside the by-law requirement of prior approval. Settled jurisprudence has it that where
similar acts have been approved by the directors as a matter of general practice, custom,
and policy, the general manager may bind the company without formal authorization of the
board of directors. (The Board of Liquidators, representing the Government of the
Republic of the Philippines vs.Heirs of Maximo M. Kalaw)
When a bank, by its acts and failure to act, has clearly clothed its manager with apparent
authority to sell an acquired asset in the normal course of business, it is legally obliged to
confirm the transaction by issuing a board resolution to enable the buyers to register the
property in their names. It has a duty to perform necessary and lawful acts to enable the
other parties to enjoy all benefits of the contract which it had authorized. (Rural Bank Of
Milaor (Camarines Sur) vs. Ocfemia)
. 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. (Associated Bank vs. Spouses
Pronstroller, G.R. No. 148444, 14 July 2008)
Although a branch manager, within his field and as to third persons, is the general agent and
is in general charge of the corporation, with apparent authority commensurate with the
ordinary business entrusted him and the usual course and conduct thereof, yet the power to
modify or nullify corporate contracts remains generally in the board of directors. Being a
mere branch manager alone is insufficient to support the conclusion that he has been
clothed with apparent authority to verbally alter terms of written contracts, especially
when viewed against the telling circumstances of this case: the unequivocal provision in the
mortgage contract; the corporations vigorous denial that any agreement to release the
mortgage was ever entered into by it; and, the fact that the purported agreement was not
even reduced into writing considering its legal effects on the parties interests. Banate vs.
Philippine Countryside Rural Bank (Liloan, Cebu), Inc., G.R. No. 163825, July 13,
2010
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 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. When the sole management of the corporation was entrusted
 to two of its officers/incorporators with the other officers never had dealings with the
corporation for 14 years and that the board and the stockholders never had its meeting, the
corporation is now estopped from denying the officers authority to obtain loan from the
lender on behalf of the corporation under the doctrine of apparent authority. Advance
Paper Corporation vs Arma Traders Corporation , G.R. No 176897, December 11,
2013.
i. Theory of Estoppel or Ratification
The principle of estoppel precludes a corporation and its Board of Directors from denying the
validity of the transaction entered into by its officer with a third party who in good faith, relied
on the authority of the former as manager to act on behalf of the corporation. Lipat v. Pacific
Banking Corp., 402 SCRA 339 (2003).
In order to ratify the unauthorized act of an agent and make it binding on the corporation, it
must be shown that the governing body or officer authorized to ratify had full and complete
knowledge of all the material facts connected with the transaction to which it relates.
Ratification can never be made on the part of the corporation by the same person who
wrongfully assume the power to make the contract, but the ratification must be by the
officer or governing body having authority to make such contract. Vicente v. Geraldez, 52
SCRA 210 (1973).
The admission by counsel on behalf of the corporation of the latters culpability for personal
loans obtained by its corporate officers cannot be given legal effect when the admission was
without any enabling act or attendant ratification of corporate act, as would authorize or
even ratify such admission. In the absence of such ratification or authority, such admission
does not bind the corporation. Aguenza v. Metropolitan Bank and Trust Co., 271 SCRA 1
(1997).
f. Doctrine of Laches or Stale Demands
The principle of laches or stale demands provides that the failure or neglect, for an
unreasonable and unexplained length of time, to do that which by exercising due diligence
could or should have been done earlier, or the negligence or omission to assert a right within a
reasonable time, warrants a presumption that the party entitled to assert it either has
abandoned it or declined to assert it. Rovels Enterprises, Inc. v. Ocampo, 391 SCRA 176 (2002).
PRINCIPLE OF ESTOPPEL It being merely voidable, an ultra vires act can be enforced
or validated if there are equitable grounds for taking such action. Here it is fair that the
resolution be upheld at least on the ground of estoppel.
Ratification (a) the act must be consummated and not executory (b) creditors are not
prejudiced or all of them have given their consent (c) rights of the public or the State are
not involved (d) all the stockholders must give their consent.
j. Quorum of Board of Directors.
Sec. 25, cont. Unless the articles of incorporation or the by-laws provide for a greater majority, a majority
of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum
for the transaction of corporate business, and every decision of at least a majority of the directors or
trustees present at a meeting at which there is a quorum shall be valid as a corporate act, except for the
election of officers which shall require the vote of a majority of all the members of the board.
Directors or trustees cannot attend or vote by proxy at board meetings. (33a)
Generally, the quorum is that set in the AOI or the by-laws.
In the absence of a provision for quorum therein, the quorum is set as 50% of the number
of directors plus 1.
The basis is the number set in the AOI, despite any vacancies.
The exceptions are the ff:
 i. Powers that require a majority not only of a quorum, but of the entire board
(1) Election of corporate officers
(2) Removal of corporate officers
(3) Amendment of AOI
(4) Creation of Execom
(5) All major corporate acts
(6) Denial of Pre-emptive rights
(7) Amendment of by laws.
b. Powers that are expressly to be done by majority of the
quorum of the board
(1) Election of non-corporate officers
(2) Filling up of vacancies
(3) Increasing ordinary debts
(4) Sale in ordinary course of business
(5) Buying of treasury shares
(6) Investment in primary purpose
(7) Declaration of cash dividends
(8) Management contract
k. Removal
Section 28. Removal of directors or trustees. Any director or trustee of a corporation may be removed
from office by a vote of the stockholders holding or representing at least two-thirds (2/3) of the
outstanding capital stock, or if the corporation be a non-stock corporation, by a vote of at least two-thirds
(2/3) of the members entitled to vote: Provided, That such removal shall take place either at a regular
meeting of the corporation or at a special meeting called for the purpose, and in either case, after
previous notice to stockholders or members of the corporation of the intention to propose such removal
at the meeting. A special meeting of the stockholders or members of a corporation for the purpose of
removal of directors or trustees, or any of them, must be called by the secretary on order of the president
or on the written demand of the stockholders representing or holding at least a majority of the
outstanding capital stock, or, if it be a non-stock corporation, on the written demand of a majority of the
members entitled to vote. Should the secretary fail or refuse to call the special meeting upon such
demand or fail or refuse to give the notice, or if there is no secretary, the call for the meeting may be
addressed directly to the stockholders or members by any stockholder or member of the corporation
signing the demand. Notice of the time and place of such meeting, as well as of the intention to propose
such removal, must be given by publication or by written notice prescribed in this Code. Removal may be
with or without cause: Provided, That removal without cause may not be used to deprive minority
stockholders or members of the right of representation to which they may be entitled under Section 24 of
this Code. (n)
A director may be removed by a 2/3 vote of the outstanding capital stock or the members
at a regular or special meeting.
If the meeting is regular, the agenda must indicate the removal of the director.
If the meeting is special, the fact that it is called for the removal of the director must be
indicated in the notice
If the meeting is special, it must be called by the secretary:
At the order of the President, or
On the written demand of a majority of the capital stock or members.
i. When stockholder may call for meeting directly
If (1) the Secretary refuses to call the meeting,
(2) Fails or refuses to give the notice, or
(3) There is no secretary,
The meeting may be called by any stockholder or member signing the demand, addressed
directly to the stockholders.
 b. Limitation on removal
May not be used to deprive minorities of representation on the board.
That just means that the majority cant remove a director just because hes representing the
minority.
l. How vacancies in the board of directors can arise
(1) Removal
(2) Resignation
(3) Death
(4) Expiration of term
(5) Abandonment
(6) Disqualification
(7) Increase in number of directors
i. Abandonment vis--vis absences
Abandonment of an office is a ground for vacancy.
The most obvious way this is done is through resignation.
However, resignation must not be done to the prejudice of the corporation.
That being said, mere absence of a director does not have the effect of vacation of seats or
terminating a term of office.
Unless it is for an unreasonable length of time, or
Where the by-laws specify a number of unjustified absences as a ground for
automatic disqualification.
m. How Vacancies Filled
Section 29. Vacancies in the office of director or trustee. Any vacancy occurring in the board of
directors or trustees other than by removal by the stockholders or members or by expiration of term, may
be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a
quorum; otherwise, said vacancies must be filled by the stockholders in a regular or special meeting
called for that purpose. A director or trustee so elected to fill a vacancy shall be elected only or the
unexpired term of his predecessor in office.
Any directorship or trusteeship to be filled by reason of an increase in the number of directors or trustees
shall be filled only by an election at a regular or at a special meeting of stockholders or members duly
called for the purpose, or in the same meeting authorizing the increase of directors or trustees if so
stated in the notice of the meeting. (n)
Vacancies are filled by two different methods, depending on the cause of the vacancy.
i. By the stockholders or members
Vacancies can, of course, be filled by another election of the stockholders or members, when
the vacancy is due to the ff. causes:
(1) Removal by stockholders or members
(2) Increase in the number of directors or trustees due to amendment of AOI
When an incumbent member of the board of directors continues to serve in a holdover
capacity, it implies that the office has a fixed term, which has expired, and the incumbent is
holding the succeeding term. A vacancy resulting from the resignation of an officer in a hold-
over capacity, by the terms of Section 29 of the Corporation Code, must be filled by the
stockholders in a regular or special meeting called for the purpose.(Valle Verde Country
Club, Inc., et al. vs. Victor Africa, G.R. No. 151969, 4 September 2009)
ii. By the board of directors
The remaining members of the board of directors may fill a vacancy by a majority vote if the
vacancy is due to other causes.
c. When board does not fill vacancy in other causes
(1) When the remaining members no longer constitute a quorum
(2) When they refer the matter to the stockholders.
 In all cases, the replacement director only holds the position for the remainder of the
unexpired term of the director causing the vacancy.
n. Compensation of Directors
Section 30. Compensation of directors. In the absence of any provision in the by-laws fixing their
compensation, the directors shall not receive any compensation, as such directors, except for reasonable
per diems: Provided, however, That any such compensation other than per diems may be granted to
directors by the vote of the stockholders representing at least a majority of the outstanding capital stock
at a regular or special stockholders meeting. In no case shall the total yearly compensation of directors,
as such directors, exceed ten (10%) percent of the net income before income tax of the corporation
during the preceding year. (n)
Generally, except for reasonable per diems, directors do not receive compensation.
However, they may receive compensation in the ff. cases:
(1) When there is a provision therefor in the by-laws;
(2) When granted by the vote of a majority of the outstanding capital stock at a regular or
special meeting; and
(3) When they render services to the corporation in any other capacity. (Western Institute v.
Salas)
The proscription against granting compensation to directors/trustees of a corporation is not
a sweeping rule as worthy of note is the clear phraseology of Section 30 which states: xxx
[T]he directors shall not receive any compensation, as such directors, xxx. The
unambiguous implication is that members of the board may receive compensation, in
addition to reasonable per diems, when they render services to the corporation in a capacity
other than as directors/trustees. (Western Institute of Technology, Inc., et al.
vs.Ricardo T. Salas)
i. Limitation on such compensation
However, in no case shall the total yearly compensation of directors, as such directors, exceed
ten (10%) percent of the net income before income tax of the corporation during the preceding
year.
That is as such directors. So the limit doesnt apply to (3) above.
Also note that its 10% of net income before tax. So there has to be a profit for the
corporation. Dapat lang. Kung nalugi yung corp they dont deserve anything.
o. Liability of directors
Section 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and knowingly
vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or
bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in
conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages
resulting therefrom suffered by the corporation, its stockholders or members and other persons.
When a director, trustee or officer attempts to acquire or 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, he shall be liable as a trustee for the
corporation and must account for the profits which otherwise would have accrued to the corporation. (n)
This provision is an offshoot of the three-fold duties of directors, which are:
(1) Duty of obedience, which is to direct the affairs of the corporation only in accordance
with the purposes for which it was organized.
(2) Duty of Loyalty, which means that they may not acquire personal or personal interests in
conflict with the corporation, and
(3) Duty of Diligence, which means that the directors must exercise due care in the
performance of their functions.
However, the standard of care is only ordinary diligence. Directors do not stand in fiduciary
relation with the corporation or the stockholders.
 Given these duties, Sec. 31 provides for the ff. liabilities:
b. For Negligence or Bad Faith
Sec. 31, 1st par. Directors or trustees who willfully and knowingly vote for or assent to patently unlawful
acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the
corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or
trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the
corporation, its stockholders or members and other persons.
So under this paragraph, a director is severally liable with the corporation for damages
resulting from the directors:
(1) Willfully and knowingly voting for or assenting to patently unlawful acts of the
corporation.
(2) Gross negligence or bad faith in directing the affairs of the corporation.
c. For conflict of interest
When a director, trustee or officer attempts 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, he shall be liable as a trustee for the
corporation and must account for the profits which otherwise would have accrued to the corporation. (n)
Under this paragraph, on the other hand, the director is liable as a trustee for the
corporation for the profits that would have accrued to the corporation, when he attempts to
acquire or acquires an interest adverse to the corporation in respect of any matter
which has been reposed in him in confidence.
Compare with Sec. 34, infra.
d. For crimes committed
As discussed supra., generally, a director is not liable for a crime committed by the
corporation, but when the law making the corporation liable so provides, a director or officer
may be criminally liable.
The Trust Receipts Law recognizes the impossibility of imposing the penalty of
imprisonment on a corporation. Hence, if the entrustee is a corporation, the law makes the
officers or employees or other persons responsible for the offense liable to suffer the penalty
of imprisonment. (Edward C. Ong, vs. the Court of Appeals and the People of the
Philippines, G.R. No. 119858, April 29, 2003)
Though the entrustee is a corporation, nevertheless, the law specifically makes the officers,
employees or other officers or persons responsible for the offense, without prejudice to the
civil liabilities of such corporation and/or board of directors, officers, or other officials or
employees responsible for the offense. The rationale is that such officers or employees are
vested with the authority and responsibility to devise means necessary to ensure compliance
with the law and, if they fail to do so, are held criminally accountable; thus, they have a
responsible share in the violations of the law. (Alfredo Ching vs. the Secretary of Justice,
et al., G. R. No. 164317, February 6, 2006)
e. For insider trading
Under the SRC, infra., a director or officer may be found liable of insider trading, which is the
buying and selling of securities by an insider while in possession of material non-public
information.
Under the law, the insider is only liable if he had reason to believe the person to whom the
insider gives the info would buy or would likely buy the securities.
f. For corporate obligations
Before a director or officer of a corporation can be held personally liable for corporate
obligations, the following requisites must concur:
(1) the complainant must allege in the complaint that the director or officer assented to patently
unlawful acts of the corporation, or that the officer was guilty of gross negligence or bad faith;
and
(2) the complainant must clearly and convincingly prove such unlawful acts, negligence or bad
faith..(Heirs of Fe Tan Uy, vs. International Exchange Bank, G.R. No. 166282 & 83,
February 13, 2013)
The fact that the corporation ceased its operations the day after the promulgation of the
SC resolution finding the corporation liable does not prove bad faith on the part of the
incorporator of the corporation. Polymer Rubber Corporation vs. Ang, G.R. No.
185160. July 24, 2013
Although joint and solidary liability for money claims and damages against a corporation
attaches to its corporate directors and officers under R.A. 8042, it is not automatic. To
make them jointly and solidarily liable, there must be a finding that they were remiss in
directing the affairs of the corporation, resulting in the conduct of illegal activities.
Absent any findings regarding the same, the corporate directors and officers cannot be
held liable for the obligation of the corporation against the judgment debtor.(Gagui v.
Permejo)
Article 212(e) of the Labor Code, by itself, does not make a corporate officer personally
liable for the debts of the corporation. The governing law on personal liability of directors
for debts of the corporation is still Section 31 of the Corporation Code.(Alert Security and
Investigation Agency, Inc. vs. Pasawilan)
The execution of a document by a bank manager called pagares which guaranteed
purchases on credit by a client is contrary to the General Banking law which prohibits bank
officers from guaranteeing loans of bank clients. In this case, it is plain from the guarantee
Grey executed that he was acting for himself, not in representation of UCPB; hence, UCPB
cannot be bound by Greys above undertaking since he appears to have made it in his
personal capacity. (UCPB vs. Planters Products, Inc., Janet Layson and Gregory Grey,
G.R. No. 179015, June 13, 2012)
A corporation has its own legal personality separate and distinct from those of its
stockholders, directors or officers. Hence, absent any evidence that they have exceeded
their authority, corporate officers are not personally liable for their official acts. Corporate
directors and officers may be held solidarily liable with the corporation for the termination
of employment only if done with malice or in bad faith.(Rolando DS. Torres v. Rural Bank
of San Juan, Inc. et al., G.R. No. 184520, March 13, 2013)
p. Contracts of directors
i. Dealings with the Corporation
Section 32. Dealings of directors, trustees or officers with the corporation. A contract of the
corporation with one or more of its directors or trustees or officers is voidable, at the option of such
corporation, unless all the following conditions are present:
1. That the presence of such director or trustee in the board meeting in which the contract was approved
was not necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was not necessary for the approval of the contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in case of an officer, the contract has been previously authorized by the board of directors.
Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a
contract with a director or trustee, such contract may be ratified by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the
members in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the
directors or trustees involved is made at such meeting: Provided, however, That the contract is fair and
reasonable under the circumstances. (n)
A contract of the corporation with one or more of their directors or trustees are generally
voidable, unless:
1. The presence of such director or trustee in the board meeting in which the contract was
approved was not necessary to constitute a quorum for such meeting;
2. The vote of such director or trustee was not necessary for the approval of the contract;
3. The contract is fair and reasonable under the circumstances; and
4. In case of an officer, the contract has been previously authorized by the board of directors.
If any of these requirements is missing, the contract is voidable.
However, being voidable, it is subject to
Ratification
The contract of the director with the corporation, if voidable, may be ratified by a 2/3 vote of
the stockholders, provided that:
(1) The adverse interest of the director or trustee involved is fully disclosed, and
(2) The contract, in any case, is fair and reasonable.
Thus, that a contract is fair and reasonable is an indispensable requirement.
b. Contracts between Corporations with Interlocking
Directors
Section 33. Contracts between corporations with interlocking directors. Except in cases of fraud, and
provided the contract is fair and reasonable under the circumstances, a contract between two or more
corporations having interlocking directors shall not be invalidated on that ground alone: Provided, That if
the interest of the interlocking director in one corporation is substantial and his interest in the other
corporation or corporations is merely nominal, he shall be subject to the provisions of the preceding
section insofar as the latter corporation or corporations are concerned.
Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be considered
substantial for purposes of interlocking directors. (n)
Corporations have interlocking directors hen some or all of the directors of one corporation
is also a director of the other corporation.
Since it says directorS, Im guessing that means there has to be more than one.
Interlocking directorship itself is not prohibited by the Corporation Code. However, any
contracts between corporations with interlocking directors are subject to the ff. rules:
Generally, contracts between such corporations are valid, provided they are (1) Not
fraudulent, and (2) fair and reasonable under the circumstances.
However, if the interlocking director has a substantial interest in one corporation, and
merely a nominal one in the other, the contract must be ratified by a 2/3 vote, after that
fact is made known to them, and if the contract is fair and reasonable.
Substantial interest means stockholdings exceeding 20% of the outstanding capital
stock.
A third party cannot assail this contract. (Remington v. Marinduque)
When a mortgagee bank foreclosed the mortgage on the real and personal property of the
debtor and thereafter assigned the properties to a corporation it formed to manage the
foreclosed assets, the unpaid seller of the debtor cannot complain that the assignment is
invalid simply because the mortgagee and the assignee have interlocking directors, if this
was necessary to manage and operate the assets acquired in the foreclosure sale lest they
deteriorate from non-use and lose their value.(Development Bank of the Philippines vs.
CA)
c. Disloyalty of a Director
Section 34. Disloyalty of a director. Where 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, 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. (n)
Under this provision, when a director acquires a business opportunity which should belong
to the corporation, he must account to the corporation for all profits by refunding the same.
This applies even if the director risked his own funds in the venture.
However, his act may be ratified by a vote of 2/3 of the outstanding capital stock.
When a business opportunity should belong to the corporation
A business opportunity should belong to a corporation if:
(1) The corporation is financially able to undertake it;
(2) It is in line with the corporations business and is of practical advantage to it, and
(3) The corporation has an interest or reasonable expectancy therein.
Where the corporation refuses or is definitely no longer able to take advantage of the
opportunity, it is no longer applicable.
Neither does this provision apply when:
The business opportunity is distinct from the line of business of the corporation
Where the opportunity is not essential to the corporations business.
Cf. Sec. 31, supra.
Sec. 31, 2nd par. Sec.34
Applies to directors, trustees, and officers Only applies to directors
Contract cannot be ratified Contract can be ratified by 2/3 vote of the
outstanding capital stock.
Covers stock and non-stock corporation Covers stock corporations only.

ii. By the Executive Committee

Section 35. Executive committee. The by-laws of a corporation may create an executive committee,
composed of not less than three members of the board, to be appointed by the board. Said committee
may act, by majority vote of all its members, on such specific matters within the competence of the board,
as may be delegated to it in the by-laws or on a majority vote of the board, except with respect to: (1)
approval of any action for which shareholders approval is also required; (2) the filing of vacancies in the
board; (3) the amendment or repeal of by-laws or the adoption of new by-laws; (4) the amendment or
repeal of any resolution of the board which by its express terms is not so amendable or repealable; and
(5) a distribution of cash dividends to the shareholders.
An executive committee is a body created by the by-laws composed of not less than 3
members of the board, who shall be appointed by the board, which, subject to statutory
limitations, has all the authority of the board to the extent provided int eh board resolution of
the by-laws.
a. How created
Must be created in the by-laws.
While the BOD can create other committees, they cant create an Executive Committee.
b. Powers granted to the Executive Committee
Whatever the board decides to delegate tot it, either in the by-laws or by a board resolution.
However, it cannot be delegated any of the ff. powers:
(1) approval of any action for which shareholders approval is also required;
(2) the filing of vacancies in the board;
(3) the amendment or repeal of by-laws or the adoption of new by-laws;
(4) the amendment or repeal of any resolution of the board which by its express terms is not so
amendable or repealable; and (5) a distribution of cash dividends to the shareholders.
c. How Exercised
By majority vote of all. Wala nang quorum ang konti na nga eh.
 iii. By the Stockholders and Members
a. Powers exercised by the shareholders alone
(1) Election of directors during regular stockholders meeting
(2) Removal of directors
(3) Filling up vacancy of directors
(4) Payment of compensation.
(5) Delegation of authority to amend by laws
b. Powers that must be exercised jointly with the stockholders
(1) Amendment of AOI
(2) Extension or shortening of term
(3) Increase or decrease of capital stock
(4) Incur bonded indebtedness
(5) Sale of all or essentially all assets
(6) Investment in secondary purposes
(7) Declaration of stock dividends
(8) Entering into management contract with another corporation
(9) Adoption of by-laws
(10) Merger and consolidation
(11) Dissolution
On that, lets talk about

j. Stocks; Capital Structure of a Corporation
1. Definitions
1.) Capital Stock the amount fixed in the AI procured to be subscribed and paid up.
Shares issued in excess of the authorized capital stock are void. Also known as
authorized capital stock.
2.) Capital the actual property or estate of the corporation whether in money or property.
It may be higher or lower than the capital stock.
3.) Subscribed Capital Stock the portion of the capital stock subscribed (procured to be
paid) whether or not fully paid.
4.) Outstanding Capital Stock--the total shares of stock issued under binding subscription
agreements to subscribers or stockholders, whether or not fully or partially paid, except
treasury share (Sec. 137)
5.) Paid-up capitalthe amount paid by the stockholders on subscriptions.
6.) Unissued capital stockthe portion of the capital stock that is not issued or
subscribed. It has no rights.
7.) Legal capital--the amount equal to the aggregate par value and/or issued value of the
outstanding capital stock.
8.) Stated capitalthe capital stock divided into no par value shares.
ii. Shares Of Stocks; nature.
A share of stock is a definite portion of the capital of a company. (Blacks Law Dictionary)
Shares of stock in a corporation constitute intangible personal property of the SH, which
he can contract with as in any other form of property, like assignment by way of disposition,
or pledge by way of encumbrance.
Shares of stock are therefore properties and have intrinsic pecuniary value to SHs. They do
not represent however proprietary rights of SHs to the assets or properties of the
corporation.
However, they are not shares of the stockholders in corporate assets. Rather
iii. Stockholders interest in corporate assets
Shares of stock, issued or unissued, do not constitute part of the assets of the
corporation.
They are not debts or liabilities of the corporation and they are not reported as components
of liabilities in the corporations financial statements.
Shares of stock are intangible personal properties called equity.
A shareholders equity represents the primary claim of the SHs to the results of the
operations of the corporations business enterprise, which if run profitably (i.e. there are
accumulated retained earnings), tend to increase the assets of the corporation; and when
run unprofitable at a loss, tends to decrease the corporate assets.
It is merely an expectancy of a right in the following after payment of the corporate debts
and obligations:
1. Management of the corporation
2. Share in the profits and assets thereof on dissolution.
iv. Classification of shares
Section 6. Classification of shares. The shares of stock of stock corporations may be divided into
classes or series of shares, or both, any of which classes or series of shares may have such rights,
privileges or restrictions as may be stated in the articles of incorporation: Provided, That no share may be
deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, unless
otherwise provided in this Code: Provided, further, That there shall always be a class or series of shares
which have complete voting rights. Any or all of the shares or series of shares may have a par value or
have no par value as may be provided for in the articles of incorporation: Provided, however, That banks,
trust companies, insurance companies, public utilities, and building and loan associations shall not be
permitted to issue no-par value shares of stock.
Preferred shares of stock issued by any corporation may be given preference in the distribution of the
assets of the corporation in case of liquidation and in the distribution of dividends, or such other
preferences as may be stated in the articles of incorporation which are not violative of the provisions of
this Code: Provided, That preferred shares of stock may be issued only with a stated par value. The board
of directors, where authorized in the articles of incorporation, may fix the terms and conditions of
preferred shares of stock or any series thereof: Provided, That such terms and conditions shall be
effective upon the filing of a certificate thereof with the Securities and Exchange Commission.
Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the
holder of such shares shall not be liable to the corporation or to its creditors in respect thereto: Provided;
That shares without par value may not be issued for a consideration less than the value of five (P5.00)
pesos per share: Provided, further, That the entire consideration received by the corporation for its no-
par value shares shall be treated as capital and shall not be available for distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of insuring compliance with
constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each
share shall be equal in all respects to every other share.
Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the
holders of such shares shall nevertheless be entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate
property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other corporations;
7. Investment of corporate funds in another corporation or business in accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular
corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights. (5a)
Section 7. Founders shares. Founders shares classified as such in the articles of incorporation may be
given certain rights and privileges not enjoyed by the owners of other stocks, provided that where the
exclusive right to vote and be voted for in the election of directors is granted, it must be for a limited
period not to exceed five (5) years subject to the approval of the Securities and Exchange Commission.
The five-year period shall commence from the date of the aforesaid approval by the Securities and
Exchange Commission. (n)
Section 8. Redeemable shares. Redeemable shares may be issued by the corporation when expressly
so provided in the articles of incorporation. They may be purchased or taken up by the corporation upon
the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the books
of the corporation, and upon such other terms and conditions as may be stated in the articles of
incorporation, which terms and conditions must also be stated in the certificate of stock representing said
shares. (n)
Section 9. Treasury shares. Treasury shares are shares of stock which have been issued and fully paid
for, but subsequently reacquired by the issuing corporation by purchase, redemption, donation or
through some other lawful means. Such shares may again be disposed of for a reasonable price fixed by
the board of directors. (n)
Under the Corporation code, shares can be classified into:
Kind of share Defn. Requirements/Rules
As to rights granted
Common Basic class of stock ordinarily May not be deprived of voting rights,
and usually issued without except
extraordinary rights and Delinquent shares, and
privileges.
Preferred Those which entitle the
holder thereof to certain
preferences over the holders
of the common stock
See infra for kinds of
preferred stock.
As to Voting Rights
Voting Those with a right to vote
Non-voting Those without a right to vote
As to valuation
Par value Those with a value fixed in
the AOI, called a par value
No par value Those without a par value
As to other characteristics
Share in escrow Share subject to an
agreement by virtue of which
the share is deposited by the
grantor or his agent with a 3rd
person to be kept by the
escrow agent until the
performance of a certain
condition.
Over-issued That issued in excess of the
authorized capital stock. Also
known as spurious stock.
Watered Those issued at below par
value
Convertible Those that can be converted
from one class to another at a
certain price and within a
certain period
Fractional Share with value of less than
one full share
Promotion Issued to promoters for
Must have par value
However, may be deprived of
voting rights.
BOD can only fix rights if allowed
by AOI
Preference must not be violative of
the Code.
There must be at least one class of
shares that has complete voting rights.
Only preferred and redeemable shares
may be denied voting rights
However, in certain cases,
Par value must be indicated
May not be issued for less than
P5.00
Entire consideration constitutes
capital, and so no part of it should
be distributed as dividends
Cannot be preferred
Must be indicated in the AOI
Cannot be issued by
(1) Banks
(2) Public Utilities
(3) Insurance Companies
(4) Trust Companies, and
(5) Building and Loan Associations.
Before fulfillment of condition, grantee
or holder is not yet the owner of the
shares.
Null and void
Subjects responsible officers to
liability. See infra.
Must be provided for in AOI
May be acquired by the corporation
even without URE
 services rendered in
launching or promoting the
corporation
Founders share Shares classified as such in May be given certain rights and
the articles of incorporation privileges not enjoyed by the owners
and issued to organizers and of other stocks.
promoters in consideration of However, where the exclusive right
some supposed right or to vote and be voted for in the
property. election of directors is granted, it
must be for a limited period not to
exceed five (5) years subject to the
approval of the Securities and
Exchange Commission
Redeemable Those that may be purchased May be redeemed regardless of the
or taken up by the existence of URE, and upon such
corporation upon the other terms and conditions as may
expiration of a fixed period, be stated in the articles of
incorporation, which terms and
conditions must also be stated in
the certificate of stock representing
said shares
However, after redemption,
sufficient assets must remain to
cover debts and liabilities
Must be provided for in AOI
May be deprived of voting rights
Treasury Shares that have been issued Are not retired
and fully paid for, but are Do not revert to unissued shares of
subsequently reacquired by the corporation, but are regarded
the corporation by some as property thereof, which may be
lawful means reissued or resold at a price fixed
by the Board.
Need not be sold at par or issued
value.
See infra.
a. Preferences that may be granted
Preference may be granted as to:
(1) Assets
(2) Dividends, or
(3) Other matters, as may be determined by the Board.
b. Kinds of Preferred Shares as to dividends
(1) Cumulativeback dividends not paid must also be paid
(2) Non-cumulativeback dividends not to be paid. Only current dividends are due.
(3) Participatingone which entitles the shareholder to participate with the common shares
in excess distribution, at a predetermined or fixed ratio.
(4) Non-participatingone which entitles the shareholder to receive preferred dividends and
nothing more.
(5) Cumulative participatingboth cumulative and participating.
c. When even non=voting shares may vote
 (1) Incurring, creating, or increasing bonded indebtedness
(2) Increase or decrease of capital stock
(3) Sale of all or substantially all assets
(4) Amendment of AOI
(5) Merger of Consolidation
(6) Adoption and amendment of by laws
(7) Investmetn in secondary purposes
(8) Dissolution.
d. Par value
The assigned value for the share determined by the board of directors indicated in the stock
certificate and in the AOI
The Par Value is a limitation on the amount of the shares to be issued by a corporation not to
shares sold or transferred by the Stockholder to another. The stockholder owns the shares
and he has the right to sell for any amount he pleases.
The Par Value is the minimum amount for which the corporation may issue shares
Cf. Book Value
The actual value of share based on the finances and capital of the corporation
Calculated by capital/number of outstanding shares
Cf. Market Value
The value in which the seller is willing to sell and a buyer is willing to buy
e. Redeemable Shares
i. Kinds of redeemable shares
Compulsory if the corporation has no choice/option but to redeem the shares
Subject to limitation that if the redemption results in the insolvency of the
corporation, it is not allowed.
Optional at the option of the corporation. There is no mandatory obligation on the part of
the corporation to redeem the shares
Shares, once redeemed, are deemed retired unless reissuance is expressly authorized by the
AOI
v. Subscription
TITLE VII
STOCKS AND STOCKHOLDERS
Section 60. Subscription contract. Any contract for the acquisition of unissued stock in an existing
corporation or a corporation still to be formed shall be deemed a subscription within the meaning of this
Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract. (n)
A subscription agreement is any contract for the acquisition of unissued stock in an existing
corporation or a corporation still to be formed
It is considered as such notwithstanding the fact that the parties refer to it as purchase or
some other contract.
It is a consensual contract perfected upon the meeting of the minds of the parties.
It is the subscription to the shares of stock that creates the legal relationship between the
SH and the corporation, not the payment of the subscription.
It is a special contract in Corpo law because it underpins the relationship between the
stockholder and the corporation. The name of the subscriber is recorded in the stock and
transfer book, and from that time, such subscriber becomes a stockholder of record, entitled
to all the rights of a SH. Until the stocks are fully paid, it continues to be a subsisting
liability that is legally enforceable.
Even if subscribers have legal standing to sue for rescission of subscription contract based
on breach of contract, such action cannot prosper since rescission will violate the Trust
 Fund Doctrine and the procedures for the valid distribution of assets and property under the
Corporation Code (Ong Yong v. Tiu (2003))
A corporation has no power to release an original subscriber to its capital stock from the
obligation of paying for his shares, without a valuable consideration for such release; and
as against creditors a reduction of the capital stock can take place only in the manner
and under the conditions prescribed by the statute or the charter or the articles of
incorporation. 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 debt. (Philippine National Bank vs.Bitulok Sawmill,
Inc., et al., G.R. Nos. L-24177-85, June 29, 1968)
A subscription contract may cover one or more shares. But even if it covers more than one
share, the contract is still an indivisible contract.
A stock corporation is expressly granted the power to issue or sell stocks. The power to issue
stocks is lodged with the Board of Directors and no stockholders meeting is required to
consider it because additional issuances of stock ( unlike increase in capital stock ) does not
need approval of the stockholders. What is only required is the board resolution approving
the additional issuance of shares. The corporation shall also file the necessary application
with the SEC to exempt these from the registration requirements under the SRC. Majority
of Stockholders of Ruby Industrial Corporation vs Lim, GR No. 165887, June 6, 2011
a. Subscription Agreement under Statute of Frauds
Subscription agreements are not covered by the Statute of Frauds, and the corporation has a
right to enforce and collect, and to adduce oral evidence upon oral subscription agreement on
the following grounds:
1. Special treatment accorded to subscription agreements under Corporate Law requires
that subscription agreements, even when they have been entered into orally, should be
allowed to be proved and enforced by parol evidence, in order to fully protect corporate
creditors under the trust fund doctrine; and
2. Even if subscription agreements are covered by the Statute of Frauds, by their nature,
which upon consent would make the subscriber a SH and owner of the covered shares
(which would constitute partial execution), they are deemed to be exempted from the
prohibition against the presenting of oral evidence to prove and enforce them.
b. Kinds of subscription contracts
1. Pre-incorporation subscription (Sec. 61) subscription for shares of stock of a
corporation still to be formed.
Pre-incorporation subscription constitutes a binding contract among subscribers.
2. Post-incorporation subscription entered into after incorporation for the acquisition
of unissued stock.
The subscriber becomes a SH upon acceptance by the corporation of the subscribers offer
or by the subscriber of the corporations offer even though he has not paid for his shares
unless the subscription agreement or charter otherwise provides.
3. Conditional subscription subject to a condition. Subscriber doesnt become a SH
until condition fulfilled.
4. Absolute subscription one where subscriber becomes liable on the subscription and
acquires the rights of a SH from the time it is accepted.
5. Subscription with a special term one where the corporation agrees to do something,
the fulfillment of which not being a condition precedent to the accrual of a liability of the
subscriber or the acquisition of the rights of a SH.
c. Pre-incorporation Subscription
Section 61. Pre-incorporation subscription. A subscription for shares of stock of a corporation still to
be formed shall be irrevocable for a period of at least six (6) months from the date of subscription, unless
all of the other subscribers consent to the revocation, or unless the incorporation of said corporation fails
to materialize within said period or within a longer period as may be stipulated in the contract of
subscription: Provided, That no pre-incorporation subscription may be revoked after the submission of
the articles of incorporation to the Securities and Exchange Commission. (n)
GR: A subscription for shares of stock of a corporation still to be formed shall be irrevocable for
a period of at least 6 months from the date of subscription.
EXC:
a. All of the other subscribers consent to the revocation; or
b. Incorporation of said corporation fails to materialize within said period
Provided:
No pre-incorporation subscription may be revoked after the submission of the AOI to the SEC.
NOTE: A person who subscribes for stock in a corporation to be formed does not consent to any
change in the subscription, is not liable if the corporation afterwards formed is different from
the one contemplated by the subscription.
vi. Consideration for stocks
Section 62. Consideration for stocks. Stocks shall not be issued for a consideration less than the par or
issued price thereof. Consideration for the issuance of stock may be any or a combination of any two or
more of the following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and necessary or convenient for
its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital; and
6. Outstanding shares exchanged for stocks in the event of reclassification or conversion.
Where the consideration is other than actual cash, or consists of intangible property such as patents of
copyrights, the valuation thereof shall initially be determined by the incorporators or the board of
directors, subject to approval by the Securities and Exchange Commission.
Shares of stock shall not be issued in exchange for promissory notes or future service.
The same considerations provided for in this section, insofar as they may be applicable, may be used for
the issuance of bonds by the corporation.
The issued price of no-par value shares may be fixed in the articles of incorporation or by the board of
directors pursuant to authority conferred upon it by the articles of incorporation or the by-laws, or in the
absence thereof, by the stockholders representing at least a majority of the outstanding capital stock at a
meeting duly called for the purpose. (5 and 16)
Valid consideration in subscription agreements
1. Cash actually received
2. Property, tangible or intangible, actually received and necessary or convenient for its use
and lawful purposes
3. Amount transferred from unrestricted retained earnings to stated capital
4. Labor or services actually rendered to the corporation
5. Previously incurred corporate indebtedness
6. Outstanding shares in exchange for stock in the event of reclassification or conversion
a. Cash Actually Received
Remember the wording of the treasurers affidavit that the treasurer must certify that at least
25% of the subscription has been paid up in cash or property received by the corporation
b. Property
Requisites
1. Property is necessary or convenient to its use and lawful purpose.
2. Must be subject to fair valuation equal to the par or issued value of the issued stock;
3. Valuation subject to SEC approval;
 4. Property is actually received by the corporation;
5. Valuation thereof shall initially be determined by the incorporators or the BOD;
b. The property must be necessary and convenient for the
lawful use of the corporation
The treasurer in trust therefore cannot accept a property if it is not related to the purpose for
which the corporation was organized. Or if the corporation is already in existence, it cannot
accept a property in exchange for shares unless the property is necessary and convenient for
the use of the corporation.
c. The property must be fairly valued
The shares cannot be issued for an amount lower than par or issued value of the shares
d. Subject to the approval of the SEC.
The initial valuation determined by the incorporators or by the board, in case the corporation is
already in existence, is always subject to the approval by the Securities and Exchange
Commission.
This is the only instance where a consideration requires the approval by the SEC.
e. Labor performed or services actually rendered.
So shares cannot be issued for services to be performed or work to be done in the future.
Thus, while a non-stockholder is not allowed to receive stock dividends, he may be issued
shares in consideration of services actually rendered to the corporation. (Nielson vs.
Lepanto Consolidated)
f. Previously incurred indebtedness
This is a form of dacion en pago.
g. Amounts transferred from retained earnings to capital
which means stock dividends;
h. Outstanding shares issued in the event of reclassification
or conversion.
Even though preferred shares are guaranteed, the right to receive dividends depends still on
the availability of surplus profit (Republic Planters Bank v. Lopez)
Intangible properties may be used as consideration like patents and copyrights. Mining
claims, since they are subject to valuation, may also be used.
vii. Trust Fund Doctrine
The trust fund doctrine provides that subscriptions to the capital stock of a corporation
constitute a fund to which the creditors have a right to look for the satisfaction of their claims.
(Ong Yong v. Tiu)
This doctrine is the underlying principle in the procedure for the distribution of corporate
capital only in three instances :
1 ) amendment of articles of incorporation to reduce the authorized capital stock,
2 ) purchase of redeemable shares by the corporation regardless of the existence of
unrestricted retained earnings, and
3 ) dissolution and eventual liquidation of the corporation.
Furthermore, the doctrine is articulated in Section 41 of the Corporation Code on the power
of the corporation to acquire its own shares and in Section 122 on the prohibition against
the distribution of corporate assets and property unless the stringent requirements are
complied with.
Save for these 3 cases, the properties of the corporation belong to the corporation and the
stockholders have no right to possess, use, or occupy these corporate properties.
Under the trust fund doctrine, the capital stock, property and other assets of the corporation
are regarded as equity in trust for the payment of the corporate creditors. Comm. of Internal
Revenue v. Court of Appeals, 301 SCRA 152 (1999).
 Until the liquidation of the corporation, no part of the subscribed capital stock may be
turned over or released to the stockholder (except in the redemption of the redeemable
shares) without violating this principle. Thus dividends must never impair the subscribed
capital stock; subscription commitments cannot be condoned or remitted; nor can the
corporation buy its own shares using the subscribed capital as the consideration therefore.
NTC v. Court of Appeals, 311 SCRA 508 (1999).
The requirement of unrestricted retained earnings to cover the shares is based on the trust
fund doctrine which means that the capital stock, property and other assets of a corporation
are regarded as equtiy in trust for the payment of corporate creditors. The reason is that
creditors of a corporation are preferred over the stockholders in the distribution of
corporate assets. There can be no distribution of assets among the stockholders without first
paying corporate creditors. Hence, any disposition of corporate funds to the prejudice of
creditors is null and void. Boman Environmental Dev. Corp. v. CA, 167 SCRA 540 (1988).
a. Rescission of Subscription Agreement Based on Breach
The violation of terms embodied in a subscription agreement, with are personal commitments,
do not constitute legal ground to rescind the subscription agreement since such would violate
the Trust Fund Doctrine and the procedures for the valid distribution of assets and property
under the Corporation Code. Ong Yong v. Tiu, 401 SCRA 1 (2003).
b. Distribution of Corporate Assets
The distribution of corporate assets and property cannot be made to depend on the whims and
caprices of the stockholders, officers or directors of the corporation, or even, for that matter, on
the earnest desire of the court a quo to prevent further squabbles and future litigations unless
the indispensable conditions and procedures for the protection of the corporate creditors are
followed. (id)
When negotiations ensued in light of a planned takeover of company and the counsel of the
buyer advised the stockholder through a letter that he may take the machineries he brought
to the corporation out with him for his own use and sale, the previous stockholder cannot
recover said machineries and equipment because these properties remained part of the
capital property of the corporation. Under the 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 which are preferred over the stockholders in the distribution of
corporate assets. (Yamamoto vs. Nishino Leather Industries, Inc.)
c. Coverage of Trust Fund Doctrine
In a solvent corporation, the trust fund doctrine encompasses only the capital stock.
Retained earnings, although part of the stockholders equity, do not constitute part of the
capital stock. It is not covered by the doctrine. The corporation is at liberty to declare and
pay out dividends from its assets.
If par value shares are sold at premium, excess is not treated as legal capital/capital stock
but can be declared as stock dividends.
viii. Stock Certificate
Section 63. Certificate of stock and transfer of shares. The capital stock of stock corporations shall be
divided into shares for which certificates signed by the president or vice president, countersigned by the
secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance
with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of
the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally
authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until
the transfer is recorded in the books of the corporation showing the names of the parties to the
transaction, the date of the transfer, the number of the certificate or certificates and the number of
shares transferred.
No shares of stock against which the corporation holds any unpaid claim shall be transferable in the
books of the corporation. (35)
A certificate of stock is a paper representation or tangible evidence of the stock itself and of
the various interests therein .
a. Nature
Itexpresses the contract between the corporation and the stockholder
Itis not essential to the ownership and/or existence of the shares of stock.
Itis prim facie evidence that the holder is a shareholder in a corporation.
However, in the absence of the certificate, other proof, such as the record in the stock
and transfer book, may be adduced to prove ownership.
A certificate of stock is the paper representative or tangible evidence of the stock itself
and of the various interests therein. The certificate is not stock in the corporation but is
merely evidence of the holder's interest and status in the corporation, his ownership of
the share represented thereby, but is not in law the equivalent of such ownership. It
expresses the contract between the corporation and the stockholder, but is not essential
to the existence of a share in stock or the nation of the relation of shareholder to the
corporation. (Tan v. SEC)
b. Uncertificated Shares
Uncertificated shares, under the SRC, are those evidenced by electronic or similar records.
Notwithstanding Sec. 63, a corporation whose securities are registered may
(1) If so resolved by the BOD and agreed to by a shareholder, issue shares to, or record
the transfer of some or all its shares into the name of such shareholders, investors, or
securities intermediary in the form of uncertified securities.
The use of uncertificated securities in these circumstances is without prejudice to the rights
of the securities intermediary subsequently to require the corporation to issue a certificate
in respect of any shares recorded in its name.
(2) If so provided in its articles of incorporation and by-laws, issue all of the shares of a
particular class in the form of uncertificated shares, subject to the condition that
investors may not require the corporation to issue a certificate in respect of any shares
recorded in their name.
c. Negotiability
Stock certificates are quasi-negotiable, in that they can be transferred by mere indorsement
and delivery
However, theyre not negotiable instruments, since they dont pass pretty much all the
requirements thereof, since theyre not for money, payable at a future time, to order or to
bearer, or addressable to a payee.
More importantly, the holder takes it without prejudice to any rights or defenses as the
registered owner or creditor may have under the law. (De Los Santos v. Republic)
d. Issuance of Stock Certificate
Section 64. Issuance of stock certificates. No certificate of stock shall be issued to a subscriber until
the full amount of his subscription together with interest and expenses (in case of delinquent shares), if
any is due, has been paid. (37)
A stock certificate can only be issued if the full amount of the subscription, together with
interests and expenses, if any, have been paid.
As to the certificate itself, for it to be valid, it must comply with the following requirements:
(1) it must be signed by the president or vice president;
 (2) countersigned by corporate secretary
(3) sealed by the corporation
(4) it must be detached from the stock certificate and delivered to the stockholder and
(5) the subscription price must have been paid in full,
which gives us the annoyingly different jurisprudential list of :
(1) The certificate must be signed by the president or vice-president and countersigned by
the secretary or assistant secretary;
(2) The certificate must be sealed with the seal of the corporation;
(3) The certificate must be delivered;
(4) The subscription must 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. (Bitong v. CA)
See provisions on transfers of stock, infra.
e. Issuance of new stock certificates in case of loss, theft, or destruction
Section 73. Lost or destroyed certificates. The following procedure shall be followed for the issuance
by a corporation of new certificates of stock in lieu of those which have been lost, stolen or destroyed:
1. The registered owner of a certificate of stock in a corporation or his legal representative shall file with
the corporation an affidavit in triplicate setting forth, if possible, the circumstances as to how the
certificate was lost, stolen or destroyed, the number of shares represented by such certificate, the serial
number of the certificate and the name of the corporation which issued the same. He shall also submit
such other information and evidence which he may deem necessary;
2. After verifying the affidavit and other information and evidence with the books of the corporation, said
corporation shall publish a notice in a newspaper of general circulation published in the place where the
corporation has its principal office, once a week for three (3) consecutive weeks at the expense of the
registered owner of the certificate of stock which has been lost, stolen or destroyed. The notice shall
state the name of said corporation, the name of the registered owner and the serial number of said
certificate, and the number of shares represented by such certificate, and that after the expiration of one
(1) year from the date of the last publication, if no contest has been presented to said corporation
regarding said certificate of stock, the right to make such contest shall be barred and said corporation
shall cancel in its books the certificate of stock which has been lost, stolen or destroyed and issue in lieu
thereof new certificate of stock, unless the registered owner files a bond or other security in lieu thereof
as may be required, effective for a period of one (1) year, for such amount and in such form and with such
sureties as may be satisfactory to the board of directors, in which case a new certificate may be issued
even before the expiration of the one (1) year period provided herein: Provided, That if a contest has been
presented to said corporation or if an action is pending in court regarding the ownership of said
certificate of stock which has been lost, stolen or destroyed, the issuance of the new certificate of stock in
lieu thereof shall be suspended until the final decision by the court regarding the ownership of said
certificate of stock which has been lost, stolen or destroyed.
Except in case of fraud, bad faith, or negligence on the part of the corporation and its officers, no action
may be brought against any corporation which shall have issued certificate of stock in lieu of those lost,
stolen or destroyed pursuant to the procedure above-described. (R.A. 201a)
If a stock certificate is lost, stolen or destroyed, a new one can be issued, if the ff. procedure is
followed
1. The registered owner of a certificate of stock in a corporation or his legal representative
shall file with the corporation an affidavit in triplicate setting forth, if possible:
a. the circumstances as to how the certificate was lost, stolen or destroyed,
b. the number of shares represented by such certificate,
c. the serial number of the certificate and
d. the name of the corporation which issued the same.
He shall also submit such other information and evidence which he may deem necessary;
2. The corporation will verify the affidavit and the other information and evidence with the
books of the corporation
 3. The corporation shall publish a notice in a newspaper of general circulation published
in the place where the corporation has its principal office, once a week for three (3)
consecutive weeks at the expense of the registered owner of the certificate of stock
which has been lost, stolen or destroyed. The notice shall state
a. The name of said corporation,
b. The name of the registered owner
c. The serial number of said certificate,
d. The number of shares represented by such certificate, and
e. That after the expiration of one (1) year from the date of the last publication, if no
contest has been presented to said corporation regarding said certificate of stock, the
right to make such contest shall be barred and said corporation shall cancel in its
books the certificate of stock which has been lost, stolen or destroyed and issue in lieu
thereof new certificate of stock,
4. A one-year waiting period must then be observed from the date of the last publication
during which a contest to the issuance of a new certificate may be interposed.
5. If there is no contest within the one year period, the corporation will replace the
certificate.
i. When one-year period need not be observed
If the registered owner files a bond or other security in lieu thereof as may be required,
effective for a period of one (1) year, for such amount and in such form and with such sureties
as may be satisfactory to the board of directors, a new certificate may be issued even before the
expiration of the one (1) year period.
b. If issuance contested
If a contest has been presented to said corporation or if an action is pending in court regarding
the ownership of said certificate of stock which has been lost, stolen or destroyed, the issuance
of the new certificate of stock in lieu thereof shall be suspended until the final decision by
the court regarding the ownership of said certificate of stock which has been lost, stolen or
destroyed.
c. Liability for issuance of new stock certificates
Except in case of fraud, bad faith, or negligence on the part of the corporation and its officers,
no action may be brought against any corporation which shall have issued certificate of stock in
lieu of those lost, stolen or destroyed pursuant to the procedure above-described.
So by implication, such an action may be brought against the corporation in cases of fraud,
bad faith, or negligence on the part of the corporation and its officers.
ix. Watered Stock (Sec. 65)
Section 65. Liability of directors for watered stocks. Any director or officer of a corporation consenting
to the issuance of stocks for a consideration less than its par or issued value or for a consideration in any
form other than cash, valued in excess of its fair value, or who, having knowledge thereof, does not
forthwith express his objection in writing and file the same with the corporate secretary, shall be
solidarily, liable with the stockholder concerned to the corporation and its creditors for the difference
between the fair value received at the time of issuance of the stock and the par or issued value of the
same. (n)
Watered stock consists of stocks issued for an amount below par. It may also refer to stocks
issued not in exchange for its equivalent either in cash, property, share of stock dividends, or
services.
a. Persons liable for watered stock
1. Consenting director or officer
2. Subscriber
3. Subsequent transferee
4. Transferor or party to the fraud
 b. Liability of directors
Any director is solidarily liable with the participating stockholder for the difference between the
fair value received at the time of the issuance of the stock and the par or the issued value of the
same, if he:
(1) Consents to the issuance of watered stock, or
(2) Having knowledge thereof, does not forthwith express his objection in writing
and file the same with the corporate secretary.
c. Trust Fund Doctrine liability for watered stocks
Where the corporation issues watered stocks and thereby assumes an ostensible capitalization
in excess of its real assets, the transaction necessarily involves the misleading of subsequent
creditors and whether done with that purpose actually in mind or not, is at least a constructive
fraud upon creditors.
As such, the issuance of watered stock violates the trust fund doctrine, because under the
trust fund doctrine, the full amount of subscriptions forms part of the trust fund. If stock can
be issued at less than par, then the trust fund is reduced, to the detriment of the corporate
creditors.
x. Situs of the shares of stock
The situs of shares of stock is the domicile of the corporation.
This is important because its an exception to the general rule that the situs of personal
property follows its owner. But its important for tax. Which was last week.
xi. Unpaid Subscriptions
Section 67. Payment of balance of subscription. Subject to the provisions of the contract of
subscription, the board of directors of any stock corporation may at any time declare due and payable to
the corporation unpaid subscriptions to the capital stock and may collect the same or such percentage
thereof, in either case with accrued interest, if any, as it may deem necessary.
Payment of any unpaid subscription or any percentage thereof, together with the interest accrued, if any,
shall be made on the date specified in the contract of subscription or on the date stated in the call made
by the board. Failure to pay on such date shall render the entire balance due and payable and shall make
the stockholder liable for interest at the legal rate on such balance, unless a different rate of interest is
provided in the by-laws, computed from such date until full payment. If within thirty (30) days from the
said date no payment is made, all stocks covered by said subscription shall thereupon become delinquent
and shall be subject to sale as hereinafter provided, unless the board of directors orders otherwise. (38)
The unpaid balance on subscriptions to shares of stock may be collected under the ff. means of

a. Collection of Unpaid Subscription

1. Voluntary Payment
a. Upon the date specified in the subscription contract; or
b. Upon call by the BOD
2. Involuntary Payment
a. Extra-judicial
i. Delinquency sale; or
ii. Application of dividends
b. Judicial action
NOTE: The prescriptive period in case of subscription of shares begins to run only from the
time the BOD declare that the balance is due and payable.
Call is only needed if there is no due date specified in the contract of subscription.
b. Voluntary payment
A stockholder can pay for his subscribed shares of stock at any time, even before call or before
the date specified. The corporation, as a creditor, cannot refuse a valid tender of payment
offered to it.
c. Need for call
If the subscription contract fixes the date for payment, failure to pay on that date shall render
the entire balance due and payable with interest.
30 days from that date, if still unpaid, the shares become delinquent. See infra.
d. Call by BOD
However, if the subscription contract does not fix a date for payment, it becomes mandatory to
make a call by the Board of Directors to make the unpaid subscription due and demandabale
As call by the BOD is a resolution or formal declaration of the board that the unpaid
subscriptions are due and payable.
A mere demand is insufficient. A valid call must:
(1) Be made in the manner prescribed by law, i.e. through a board resolution.
(2) By the board of directors, and
(3) Operate uniformly upon all the shareholders
The call must also specify the due date for unpaid subscriptions.
Failure to pay on that due date renders the entire balance due and payable with
interest
If, 30 days from that date, the balance is still unpaid, the stock becomes delinquent.
Where a call is necessary, notice must be given to the SH concerned. A call without notice to
the subscriber is practically no call at all. The subscriber, however, may waive the right to
notice of call.
There must also be notice to the stockholders concerned. (says de Leon anyway.)
e. Summary of the above rules.
GR: Call by BOD necessary to make the unpaid subscription due and demandable. A corporation
cannot file an action to recover the unpaid price if the action is not preceded by call. There can
be no set-off when there is no call.
EXC:
1. Date specified in subscription agreement; and
2. When corporation becomes insolvent.
f. Rights of unpaid shares
Section 72. Rights of unpaid shares. Holders of subscribed shares not fully paid which are not
delinquent shall have all the rights of a stockholder. (n)
Holders of unpaid shares that are not delinquent shall have all the rights of a stockholder.
Contrast with delinquent shares, infra.
xii. Interest on unpaid balance
Section 66. Interest on unpaid subscriptions. Subscribers for stock shall pay to the corporation interest
on all unpaid subscriptions from the date of subscription, if so required by, and at the rate of interest
fixed in the by-laws. If no rate of interest is fixed in the by-laws, such rate shall be deemed to be the legal
rate. (37)
Generally, the unpaid balance is not subjected to interest.
However, in the ff. situations, the unpaid balance is subjected to interest:
(1) When required by the by-laws or the subscription contract, and
(2) When the balance is unpaid after the due date specified by the contract or after call.
When the balance is subjected to interest, the amount thereof will be:
(1) The amount specified by the by-laws, or
(2) If no rate is specified in the by-laws, at the legal rate of 6%.
 xiii. Delinquent Shares
Delinquent shares are those covered by a subscription unpaid past 30 days of its due date.
a. Remedies against delinquent shares
Extrajudicial - To cause the sale of the delinquent shares based on these procedures and
formalities.
Judicial - File an action for collection to recover the subscription.
b. Effect of delinquency upon the SH
Section 71. Effect of delinquency. No delinquent stock shall be voted for or be entitled to vote or to
representation at any stockholders meeting, nor shall the holder thereof be entitled to any of the rights
of a stockholder except the right to dividends in accordance with the provisions of this Code, until and
unless he pays the amount due on his subscription with accrued interest, and the costs and expenses of
advertisement, if any. (50a)
1. Delinquent stock cannot be voted for or be entitled to vote.
2. Accelerates the entire amount of the unpaid subscription
3. Subjects the shares to interest, expenses and costs
4. Disenfranchises the shares from any right that adheres to a SH, except the right to
dividends
a. The dividends however will be withheld by the corporation until full payment of the
delinquent shares (Sec. 43)
b. Cash dividends should be applied against unpaid subscription.
c. Stock dividends should be withheld until full payment of the subscription.
c. Interest due on delinquent stock
2 kinds of interest are contemplated.
(1) Interest on the subscription (moratory interest)
(2) Interest by reason of default (compensatory interest)
Section 66 covers interest on the subscription. This is due only if specified in contract of
subscription at the rate provided in the by-laws. If the rate is silent, it is legal rate.
In other words, the unpaid subscription shall earn interest from the date of the subscription
until full payment.
This is the moratory interest (interest on subscription). It can be collected only if stipulated
and for the rate specified in the contract. If the rate is silent the legal rate shall be followed.
d. Sale of Delinquent Shares (Sec. 68)
Section 68. Delinquency sale. The board of directors may, by resolution, order the sale of delinquent
stock and shall specifically state 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 thirty (30) days nor more than sixty (60) days
from the date the stocks become delinquent.
Notice of said sale, with a copy of the resolution, shall be sent to every delinquent stockholder either
personally or by registered mail. The same shall furthermore be published once a week for two (2)
consecutive weeks in a newspaper of general circulation in the province or city where the principal office
of the corporation is located.
Unless the delinquent stockholder pays to the corporation, on or before the date specified for the sale of
the delinquent stock, the balance due on his subscription, plus accrued interest, costs of advertisement
and expenses of sale, or unless the board of directors otherwise orders, said delinquent stock shall be
sold at public auction to such bidder who shall offer to pay the full amount of the balance on the
subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest
number of shares or fraction of a share. The stock so purchased shall be transferred to such purchaser in
the books of the corporation and a certificate for such stock shall be issued in his favor. The remaining
shares, if any, shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the
issuance of a certificate of stock covering such shares.
Should there be no bidder at the public auction who offers to pay the full amount of the balance on the
subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest
number of shares or fraction of a share, the corporation may, subject to the provisions of this Code, bid
for the same, and the total amount due shall be credited as paid in full in the books of the corporation.
Title to all the shares of stock covered by the subscription shall be vested in the corporation as treasury
shares and may be disposed of by said corporation in accordance with the provisions of this Code. (39a-
46a)
i. Procedure for delinquency sale
1. Resolution BOD shall issue a resolution ordering the sale of delinquent stock. It must
contain:
a. Amount due on each subscription
b. All accrued interest; and
c. Date, time and place of the sale
NOTE: The resolution under Sec. 68 is different from the call in Sec. 67. Sec. 68 orders sale of
delinquent stock while Sec. 67 makes an unpaid price due and demandable.
2. Notice notice of said sale with a copy of the resolution shall be sent to every delinquent
SH either personally or by registered mail.
3. Publication the notice shall be published once a week for 2 weeks in a newspaper of
general circulation in the province or city where the principal office of the corporation is
located
4. Sale the delinquent stock shall be sold at the public auction to be held not less than 30
days nor more than 60 days from the date the stocks became delinquent
a. Sale may be cancelled by:
i. Payment on or before date of sale
ii. Order of BOD to that effect
5. Transfer the stock purchased shall be transferred to the purchaser in the books of the
corporation and a certificate for such stock shall be issued in his favor
6. Credit Remainder the remaining shares, if any, shall be credited in favor of the
delinquent SH who shall likewise be entitled to the issuance of a certificate of stock
covering the same
b. Who is the highest bidder
In a delinquency sale, the highest bidder is the person who offers to pay for the full amount
of the balance of the description, plus interests, costs and expenses, for the smallest
number of shares.
So its sort of reversed. The winner is fewest shares for the same price, not the highest price
for the same amount of shares.
Now then, since its fewest shares, unless no one bids for less than all of them, there will
be leftover shares. Those go to the delinquent stockholders.
If there are no participants at the bidding, the corporation itself may bid for and acquire
the shares, which will become treasury shares.
NOTE: The BOD is not bound to accept the highest bid unless the contrary appears.
e. When sale may be questioned
Section 69. When sale may be questioned. No action to recover delinquent stock sold can be sustained
upon the ground of irregularity or defect in the notice of sale, or in the sale itself of the delinquent stock,
unless the party seeking to maintain such action first pays or tenders to the party holding the stock the
sum for which the same was sold, with interest from the date of sale at the legal rate; and no such action
shall be maintained unless it is commenced by the filing of a complaint within six (6) months from the
date of sale. (47a)
The validity of a delinquency sale may only be challenged in an action to recover the delinquent
stock if the delinquent shareholder first pays or tenders payment of the purchase price
plus interests.
Further, the case must be filed within 6 months from the date of sale.
 f. Court action to recover unpaid subscription.
Section 70. Court action to recover unpaid subscription. Nothing in this Code shall prevent the
corporation from collecting by action in a court of proper jurisdiction the amount due on any unpaid
subscription, with accrued interest, costs and expenses. (49a)
As previously mentioned, aside from causing a delinquency sale, the court may pursue the
judicial remedy of filing a collection suit against the stockholder who hasnt paid for the
balance plus interest, costs, and expenses.
As a civil suit on breach of the subscription contract, it is subject to the prescriptive periods
of 10 years for a written subscription contract or 6 years for an oral subscription contract.
 k. Stockholders and Members
1. Corporators and Incorporators; Stockholders and members
Section 5. Corporators and incorporators, stockholders and members. Corporators are those who
compose a corporation, whether as stockholders or as members. Incorporators are those stockholders or
members mentioned in the articles of incorporation as originally forming and composing the corporation
and who are signatories thereof.
Corporators in a stock corporation are called stockholders or shareholders. Corporators in a non-stock
corporation are called members. (4a)
Corporators are those who compose a corporation, whether as stockholders or members
Corporators in stock corporations are stockholders
Those in non-stock corporations are members.
Incorporators, on the other hands, are those stockholders or members mentioned in the
articles of incorporation as originally forming and composing the corporation, and who
are signatories thereof.
As such, there can only ever be one set of incorporators.
Thats why the list thereof, as well as the list of the first officers, are the only non-amendable
items in an AOI.
ii. Rights of a Stockholder or a Member
a. Doctrine of Equality of Shares
Where the AOI do not provide for any distinction of the shares of stock, all shares issued by the
corporation are presumed to be equal and enjoy the same rights and privileges and are
also subject to the same liabilities (Sec. 6(5), Corpo Code)
b. List of Rights of a Shareholder
Because of the doctrine of equality, all shares have the ff. rights:
(1) As to Control and Management
(a)Attend and vote in person/proxy at stockholders meetings
(b) Elect and remove directors
(c)Enter into voting trust agreement
(d) Compel calling of meetings
(e)Adopt, amend or repeal the by-laws or adopt new ones
(f) Cause voluntary dissolution
(g) Approve certain corporate acts
(2) Proprietary Rights
(a)Pre-emptive rights in the issuance of shares
(b) Transfer stocks
(c)Receive dividends when declared
(d) To issuance of stock certificate
(e)To participate in distribution of corporate assets upon dissolution
(3) Remedial Rights
(a)To be furnished financial statements/reports of the corporations operations
(b) To bring suits
(c)To inspect corporate books
(d) To recover stock unlawfully sold for delinquency, and
(e)To demand payment in the exercise of appraisal rights.
iii. Participation in Management
To be clear, generally, the participation of a stockholder as such in management is limited to
the election of the directors.
The exceptions are the instances when the approval of stockholders is needed, which has
already been listed, supra.
 As for that election thing, that must be done at a stockholders meeting. See infra.
a. How voting done
Unless otherwise provided, by cumulative voting. See supra under directors.
May be done in person, or, as will be the focus of this section, by proxy or through a voting
trust agreement.
But first
b. Who may vote
In general, only the stockholders of record may vote for directors or trustees.
This is generally reckoned on the day of the election itself.
Special rules follow as to who may vote
i. Record date
Again, generally, the stockholders of record on the day of the election can vote.
However, the by-laws may provide for a record date, which is a day before the election on
which stock ownership will be reckoned for the purposes of the meeting.
b. Stocks that may not vote
(1) Delinquent shares, supra.
a. However, unpaid but not delinquent shares can vote.
(2) Fractional shares
(3) Escrow shares
(4) Treasury shares, but see qualification infra.
(5) Sequestered shares, see infra.
c. Treasury shares
Section 57. Voting right for treasury shares. Treasury shares shall have no voting right as long as such
shares remain in the Treasury. (n)
So again generally treasury shares cannot vote.
However, if they are resold to other persons, they may be voted.
d. Sequestered shares
Under the case of Republic v. SB, sequestered shares may be voted by the PCGG if they pass
the ff. two-tiered test:
(1) Whether there is prima facie evidence showing that the said shares are ill-gotten and
thus belong to the state, and
(2) Whether there is an immediate danger of dissipation, thus necessitating their continued
sequestration and voting by the PCGG while the main issue is pending before the SB.
However, this test does not apply to cases involving funds of public character. In such
cases, the government may be granted the authority to vote the shares where:
(1) The government shares were taken over by private persons or entities who registered
them in their own names, and
(2) The capitalization of shares that were acquired with public funds somehow landed in
private hands.
e. Right of Pledgors, mortgagors, and administrators
Section 55. Right to vote of pledgors, mortgagors, and administrators. In case of pledged or
mortgaged shares in stock corporations, the pledgor or mortgagor shall have the right to attend and vote
at meetings of stockholders, unless the pledgee or mortgagee is expressly given by the pledgor or
mortgagor such right in writing which is recorded on the appropriate corporate books. (n)
Executors, administrators, receivers, and other legal representatives duly appointed by the court may
attend and vote in behalf of the stockholders or members without need of any written proxy. (27a)
Of course, generally, pledgors, mortgagors, generally dont have the right to vote stocks in their
hands, since theyre not stockholders,
 However, if pledgors or mortgagors are granted the right to attend and vote at meetings by
the pledgee or mortgagee
(1) In writing, and
(2) Recorded on the corporate books.
In contrast, executors, administrators, receivers, and other legal representatives can vote
the shares they hold in such positions without need of any written proxy.
f. Voting in case of joint ownership of stocks.
Section 56. Voting in case of joint ownership of stock. In case of shares of stock owned jointly by two
or more persons, in order to vote the same, the consent of all the co-owners shall be necessary, unless
there is a written proxy, signed by all the co-owners, authorizing one or some of them or any other person
to vote such share or shares: Provided, That when the shares are owned in an "and/or" capacity by the
holders thereof, any one of the joint owners can vote said shares or appoint a proxy therefor. (n)
If a share of stock is co-owned by 2 or more persons, generally, the consent of all the owners is
necessary.
However, if a written proxy signed by all owners authorizes on or some of them to vote the
share, they may do so.
That being said, if the shares are owned in an and/or capacity, i.e. solidarily, any one of
the joint owners may vote the shares.
c. Proxies
Section 58. Proxies. Stockholders and members may vote in person or by proxy in all meetings of
stockholders or members. Proxies shall in writing, signed by the stockholder or member and filed before
the scheduled meeting with the corporate secretary. Unless otherwise provided in the proxy, it shall be
valid only for the meeting for which it is intended. No proxy shall be valid and effective for a period
longer than five (5) years at any one time. (n)
A Proxy is a written authorization given by one person to another so that the second person can
act for the first.
It may also be the instrument where the authorization is embodied.
Thus, it refers either to the instruments evidencing the authority to vote or it may refer to
the proxy holder.
i. Who may be proxy
Sec. 58 imposes no limitation as to who may be a proxy. A stockholder/member may appoint any
person he sees fit to represent him, and by-laws restricting his right in this respect are likewise
void.
b. In non-stock corporations
As for non-stock corporations, the right to vote, including that of by proxy, may be denied to
members in AOI or by-laws as long as the denial is not discriminatory. (Sec. 89)
c. Requirements For Validity
1. Must be in writing
2. Signed by the stockholder or member concerned
3. File with the corporate secretary before the meeting
4. Valid only for the meeting which it was intended unless otherwise provided in the proxy.
NOTE: No proxy shall be valid and effective for a period longer than 5 years at any one time
Note, further, the additional requirements on proxy solicitation under the SRC, infra.
d. Rules on proxies
Since a proxy acts for another, he may vote as a proxy even when he himself is disqualified
to vote his shares
The same person may act as proxy for several stockholders or members.
Directors or Trustees cannot attend or vote by proxy at board meetings, but they may act as
proxies in stockholders meetings.
 e. How proxy may be revoked
1. Formal notice;
2. Verbal communication; or
3. Conduct (i.e. when SH attends meeting)
NOTE: Proxies, even those with irrevocable terms, have always been considered as revocable,
unless coupled with an interest (SEC Memo 4, Series 2004)
The last proxy given revokes all previous proxies.
f. When Voting by proxy is allowed
1. Election of BOD/T
2. Voting in case of joint ownership of stock
3. Voting by members in non-stock corporation
4. Pledge or mortgage of shares
5. Provided in by-laws
6. Voting by trustee under voting trust agreement
d. Voting trust agreements
Section 59. Voting trusts. One or more stockholders of a stock corporation may create a voting trust
for the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to
the shares for a period not exceeding five (5) years at any time: Provided, That in the case of a voting
trust specifically required as a condition in a loan agreement, said voting trust may be for a period
exceeding five (5) years but shall automatically expire upon full payment of the loan. A voting trust
agreement must be in writing and notarized, and shall specify the terms and conditions thereof. A
certified copy of such agreement shall be filed with the corporation and with the Securities and Exchange
Commission; otherwise, said agreement is ineffective and unenforceable. The certificate or certificates of
stock covered by the voting trust agreement shall be cancelled and new ones shall be issued in the name
of the trustee or trustees stating that they are issued pursuant to said agreement. In the books of the
corporation, it shall be noted that the transfer in the name of the trustee or trustees is made pursuant to
said voting trust agreement.
The trustee or trustees shall execute and deliver to the transferors voting trust certificates, which shall
be transferable in the same manner and with the same effect as certificates of stock.
The voting trust agreement filed with the corporation shall be subject to examination by any stockholder
of the corporation in the same manner as any other corporate book or record: Provided, That both the
transferor and the trustee or trustees may exercise the right of inspection of all corporate books and
records in accordance with the provisions of this Code.
Any other stockholder may transfer his shares to the same trustee or trustees upon the terms and
conditions stated in the voting trust agreement, and thereupon shall be bound by all the provisions of
said agreement.
No voting trust agreement shall be entered into for the purpose of circumventing the law against
monopolies and illegal combinations in restraint of trade or used for purposes of fraud.
Unless expressly renewed, all rights granted in a voting trust agreement shall automatically expire at the
end of the agreed period, and the voting trust certificates as well as the certificates of stock in the name
of the trustee or trustees shall thereby be deemed cancelled and new certificates of stock shall be
reissued in the name of the transferors.
The voting trustee or trustees may vote by proxy unless the agreement provides otherwise. (36a)
A voting trust agreement is an agreement whereby a stockholder confers upon a trustee/s the
right to vote and other rights pertaining to the shares for a period not exceeding 5 years at any
time.
i. Powers Of Trustee
1. Possess the right to vote and other rights pertaining to the shares so transferred and
registered in hi ror their names subject to the terms and conditions of and for the period
specified in the agreement
2. May vote in person or by proxy unless the agreement provides otherwise
3. Trustee may exercise the rights of inspection of all corporate books and records
 4. Trustee is the legal title holder or owner of the shares so transferred under the
agreement. He is therefore qualified to be a director
b. Term of a VTA
Generally, a VTA cannot be entered into for a period exceeding 5 years at any one time.
Unless expressly renewed, all rights granted in a voting trust agreement shall automatically
expire at the end of the agreed period, and the voting trust certificates as well as the
certificates of stock in the name of the trustee or trustees shall thereby be deemed cancelled
and new certificates of stock shall be reissued in the name of the transferors.
However, when it is a condition in a loan agreement, the VTA expires automatically upon
full payment of the loan, though that period may exceed 5 years.
c. Form
The VTA must be in writing and notarized, and shall specify the terms and conditions thereof.
A certified copy of such agreement shall be filed with the corporation and with the Securities
and Exchange Commission; Otherwise, said agreement is ineffective and unenforceable.
The voting trust agreement filed with the corporation shall be subject to examination by any
stockholder of the corporation in the same manner as any other corporate book or record:
d. Limitations
No voting trust agreement shall be entered into for the purpose of circumventing the law
against monopolies and illegal combinations in restraint of trade or used for purposes of fraud.
Any other stockholder may transfer his shares to the same trustee or trustees upon the
terms and conditions stated in the voting trust agreement, and thereupon shall be bound by
all the provisions of said agreement.
e. Rights granted by the voting trust agreement
(1) As to legal title over the shares
Under the voting trust agreement, legal title is conveyed to the trustee who will hold the shares
for the benefit of the SH.
The stockholder has beneficial title; the trustee has legal title.
The trustee is recorded as the stockholder in trust for the trustor.
The trustor, on the other hand, retains beneficial ownership, i.e. the right to dividends and
other proprietary rights.
(2) As to voting and candidacy
Obviously, the point of the VTA is that the trustee votes
However, the trustor is deprived not only the right to vote, but also the right to be a director,
since he is no longer a stockholder of record. (Lee v CA)
That being said, he voting trustee or trustees may vote by proxy unless the agreement
provides otherwise.
(3) Other rights
Both the transferor and the trustee or trustees may exercise the right of inspection of all
corporate books and records in accordance with the provisions of this Code.
The trustee is also granted
(1) the right to obtain copies of financial statements;
(2) all other rights pertaining to shares except the right to receive dividends which belongs
to the beneficial owner unless otherwise stipulated under the terms of the voting trust
agreement.
f. Voting Trust Certificates
The certificate or certificates of stock covered by the voting trust agreement shall be cancelled
and new ones shall be issued in the name of the trustee or trustees stating that they are issued
pursuant to said agreement. In the books of the corporation, it shall be noted that the transfer
in the name of the trustee or trustees is made pursuant to said voting trust agreement.
The trustee or trustees shall execute and deliver to the transferors voting trust certificates,
which shall be transferable in the same manner and with the same effect as certificates of
stock.
e. VTA And Proxy Distinguished
Proxy Voting trust agreement
As to The proxy it is enough that it Must be in writing, notarized
form is in writing. It need not be It must be filed with the SEC to be valid and
notarized enforceable.
A proxy need not be filed
with the SEC.
As to Proxy is valid only for the VTA is valid for all meetings but not to exceed 5
period meeting intended years likewise, unless it is made pursuant to a
Unless it is general and loan agreement in which case the VTA is co-
continuing in nature but not terminous with the loan.
to exceed the period of 5 So it may be longer than 5 years or shorter than 5
years years depending on the extinguishment of the
loan obligation.
So if the loan is for seven years, the VTA will
automatically extend to 7 years.
As No legal title is transferred In VTA, legal title is transferred to the trustee
regards or conveyed to the proxy thats why he is qualified to be elected as director
title holder thats why he has no
conveye right to be voted or elected
d as director.
As to Proxy only acquires the right Trustee acquires the right to vote as well as all
rights to vote, no more no less other rights pertaining to the shares including the
acquired right to:
inspect corporate books
obtain copies of the financial statements
As to Governed by law on agency Governed by law on trust and corporation code
law
governin
g it
Effect of Proxy loses authority if his Presence of SH does not revoke authority of
presence principal is present trustee
of SH
f. Cases when SHs action required
i. BY MAJORITY VOTE
Fixing of price of no par value shares
o But AOI may fix the issue price or may authorize BOD to fix price (Sec. 62)
Adoption or amendment of by-laws (Sec. 48)
Execution of management contracts (Sec. 44)
o Unless in case of interlocking SHs of more than 1/3 in managing corporation; or
o Interlocking majority of directors in both managing and managed corporations
Revocation of delegation to BOD on amendment of by-laws (Sec. 48)
Payment of compensation for directors unless already fixed in by-laws
 b. BY TWO-THIRDS VOTE
Declaration of bond or stock dividends (Sec. 43)
Investment in other corporations or for purposes other than those provided in AOI (Sec.
42)
Certain amendments to AOI (Sec. 16, 37)
Delegation to BOD to amend by-laws (Sec. 48)
Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of
the corporate assets, but SHs action is not required if corporations business is not
substantially limited to or if the proceeds are used to continue the remaining business
(Sec. 40
Removal of director (Sec. 28)
Ratification of voidable contracts in certain cases between corporation and its director or
trustee (Sec. 32)
Voluntary dissolution (Sec. 118)
Execution of management contracts in cases of interlocking directors or SHs (Sec. 44)
Increase or decrease of capital stock and creation or increase of bonded indebtedness
(Sec. 38)
Extending or shortening corporate term (Sec. 37)
Issuance of shares not subject to pre-emptive right (Sec. 39)
c. BY CUMULATIVE VOTING
Election of directors or trustees (Sec. 24)
iv. Proprietary Rights
a. Right To Dividends
It is a right on the part of a stockholder in the sense that if the conditions are present then the
stockholder has a right to receive dividends.
However, as previously discussed, the declaration of dividends is generally within the sound
discretion of the Board, and the stockholder cannot compel them to declare dividends.
Dividends are distributed to stockholders pursuant to their right to share in corporate
profits. When a dividend is declared, it belongs to the person who is the substantial and
beneficial owner of the stock at the time regardless of when the distribution profit was
earned. (Nora A. Bitongvs. Court of Appeals, et al., G.R. No. 123553, July 13, 1998)
That being said, there are certain cases, with an exception, where the URE must be
distributed. Sort of. See supra.
i. Profits vs. Dividends
Important to make distinction between profits and dividends because not all profits are
dividends. Dividends are the portions of profits that have been segregated and earmarked by
the corporation for distribution to the stockholders.
If the profits have not been segregated that means that they cannot be made available for
distribution to the stockholders.
Point of distinction
The stockholder, when they have been declared, has a right to receive them.
In contrast, the stockholder has no right at all to demand a share of the profits of the
corporation.
b. Right Of Appraisal
TITLE X
APPRAISAL RIGHT
Section 81. Instances of appraisal right. Any stockholder of a corporation shall have the right to
dissent and demand payment of the fair value of his shares in the following instances:
1. In case any amendment to the articles of incorporation has the effect of changing or restricting the
rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to those
of outstanding shares of any class, or of extending or shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially
all of the corporate property and assets as provided in the Code; and
3. In case of merger or consolidation. (n)
The appraisal right is the right to demand payment of the fair value of his shares after
dissenting from a proposed corporate action involving a fundamental change in the corporation
in the cases provided by law.
It is a statutory right because it is in Section 81 of the corporation code.
It is a proprietary right, because it is, the right to demand payment of the fair value of the
share but after dissenting from the proposed corporate act, such act involves fundamental
changes in the corporation and only in the cases specified by law.
A stockholder cannot exit or get out his investment in the corporation just because he
disagrees with the management of the corporation, because appraisal right is limited by law
to those cases specified by law.
i. Instances of Appraisal Right
1. An amendment in the AOI that has the effect of:
a. Changing or restricting shareholders rights; or
b. Changing the corporate term
2. Sale, encumbrance or other dispositions of all or substantially all of the corporate
property or assets
3. Investment of corporate funds in another corporation or in a purpose other than the
primary purpose. See Sec. 42, supra.
4. Merger or consolidations
5. In a close corporation, a stockholder may, for any reason, compel the corporation to
purchase his shares when the corporation has sufficient assets in its books to cover its
debts and liabilities exclusive of capital stock (Sec. 105, infra.)
ii. How exercised
Section 82. How right is exercised. The appraisal right may be exercised by any stockholder who shall
have voted against the proposed corporate action, by making a written demand on the corporation within
thirty (30) days after the date on which the vote was taken for payment of the fair value of his shares:
Provided, That failure to make the demand within such period shall be deemed a waiver of the appraisal
right. If the proposed corporate action is implemented or affected, the corporation shall pay to such
stockholder, upon surrender of the certificate or certificates of stock representing his shares, the fair
value thereof as of the day prior to the date on which the vote was taken, excluding any appreciation or
depreciation in anticipation of such corporate action.
If within a period of sixty (60) days from the date the corporate action was approved by the stockholders,
the withdrawing stockholder and the corporation cannot agree on the fair value of the shares, it shall be
determined and appraised by three (3) disinterested persons, one of whom shall be named by the
stockholder, another by the corporation, and the third by the two thus chosen. The findings of the
majority of the appraisers shall be final, and their award shall be paid by the corporation within thirty
(30) days after such award is made: Provided, That no payment shall be made to any dissenting
stockholder unless the corporation has unrestricted retained earnings in its books to cover such payment:
and Provided, further, That upon payment by the corporation of the agreed or awarded price, the
stockholder shall forthwith transfer his shares to the corporation. (n)
1. The dissenting stockholder shall make a written demand on the corporation within 30
days after the date on which the vote was taken;
2. If the proposed corporate action is implemented, the corporation shall pay such
stockholder, upon surrender of the corresponding certificate of stock, within 10 days
after demanding payment of his shares; and
 3. Upon payment of the agreed price, the stockholder shall transfer his shares to the
corporation.
Failure to make the demand within 30 days is waiver of the appraisal right.
In order to give rise to any obligation to pay on the part of the corporation, the dissenting
stockholder should first make a valid demand that the corporation refused to pay despite
having unrestricted retained earnings. Otherwise, the corporation could not be said to be
guilty of any actionable omission that could sustain the action to collect. The collection suit
filed by the dissenting stockholder to enforce 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)
c. Requisites of a Valid Exercise of Appraisal Right
1. It can only be exercised in the cases provided by law
2. The stockholder must have been present during the stockholders meeting in which the
vote was taken or the proposed corporate act was discussed and must his dissent to the
proposed corporate act.
3. The must make a written demand for payment for the fair value of his share within 30
days from the date the vote was taken
4. He must surrender his stock certificate for notation that stock certificate is subject to
appraisal right, he must do so within 10 days from the date of demand for payment of the
fair value of the share.
5. The fair value of the share shall be the value as of the day before the vote was taken
without taking into account the appreciation or depreciation of the value of the share. In
case of disagreement, then 3 appraisers shall be appointed to determine the fair value,
one appraiser is appointed by the corporation, the 2nd appraiser is appointed by the
stockholder and the 3rd is appointed by the nominees of the corporation and stockholder.
6. The corporation must have unrestricted retained earnings
7. After the stockholder has been paid of his share, the stock certificate shall be
surrendered and cancelled, and such shares shall become treasury shares
d. If corporation refuses to pay dissenting stockholder
If the corporation unjustifiably refuses to pay the dissenting stockholder despite compliance
with all the above requisites, the stockholder may file the appropriate action before the RTC to
compel to corporation to allow him to exercise his appraisal right.
e. Effect of Demand on rights
Section 83. Effect of demand and termination of right. From the time of demand for payment of the fair
value of a stockholders shares until either the abandonment of the corporate action involved or the
purchase of the said shares by the corporation, all rights accruing to such shares, including voting and
dividend rights, shall be suspended in accordance with the provisions of this Code, except the right of
such stockholder to receive payment of the fair value thereof: Provided, That if the dissenting stockholder
is not paid the value of his shares within 30 days after the award, his voting and dividend rights shall
immediately be restored. (n)
From the time of demand for the payment of the fair value of the shares, all rights accruing to
such shares, including voting and dividend rights, shall be suspended, except the right to
receive the payment of the fair value.
However, if the dissenting stockholder is not paid the value of his shares within 30 days after
the award, his voting and dividend rights will be immediately restored.
c. Termination of right; withdrawal of demand for payment
Section 84. When right to payment ceases. No demand for payment under this Title may be withdrawn
unless the corporation consents thereto. If, however, such demand for payment is withdrawn with the
consent of the corporation, or if the proposed corporate action is abandoned or rescinded by the
corporation or disapproved by the Securities and Exchange Commission where such approval is
necessary, or if the Securities and Exchange Commission determines that such stockholder is not entitled
to the appraisal right, then the right of said stockholder to be paid the fair value of his shares shall cease,
his status as a stockholder shall thereupon be restored, and all dividend distributions which would have
accrued on his shares shall be paid to him. (n)
Withdrawal of demand for payment
Generally, a dissenting SH who demands payment of his shares is no longer allowed to
withdraw from his decision.
However, the corporation may sent thereto.
Termination of appraisal right
The appraisal right terminates upon:
(1) Such withdrawal
(2) Failure to submit stock certificates as required within 10 days, infra., if the
corporation so chooses
(3) Abandonment or rescission of the corporate action involved
(4) Disapproval of the corporate action involved by the SEC
(5) Ruling by the SE that the stockholder is not entitled to the appraisal right.
(6) Transfer of dissenting shares and cancellation of certificate, infra.
f. Valuation Date
Again, the fair value of the shares of the dissenting SH is determined as of the day before the
date on which the vote was taken notwithstanding any appreciation or depreciation in value of
the shares in anticipation of such corporate action
In case of disagreement, then 3 appraisers shall be appointed to determine the fair value,
one appraiser is appointed by the corporation, the 2nd appraiser is appointed by the
stockholder and the 3rd is appointed by the nominees of the corporation and stockholder
g. Costs of appraisal
Section 85. Who bears costs of appraisal. The costs and expenses of appraisal shall be borne by the
corporation, unless the fair value ascertained by the appraisers is approximately the same as the price
which the corporation may have offered to pay the stockholder, in which case they shall be borne by the
latter. In the case of an action to recover such fair value, all costs and expenses shall be assessed against
the corporation, unless the refusal of the stockholder to receive payment was unjustified. (n)
The Corporation bears the cost of appraisal in the following cases:
1. If the price that the corporation is willing to pay is lower than the value as determine
by the appraisers
2. In an action to recover the cost of appraisal in case the refusal by the stockholder is
justified
The stockholder bears the cost of appraisal in the following cases:
1. If the price that the corporation is willing to pay is approximately the same as
determine by the appraisers
2. In an action to recover the cost of appraisal in case the refusal by the stockholder is
unjustified
h. Notation on certificates; Rights of transferees
Section 86. Notation on certificates; rights of transferee. Within ten (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 rights under this Title. 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 under this Title shall cease and the transferee shall have all
the rights of a regular stockholder; and all dividend distributions which would have accrued on such
shares shall be paid to the transferee. (n)
Within 10 days after demanding payment for his shares, the dissenting stockholder must
submit his stock certificates to the corporation for notation thereon that the shares are
dissenting shares.
Failure to do so shall be, at the option of the corporation, a termination of the appraisal
right.
If shares so notated are transferred, and the certificates subsequently cancelled, the
appraisal right of the transferor will cease. On the other hand, the transferee shall have all
the rights of a regular stockholder and be entitled to all dividend distributions that would
have accrued on the shares if the appraisal right had not been exercised.
d. Right to Inspect
All stockholders have the right to inspect the books and records kept by the corporation,
which, of course, leads to the question of what are the
i. Books required to be kept by the corporation
TITLE VIII
CORPORATE BOOKS AND RECORDS
Section 74. Books to be kept; stock transfer agent. Every corporation shall keep and carefully preserve
at its principal office a record of all business transactions and minutes of all meetings of stockholders or
members, or of the board of directors or trustees, in which shall be set forth in detail the time and place
of holding the meeting, how authorized, the notice given, whether the meeting was regular or special, if
special its object, those present and absent, and every act done or ordered done at the meeting. Upon the
demand of any director, trustee, stockholder or member, the time when any director, trustee, stockholder
or member entered or left the meeting must be noted in the minutes; and on a similar demand, the yeas
and nays must be taken on any motion or proposition, and a record thereof carefully made. The protest of
any director, trustee, stockholder or member on any action or proposed action must be recorded in full on
his demand.
The records of all business transactions of the corporation and the minutes of any meetings shall be open
to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on
business days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his
expense.
No stock transfer agent or one engaged principally in the business of registering transfers of stocks in
behalf of a stock corporation shall be allowed to operate in the Philippines unless he secures a license
from the Securities and Exchange Commission and pays a fee as may be fixed by the Commission, which
shall be renewable annually: Provided, That a stock corporation is not precluded from performing or
making transfer of its own stocks, in which case all the rules and regulations imposed on stock transfer
agents, except the payment of a license fee herein provided, shall be applicable. (51a and 32a; P.B. No.
268.)
The corporation must keep the following books and records under the Corpo Code:
1) Record of all business transactions
2) Book containing the minutes of meetings, whether stockholders or board meetings
o The book containing the minutes of the meeting should include:
the number directors present and absent,
those who voted for or against the resolution, yeas and the nays, including dissents
if so requested by the director.
3) Stock and transfer book
o Under Sec 63 the transfers must be recorded in the books of the corporation to
make the transfer binding to the corporation.
b. Corporate records required by SEC to be kept and/or
registered
Aside from the ones that are required under the Corpo Code, the SEC also requires the
corporation to keep the ff.:
1. Books of account
2. List of stockholders or members
3. Financial records
c. Persons given the right to inspect corporate books
1. Any director/trustee, SH/member
2. Voting trust certificate holder
3. SH of a sequestered company
4. Beneficial owner of shares
d. Limitations to right of inspection
1. The right of inspection must be exercised at the time place manner specified in the by-
laws.
2. The right of inspection does not extend to trade secrets. This is not in the Corporation
Code, but by jurisprudence.
3. The right of inspection can only be exercised for a purpose germane to his interest as
stockholder.
4. The right of inspection may be denied if the stockholder improperly used the information
secured in previous examination or examination was made in bad faith.
The by-laws of a corporation can validly delimit who can inspect corporate records.
(Gonzales v. PNB)
It does not extend to a subsidiary corporation, but it can extend to the investments of the
corporation. (Gokongwei v. SEC)
The stockholder's right of inspection of the corporation's books and records is based upon
their ownership of the assets and property of the corporation. It is, therefore, an incident of
ownership of the corporate property, whether this ownership or interest be termed an
equitable ownership, a beneficial ownership, or a ownership.(John Gokongwei, Jr. vs.
Securities and Exchange Commission, et al., G.R. No. L-45911, April 11, 1979)
The only express limitation on the right of inspection, according to the Court, is that (1) the
right of inspection should be exercised at reasonable hours on business days; (2) the person
demanding the right to examine and copy excerpts from the corporate records and minutes
has not improperly used any information secured through any previous examination of the
records of such corporation; and (3) the demand is made in good faith or for a legitimate
purpose. (Victor Africa vs. Presidential Commission on Good Government, et al., G.R.
No. 83831, January 9, 1992)
e. Refusal to allow inspection
Sec. 74, cont. Any officer or agent of the corporation who shall refuse to allow any director, trustees,
stockholder or member of the corporation to examine and copy excerpts from its records or minutes, in
accordance with the provisions of this Code, shall be liable to such director, trustee, stockholder or
member for damages, and in addition, shall be guilty of an offense which shall be punishable under
Section 144 of this Code: Provided, That if such refusal is made pursuant to a resolution or order of the
board of directors or trustees, the liability under this section for such action shall be imposed upon the
directors or trustees who voted for such refusal. xxx
Any officer or agent of the corporation who shall refuse to allow any director, trustee,
stockholder or member his right to inspection shall be liable for damages, as well as for
criminal liability under Sec. 144 of the Code.
If the refusal was made pursuant to a board resolution or order, the damages and criminal
liability will only be imposed upon the board members who voted for the refusal.
That is, unless the refusal is justified. On that
f. When refusal to allow inspection is justified.
Sec. 74, cont. Provided, further, That it shall be a defense to any action under this section that the person
demanding to examine and copy excerpts from the corporations records and minutes has improperly
used any information secured through any prior examination of the records or minutes of such
corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in
making his demand.
Just reverse the limitations.
The defenses are:
1. The right of inspection is not being exercised in accordance to the by-laws;
2. It extends to matters which are not covered by the right of inspection;
3. Request not germane to interest as a stockholder.
4. Information obtained in previous examination was used improperly; or
5. The request made in bad faith.
6. Jurisprudentially:
a. Records involve trade secrets
b. Information privileged under a special law, like the Secrecy of Bank Deposits Act
g. Vis--vis Secrecy of Bank Deposits Act
The Secrecy of Bank Deposits Act is a special law; therefore, it prevails over the general law or
the Corporation Code.
Thus, the right of inspection does not extend to the bank deposits of the corporation
h. Stock and transfer book
Stock corporations must also keep a book to be known as the "stock and transfer book", in which must be
kept a record of all stocks in the names of the stockholders alphabetically arranged; the installments paid
and unpaid on all stock for which subscription has been made, and the date of payment of any
installment; a statement of every alienation, sale or transfer of stock made, the date thereof, and by and
to whom made; and such other entries as the by-laws may prescribe. The stock and transfer book shall be
kept in the principal office of the corporation or in the office of its stock transfer agent and shall be open
for inspection by any director or stockholder of the corporation at reasonable hours on business days.
Stock corporations are required to keep a stock and transfer book. Law students are
required by the bar syllabus to know about the stock and transfer book.
Contents of Stock and Transfer Book (Bar syllabus)
(1) All stocks in the names of the stockholders alphabetically arranged;
(2) The installments paid and unpaid on all stock for which subscription has been made
and the date of payment of any installment
(3) A statement of every alienation, sale, or transfer of stock made, the date thereof, and
to whom made, and
(4) Other entries as the by-laws may prescribe.
Stock transfer agent
The corporate secretary can appoint a stock and transfer agent to take care of the stock and
transfer book.
Who may make entries (bar syllabus)
Only the corporate secretary is authorized to make entries in the stock and transfer book.
Thus, entries made by the Chairman or the President are void. (Torres Jr. v. CA)
Where kept; Right to inspection
The stock ant transfer book shall be kept in the principal office of the corporation, or in the
office of the stock transfer agent.
i. Right to Financial Statements
Section 75. Right to financial statements. Within ten (10) days from receipt of a written request of any
stockholder or member, the corporation shall furnish to him its most recent financial statement, which
shall include a balance sheet as of the end of the last taxable year and a profit or loss statement for said
taxable year, showing in reasonable detail its assets and liabilities and the result of its operations.
At the regular meeting of stockholders or members, the board of directors or trustees shall present to
such stockholders or members a financial report of the operations of the corporation for the preceding
year, which shall include financial statements, duly signed and certified by an independent certified
public accountant.
However, if the paid-up capital of the corporation is less than P50,000.00, the financial statements may
be certified under oath by the treasurer or any responsible officer of the corporation. (n)
A stockholder or member may exercise his right to inspection of corporate financial statements
by making a written request with the corporation.
The corporation must provide its most recent financial statements within 10 days, which
includes
A balance sheet, and
A profit and loss statement
The board of directors must also present a financial report at the regular meeting of the
stockholders or members, which should include the above financial statements.
Certification of financial statements
Generally, by an independent certified public accountant.
However, when the paid-up capital of the corporation is less than P50,000, the financial
statements may be certified under oath by the treasurer or any responsible officer of the
corporation.
e. Pre-Emptive Right
Weve done this before but that was ages ago.
Again, the pre-emptive right is the right of the stockholder to subscribe in and in all issuance
of shares or disposition of shares of any class by the corporation in proportion to his
shareholdings in the corporation.
Thus, before shares or new shares are to be issued, they must first be offered to the existing
SHs in proportion to their shareholdings in the corporation before the same can be offered
to third parties.
The SH can waive his pre-emptive right.
i. When available
1. All issues and disposition
2. Issuance of unsubscribed shares which are part of the OCS
3. Increase of capital stock to the extent of the additional amount
4. Issuance of unissued shares
5. Treasury shares
Even if pre-emptive right does not exist either because the issue comes within the exceptions in
Section 39 of the Corporation Code or because it is denied in the articles of incorporation, an
issue of shares may still be objectionable if the directors acted in breach of trust and their
primary purpose is to perpetuate or shift control of the corporation or to freeze out the
minority interest. Majority of Stockholders of Ruby Industrial Corporation vs Lim,
b. When not applicable
1. In case of denial in the articles of incorporation either in the original or as an amendment
of AOI. Meaning at the outset there can be pre-emptive right but can be denied later on
as an amendment of AOI. Amendment requires majority of the board and SH approval 2/3
2. Waiver of pre-emptive right. The right is not absolute therefore it can be waived by the
SH express or implied. If theres a period to exercise pre-emptive right and if that right is
not exercise within that period then it deemed waived. When you prepare a board
resolution you have to indicate the time frame within which the right to exercise
otherwise deemed waived. It cannot go on indefinitely there must be a period fixed SH
must exercise his right.
3. It doesnt apply to shares issued in compliance with laws requiring minimum stock
ownership to the public as in Banks.
 4. It does not apply to issuance of shares in exchange for the corporate property given for a
corporate purpose if approved by the SH owning at least 2/3 of the outstanding capital
stock.
5. Issuance of shares in payment of debt in regard of good faith if approve by the SH
representing 2/3 of the outstanding capital stock.
NOTE: Unless there is an express restriction in the AOI, the pre-emptive right of the SH is
transferable.
f. Cf. Right of first refusal
In contrast, the right of first refusal is a contractual right of an entity to be given the
opportunity to buy shares before anyone else can.
Since an entity with the right of first refusal has the right, but not the obligation, to buy such
shares, it is akin to a having a call option on the shares.
If the entity with the right of first refusal declines to buy the shares, the owner of the asset is
free to open the bidding up to other interested parties.
A right of first refusal is usually negotiated by a party when it wants to see how a
business will turn out. The party may therefore prefer to hold the option to get involved
at a later point, rather than make the outlay and commitment upfront.
i. Pre-emptive right and right of first refusal distinguished
PRE-EMPTIVE RIGHT RIGHT OF FIRST REFUSAL
May be exercised even without express Arises only by virtue of contractual
provision of law stipulations but is also granted under the
provisions under close corporations.
May be exercised by trustee or conservator Can only be exercised by the owner and not
(Republic v. Sandiganbayan) mere trustee or conservator since it is an act
of ownership.
Pertains to unsubscribed portion of the Exercisable against anther SH of the
authorized capital stock. A right that may be corporation of his shares of stock.
claimed against the corporation.
g. Right to transfer stock
As a stockholder is the owner of the stocks, he has the right to dispose of his shares. However,
any such transfers are covered by the ff. rules.
i. Requisites of a valid transfer
(1) There must be delivery of the certificate
(2) The share must be indorsed by the owner or his agent, and
(3) The transfer must be duly recorded in the books of the corporation. (Rural Bank
of Lipa v. CA)
Since the law does not prescribe a period for registration of shares in the books of the
corporation, the action to enforce the right to have it done does not begin until a demand for
it had been made and was refused. Africa vs. Hon. Sandiganbayan, ibid.
Section 63 of the Corporation Code strictly requires the recording of the transfer in the
books of the corporation, and not elsewhere, to be valid as against third parties. (Garcia vs.
Nicolas Jomouad)
Without such recording, the transferee may not be regarded by the corporation as one
among its stockholders and the corporation may legally refuse the issuance of stock
certificates in the name of the transferee even when there has been compliance with the
requirements of Section 64 of the Corporation Code. The situation would be different if the
petitioner was himself the registered owner of the stock which he sought to transfer to a
third party, for then he would be entitled to the remedy of mandamus.(VPonce vs. Alsons
Cement Corporation)
 The failure of the stockholder to deliver the stock certificate to the buyer within a
reasonable time the shares covered by the stock certificate should have been delivered is a
substantial breach that entitles the buyer to rescind the sale under Article 1191 of the
Corporation Code . It is not entirely correct to say the sale had already been consummated
as the buyer already enjoyed the rights a shareholder can exercise. The enjoyment of these
rights will not suffice where the law, by its express terms, requires a specific form to transfer
ownership. Fil-Estate Golf and Development vs. Vertex Sales and Trading Inc., G.R.
No. 202079, June 10, 2013
The Corporation whose shares of stock are the subject of a transfer transaction (through
sale, assignment, donation, or any other mode of conveyance) need not be a party to the
transaction, as may be inferred from the terms of Section 63 of the Corporation Code.
However, to bind the corporation as well as third parties, it is necessary that the transfer is
recorded in the books of the corporation. In a share purchase transaction, the parties are the
seller and buyer of the shares. Not being a party to the sale, the Corporation is in no position
to appeal the ruling rescinding the sale of the shares. If the Seller of the shares filed no
appeal against the court decision declaring the rescission of the sale, then the rescission is
deemed final despite any appeal by the corporation whose shares of stock are the subject of
the transfer transaction. Forest Hills Golf & Country Club vs. Vertex Sales and Trading
G.R. No. 202205, March 6, 2013.
b. Which shares may be transferred
Only shares which have been fully paid for may be answered. Shares against which the
corporation holds unpaid claims are not transferable in the books of the corporation.
c. Effects of unregistered transfer of shares
It is valid and binding as between the transferor and transferee.
However, it is invalid as to third parties, including:
(1) The corporation, unless notice is given to the corporation for purposes of registration
(2) Corporate creditors
(3) Attaching or executing creditors of the transferor
(4) Subsequent purchasers in good faith without notice.
d. Limitations
Limitations on transfer
1. Transfer may be limited in AOI, by-laws, or stock certificate
2. Any restriction/transfer cannot be more onerous than the right of first refusal
NOTE: These limitations must concur, otherwise, the transfer is null and void. These limitations
are always applicable to open corporations.
The authority granted to a corporation to regulate the transfer of its stock does not empower
it to restrict the right of a stockholder to transfer his shares by means of by-laws provisions,
but merely authorizes the adoption of regulations as to the formalities and procedure to be
followed in effecting transfer. (Marsh Thomson vs. Court of Appeals and the American
Champer of Commerce of the Philippines, Inc,, G.R. No. 116631, October 28, 1998)
The arrangement provided for in the by-laws of the Corporation whereby a lien is constituted
on the membership share to answer for dues, assessments and subsequent obligations to the
corporation cannot be upheld unless coupled by a corresponding pledge or chattel mortgage
agreement . Valley Golf and Country Club, Inc. v. Vda. De Caram
However, close corporations, infra., are allowed to impose further limitations on transfer.
e. Sale of partially paid shares
Generally, the corporation may refuse to acknowledge and register a sale or assignment of
shares not fully paid, and may continue to hold the original subscriber liable on the payment of
the subscription.
However, that only applies to unpaid claims arising from the unpaid subscription, and not to
any indebtedness of the subscriber to the corporation. (Chinabank v. CA)
Remember that the subscription contract is indivisible. Thus, the stockholder cannot sell
any portion of the shares covered by an unpaid subscription, much less all of them.
However, he may assign the shares, along with the obligation on the unpaid subscription,
with the consent of the corporation. (Villanueva)
f. Involuntary dealings with shares
ROC, Rule 57, Sec. 7 (c) .Stocks or shares, or an interest in stocks or shares, of any corporation or
company, by leaving with the president or managing agent thereof, a copy of the writ, and a notice
stating that the stock or interest of the party against whom the attachment is issued is attached in
pursuance of such writ;
Shares, like all other personal property, may attached.
Under the ROC, this is done by serving a copy of the writ on the president or the managing
agent thereof, and a notice stating that the stock or interest of the party against whom the
attachment is issued.
Upon the death of a shareholder, the heirs do not automatically become stockholders of the
corporation and acquire the rights and privileges of the deceased as shareholder of the
corporation. The stocks must be distributed first to the heirs in estate proceedings, and the
transfer of the stocks must be recorded in the books of the corporation.(Puno v. Puno
Enterprises, Inc.)
h. Right to vote
See supra.
v. Remedial rights
Stockholders and members are given the right to pursue remedies against the corporation. This
may be done through:
(1) Individual Suits
(2) Representative suits, or
(3) Derivative sutis. Hok,,,,,
a. Individual Suit
An action brought by a SH against the corporation for direct violation of his contractual rights
(e.g. denial of right to vote)
b. Representative Suit
An action brought by a SH in his own behalf and on behalf of all similarly situated to enforce a
common cause of action. (e.g. denial of pre-emptive right)
c. Derivative Suit
An action brought by a SH or members in the name and on behalf the corporation to redress
wrongs committed against it or to protect or vindicate corporate rights, whenever the officials
of the corporation refuse to sue or are the ones to be sued or hold control of the corporation.
i. Requisites of a derivative suit
Section 1, Rule 8 of the Interim Rules imposes the following requirements for derivative suits:
(1) The person filing the suit must be a stockholder or member at the time the acts or
transactions subject of the action occurred and the time the action was filed;
(2) He must have exerted all reasonable efforts, and alleges the same with particularity in the
complaint, to exhaust all remedies available under the articles of incorporation, by-laws, laws or
rules governing the corporation or partnership to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.
 Theres another list, which reads like this:
1. SHs or members must be such at the time of the objectionable acts or transactions unless
the transactions are continuously injurious, regardless of the number of shares owned.
2. Existing cause of action in favor of the corporation such cause of action must be
continuing in nature
3. He must exhaust all administrative or intra-corporate remedies.
4. Appraisal right is not available (Reyes v. RTC of Makati)
The only difference is that in the first one, the requirement is for the suit not to be a
nuisance suit, and in the second one its that the cause of action is in favor of the
corporation, so I guess theyre pretty much the same.
b. Bases for derivative suits
An election controversy is not a proper basis for derivative suit (Legaspi 3000 v. Muer)
In such a case, the stockholders are the injured party, whose rights to vote and to be
voted upon were directly affected by the election of the new set of board of directors. The
party-in-interest are the petitioners as stockholders, who wield such right to vote. The
cause of action devolves on petitioners, not the condominium corporation, which did not
have the right to vote. Hence, the complaint for nullification of the election is a direct
action by petitioners, who were the members of the Board of Directors of the corporation
before the election, against respondents, who are the newly-elected Board of Directors.
Under the circumstances, the derivative suit filed by petitioners in behalf of the
condominium corporation in the Second Amended Complaint is improper.
A personal loan, even if secured by corporate assets, is not proper basis; corporation has no
cause of action. (Ang v. Sps. Ang)
A suit to enforce pre-emptive right in a corporation is not a derivative suit because it was not
filed for the benefit of the corporation. (Lim v. Lim Yu)
Personal injury suffered by the stockholders does not disqualify them from filing a derivative
suit on behalf of the corporation. It merely gives rise to an additional cause of action for
damages against the erring directors. (Gochan v. Young)
The allegation that the suing stockholder talked to the other stockholder regarding the
dispute hardly constitutes all reasonable efforts to exhaust all remedies available .
The complaint should also allege the fact that there was no appraisal right available
under for the acts complained of and that the suit was not a nuisance or harassment suit.
\The fact that the corporation involved is a family corporation should not in any way
exempt the suing stockholder from the requirements and formalities for filing a
derivative suit. Yu vs. Yukayguan, 588 SCRA 589 ( 2009 )
vi. Obligations of stockholders
(1) To pay unpaid subscriptions
(2) To pay interests on unpaid subscription
(3) May be made to pay corporate creditors under trust fund doctrine
(4) For damages for issuance of watered stock
(5) To return dividends unlawfully paid, nad
(6) Liability for failure to create corporation.

l. Meetings
You might have noticed that certain actions must be done at action. List to follow. First off, lets
discuss what makes for a valid meeting.
1. Kinds of Meetings
Section 49. Kinds of meetings. Meetings of directors, trustees, stockholders, or members may be
regular or special. (n)
Regular meetings are those required to occur at certain intervals.
Special meetings are those which are called for a particular purpose.
ii. Stockholders meetings
Section 50. Regular and special meetings of stockholders or members. - Regular meetings of
stockholders or members shall be held annually on a date fixed in the by-laws, or if not so fixed, on any
date in April of every year as determined by the board of directors or trustees: Provided, That written
notice of regular meetings shall be sent to all stockholders or members of record at least two (2) weeks
prior to the meeting, unless a different period is required by the by-laws.
Special meetings of stockholders or members shall be held at any time deemed necessary or as provided
in the by-laws: Provided, however, That at least one (1) week written notice shall be sent to all
stockholders or members, unless otherwise provided in the by-laws.
Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member.
Whenever, for any cause, there is no person authorized to call a meeting, the Securities and Exchange
Commission, upon petition of a stockholder or member on a showing of good cause therefor, may issue an
order to the petitioning stockholder or member directing him to call a meeting of the corporation by
giving proper notice required by this Code or by the by-laws. The petitioning stockholder or member shall
preside thereat until at least a majority of the stockholders or members present have chosen one of their
number as presiding officer. (24, 26)
Section 51. Place and time of meetings of stockholders of members. Stockholders or members
meetings, whether regular or special, shall be held in the city or municipality where the principal office of
the corporation is located, and if practicable in the principal office of the corporation: Provided, That
Metro Manila shall, for purposes of this section, be considered a city or municipality.
Notice of meetings shall be in writing, and the time and place thereof stated therein.
All proceedings had and any business transacted at any meeting of the stockholders or members, if
within the powers or authority of the corporation, shall be valid even if the meeting be improperly held or
called, provided all the stockholders or members of the corporation are present or duly represented at
the meeting. (24 and 25)

a. Regular Meetings of Stockholders.

Regular meetings of SH or members shall be held annually on a date fixed in the by-laws, or if
not so fixed, on any date in April of every year as determined by the BOD/T.
The purpose thereof is to determine or to vote the directors of the corporation because of
the one year term limit under Sec. 23.
b. Special meetings of Stockholders.
Special meetings shall be held at any time deemed necessary or as provided in the by-laws.
c. Who calls meetings
Generally, the person designated in the by-laws has the authority to call the stockholders
meeting.
In his absence, it may be called by a director or a trustee or by an officer entrusted with the
management of the corporation.
If there is no such person, for any cause, the SEC, upon petition of a stockholder or member
on a showing of good cause therefor, may issue an order to the petitioning stockholder or
member directing him to call a meeting of the corporation by giving proper notice. The
petitioning stockholder or member shall preside thereat until at least a majority of the
stockholders or members present have chosen one of their number as presiding officer.
d. When And Where Held.
The meetings should be conducted in the city or municipality where the principal office is
located, preferably in the principal office itself.
e. Notice
 Regular A written notice shall be sent to all SHs or members of record at least 2 weeks
prior the meeting, unless a different period is required by the by-laws.
Special at least 1 week written notice shall be sent to all SH or members, unless
otherwise provided in the by-laws.
Notice of any meeting may be waived, expressly or impliedly, by any SH or member.
If there was no valid notice, the meeting is invalid regardless of a quorum. If everybody
except one SH is present, the latter not being notified of the meeting, the meeting is void
unless he ratifies the same. (Lopez v. Fontecha)
f. Who Presides
Section 54. Who shall preside at meetings. The president shall preside at all meetings of the directors
or trustee as well as of the stockholders or members, unless the by-laws provide otherwise. (n)
President, unless by-laws otherwise provides.
g. Quorum
Section 52. Quorum in meetings. Unless otherwise provided for in this Code or in the by-laws, a
quorum shall consist of the stockholders representing a majority of the outstanding capital stock or a
majority of the members in the case of non-stock corporations. (n)
GR: A quorum shall consist of stockholders representing a majority of the OCS or members
EXC: Unless otherwise provided in the Code or by-laws
For stock corporations, quorum refers to the number of outstanding voting stocks. For non-
stock corporations, it is composed of only those who are actual, living members with voting
rights.
i. Quorum present once certified
For corporate meetings, once the corporate secretary has certified the existence of a quorum, it
continues all throughout the proceedings. SHs walking out will not defeat the validity of the
proceedings under the guise of lack of quorum so long as there was a quorum when the
meeting was called to order.
h. Binding effect of acts done at a stockholders meeting
Provided all of the requirements for a valid meeting, discussed supra, but summarized infra, are
complied with, all acts done at the meeting are valid and binding.
However, even if the meeting is improperly held or called, all proceedings had and any
business transacted at the meeting are valid if all the stockholders or members of the
corporation are present or duly represented at the meeting.
i. Minutes of the Meeting
The non-signing by the majority of the members of the Board of Trustees of the said minutes
does not necessarily mean that the supposed resolution was not approved by the Board.
The signing of the minutes by all the members of the board is not required.
There is no provision in the Corporation Code of the Philippines that requires that the
minutes of the meeting should be signed by all the members of the board.
The proper custodian of the books, minutes and official records of a corporation is usually
the corporate secretary.
Being the custodian of corporate records, the corporate secretary has the duty to record and
prepare the minutes of the meeting.
The signature of the corporate secretary gives the minutes of the meeting probative value
and credibility.
Moreover, the entries contained in the minutes are prima facie evidence of what actually
took place during the meeting. (People v. Dumlao)
Thus, the certification by the chairman and the corporate secretary is enough to prove what
transpired in the meeting unless overcome by evidence to the contrary.
The minutes of the meeting if certified by the corporate secretary will be given probative
value and weight unless overcome by evidence to the contrary.
3. Board Meetings
Section 53. Regular and special meetings of directors or trustees. Regular meetings of the board of
directors or trustees of every corporation shall be held monthly, unless the by-laws provide otherwise.
Special meetings of the board of directors or trustees may be held at any time upon the call of the
president or as provided in the by-laws.
Meetings of directors or trustees of corporations may be held anywhere in or outside of the Philippines,
unless the by-laws provide otherwise. Notice of regular or special meetings stating the date, time and
place of the meeting must be sent to every director or trustee at least one (1) day prior to the scheduled
meeting, unless otherwise provided by the by-laws. A director or trustee may waive this requirement,
either expressly or impliedly. (n)
Section 54. Who shall preside at meetings. The president shall preside at all meetings of the directors
or trustee as well as of the stockholders or members, unless the by-laws provide otherwise. (n)

a. When held
Regular Monthly unless by-laws provide otherwise.
Special Any time upon the call of the president or as provided in the by-laws
b. Where held
Done anywhere in or out of the PH unless the by-laws provide otherwise.
c. Notice
Notice must be given to the Director or Trustee at least 1 day prior to the meeting unless:
Otherwise provided in the by-laws
Waived by the director or trustee.
Note that the notice need not be written, unlike for stockholders meetings.
d. Quorum
Majority of the number of directors as fixed in the AOI unless the law or by-laws otherwise
provides.
Under Section 25 of the Corporation Code, the articles of incorporation or by-laws may fix a
greater number than the majority of the number of directors to constitute a quorum. Any
number less than the number provided in the articles or by-laws cannot constitute a quorum;
any act therein would not bind the corporation; all that the attending directors could do is to
adjourn. (Pena v. CA)
e. Manner of voting
Directors cannot vote by proxy, nor can they delegate their powers to another.
i. Other recognized means of voting
However, the SC has recognized the ff. alternative means of voting in board meetings.
1. Internet voting
2. Teleconference
a. Requirements
i. Director requested the teleconference
ii. Requesting director has been duly identified
iii. The meeting is duly recorded
1. No need for video record; any form sufficient (Expertravael v. CA)
b. Limitation
Although SC recognized tele-conferencing as a form of board meeting, such method is
insufficient to be considered as a substituted for a written board resolution. (id)
 Also, these methods may not be availed of at stockholders meetings.
f. Rule on Abstention
Generally In case of abstention during a board meeting on a vote taken on any issue, an
abstention is counted in favor of the issue that won the majority vote since by their act of
abstention, the abstaining directors are deemed to abide by the majority rule. The prima facie
presumption is that the one who is abstaining intends to acquiesce to the action of those who
vote affirmatively.
The exception is that the presumption would not hold when there is clear evidence to the
contrary. It is thus important to inquire into the facts and circumstances which attended the
voting by the members in order to determine WON such a construction would govern.
iv. Summarized Requirements of a valid meeting
1. Must be held at the proper place
2. At the stated date and appointed time or at a reasonable time thereafter
3. Called by the proper person
a. Stockholders/Members One designated in the by-laws
b. In the absence of such provision in the by-laws, it may be called by the director or
trustee or officer entrusted with the corporations management.
c. SH or member may make call on order of SEC whenever, for any cause, there is no
person authorized to call a meeting
d. Special meeting for removal of directors or trustees may be called by the secretary
or by a SH or member
4. There must be previous notice
a. Requisites of a valid notice
i. Issued by one who has authority to issue it
ii. In writing
iii. State date, time and place unless otherwise provided in by-laws
iv. State business to be transacted thereat
v. Sent at a certain time before scheduled
vi. Other requirements as prescribed by the by-laws or law
b. The notice should state the purpose for which the meeting is called
5. There must be quorum.
v. Summary of meetings under the Corporation Code
STOCKHOLDERS MEETING BOARD OF DIRECTORS MEETING
Regular Specia Regular Special
l
HOW OFTEN Once a year Anyti Once a Anytime
me month
PURPOSE Voting
WHERE In the city or municipality Princi Anywhere Anywhere
where the principal office pal
is located office
WHEN On the date stated in the Any
CONVENE by-laws. date
IF silent, any day of APRIL
NOTICE 2 weeks 1 One day One day
week
vi. Actions that must be taken up at a stockholders meeting
(1) All actions where non-voting shares are allowed to vote, under Sec. 6.
(2) Amendment of AOI, in the ff. cases:
(3) Sale of all or substantially all assets
(4) Investments in secondary purpose
(5) Amendment of by-laws
(6) Election and removal of directors
(7) Issuance of stock dividends
(8) Entering into management contract with another corporation
(9) Fixing compensation of directors
(10) Fixing price of non-par value share
(11) Delegation of authority to amend by-laws to board
(12) Merger and Consolidation
(13) Dissolution
(14) Filling of vacancy for reasons other than removal, or when remaining directors do
not form a quorum.
 m. Dissolution
TITLE XIV
DISSOLUTION
Section 117. Methods of dissolution. A corporation formed or organized under the provisions of this
Code may be dissolved voluntarily or involuntarily. (n)
Dissolution is the extinguishment of the corporate franchise and the termination of the
corporate existence.
However, a dissolved corporation is still allowed to exist for a period of 3 years of dissolution
1. Steps for dissolution
1. Termination of corporate existence, through any of the modes infra, which also
terminates the right to go on doing ordinary business, and
2. Liquidation, which is the process by which all the residual assets of corporation are
converted into liquid assets to be distributed to the stockholders. This is done during the
winding up period of 3 years.
ii. Modes of dissolution
Liquidation may be done through voluntary or involuntary modes, viz.
1. Voluntary
a. When no creditors affected
b. When creditors affected
c. Merger/consolidation
d. Affidavit of dissolution for corporation sole
e. Shortening of Corporate Term by amendment of AOI
2. Involuntary
a. Expiration of term
b. Failure to commence operations within 2 years
c. Non-use for 5 years.
d. Order of SEC decreeing dissolution(Sec. 22 and PD 902-A)
e. Legislative dissolution.
f. Quo Warranto by OSG
3. Voluntary Dissolution
a. When no creditors affected
Section 118. Voluntary dissolution where no creditors are affected. If dissolution of a corporation does
not prejudice the rights of any creditor having a claim against it, the dissolution may be effected by
majority vote of the board of directors or trustees, and by a resolution duly adopted by the affirmative
vote of the stockholders owning at least two-thirds (2/3) of the outstanding capital stock or of at least
two-thirds (2/3) of the members of a meeting to be held upon call of the directors or trustees after
publication of the notice of time, place and object of the meeting for three (3) consecutive weeks in a
newspaper published in the place where the principal office of said corporation is located; and if no
newspaper is published in such place, then in a newspaper of general circulation in the Philippines, after
sending such notice to each stockholder or member either by registered mail or by personal delivery at
least thirty (30) days prior to said meeting. A copy of the resolution authorizing the dissolution shall be
certified by a majority of the board of directors or trustees and countersigned by the secretary of the
corporation. The Securities and Exchange Commission shall thereupon issue the certificate of dissolution.
(62a)
If the dissolution of a corporation does not prejudice the rights of any creditors having a claim
against it, dissolution may be effected by:
(1) Majority vote of the entire board,
(2) 2/3 vote of the OCS or members at a meeting called for that purpose.
Other requirements
 (3) Publication of the notice of the time, place and object of the meeting for 3 consecutive
weeks in a newspaper where the principal office of the corporation is located, or in a
newspaper of general circulation.
(4) Notice shall also be given to each stockholder or member by registered mail or personal
delivery at least 30 days before the meeting.
(5) A copy of the resolution authorizing the dissolution, certified by a majority of the board
and countersigned by the secretary, shall be filed with the SEC.
Effectivity of dissolution
Upon SEC issuance of certificate of dissolution.
A resolution approved by the Board of Directors is not sufficient to dissolve a corporation.
The Corporation Code establishes the procedure and other formal requirements a
corporation needs to follow in case it elects to dissolve and terminate its structure
voluntarily and where no rights of creditors may possibly be prejudiced under Section 118
which should have been strictly complied with by the members of the club. (Vesagas v. CA)
b. Cf. When creditors affected
Section 119. Voluntary dissolution where creditors are affected. Where the dissolution of a corporation
may prejudice the rights of any creditor, the petition for dissolution shall be filed with the Securities and
Exchange Commission. The petition shall be signed by a majority of its board of directors or trustees or
other officers having the management of its affairs, verified by its president or secretary or one of its
directors or trustees, and shall set forth all claims and demands against it, and that its dissolution was
resolved upon by the affirmative vote of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or by at least two-thirds (2/3) of the members at a meeting of its stockholders or
members called for that purpose.
If the petition is sufficient in form and substance, the Commission shall, by an order reciting the purpose
of the petition, fix a date on or before which objections thereto may be filed by any person, which date
shall not be less than thirty (30) days nor more than sixty (60) days after the entry of the order. Before
such date, a copy of the order shall be published at least once a week for three (3) consecutive weeks in a
newspaper of general circulation published in the municipality or city where the principal office of the
corporation is situated, or if there be no such newspaper, then in a newspaper of general circulation in
the Philippines, and a similar copy shall be posted for three (3) consecutive weeks in three (3) public
places in such municipality or city.
Upon five (5) days notice, given after the date on which the right to file objections as fixed in the order
has expired, the Commission shall proceed to hear the petition and try any issue made by the objections
filed; and if no such objection is sufficient, and the material allegations of the petition are true, it 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. (Rule
104, RCa)
In contrast, when the dissolution will prejudice creditors, a mere resolution will not suffice. A
petition for dissolution must be filed with the SEC.
i. Procedure for dissolution in this case
(1) Majority of board must so resolve.
(2) Must be resolved by 2/3 OCS or Members.
(3) Petition for dissolution to be filed with RTC (see note infra). Such petition:
a. Must be signed by a majority of its board or officers having management of
corporate affairs.
b. Should be verified by the president or secretary, or one of its directors or trustees
c. Must allege that the required votes above have been complied with, and
d. Must set forth all claims and demands against it.
(4) If petition sufficient in form and substance, an order shall be issued:
a. Reciting the purpose of the petition; and
b. Fix a date on or before which objections thereto may be filed by any person
 That date should be not less than 30 days but not more than 60 days after the
entry of the order.
(5) A copy of the order shall:
a. be published in a newspaper of general circulation published in the municipality or
city where the principal office of the corporation is located for 3 consecutive
weeks, and
b. Posted for 3 consecutive weeks in 3 public places in the municipality or city.
(6) Upon 5 days notice, given after the date on which the right to file objections as fixed in
the order has expired, the RTC will proceed to hearing the petition and try any issue
raised by the objection filed.
(7) If the no such objection is sufficient, and the material allegations of the petition are true,
it will render judgment dissolving the corporation and directing the disposition of its
assets as justice requires.
A receiver may be appointed to collect the assets and pay the debts of the
corporation.
b. Jurisdiction over dissolution
The SEC no longer has jurisdiction to carry out liquidation, the same having been transferred
by FRIA to the RTC in its general jurisdiction (BPI v. Hong)
c. Shortening of Corporate Term by amendment of AOI
Section 120. Dissolution by shortening corporate term. A voluntary dissolution may be effected by
amending the articles of incorporation to shorten the corporate term pursuant to the provisions of this
Code. A copy of the amended articles of incorporation shall be submitted to the Securities and Exchange
Commission in accordance with this Code. Upon approval of the amended articles of incorporation of the
expiration of the shortened term, as the case may be, the corporation shall be deemed dissolved without
any further proceedings, subject to the provisions of this Code on liquidation. (n)
Dissolution may be effected by amending the articles of incorporation to shorten the
corporate term.
The amendment must comply with all the requirements of amendment under the Code
However, a copy of the amended AOI must still be filed with the SEC.
Only upon approval of such amended AOI will the corporation be deemed dissolved.
d. How Corporation Sole Dissolved
A corporation sole is dissolved by a mere affidavit of dissolution.
However, that affidavit still requires approval of SEC to be effective, and becomes such
upon the issuance of a certificate of dissolution.
e. Merger and consolidation
Deserves its own section, so
iii. Merger and Consolidation
TITLE IX
MERGER AND CONSOLIDATION
In a merger, one corporation absorbs the other corporation, and remains in existence while the
other one is dissolved.
In contrast, in a consolidation, a new corporation is created, and the consolidating
corporations are extinguished.
In a merger or consolidation, the two or more corporations that are parties to the
consolidation are called constituent corporations.
The new company formed will be called the consolidated corporation.
 In a merger, one of the constituent corporations absorbs the other, thereby becoming the
surviving corporation
a. Procedure for merger or consolidation
Section 76. Plan or merger of consolidation. Two or more corporations may merge into a single
corporation which shall be one of the constituent corporations or may consolidate into a new single
corporation which shall be the consolidated corporation.
The board of directors or trustees of each corporation, party to the merger or consolidation, shall
approve a plan of merger or consolidation setting forth the following:
1. The names of the corporations proposing to merge or consolidate, hereinafter referred to as the
constituent corporations;
2. The terms of the merger or consolidation and the mode of carrying the same into effect;
3. A statement of the changes, if any, in the articles of incorporation of the surviving corporation in case
of merger; and, with respect to the consolidated corporation in case of consolidation, all the statements
required to be set forth in the articles of incorporation for corporations organized under this Code; and
4. Such other provisions with respect to the proposed merger or consolidation as are deemed necessary
or desirable. (n)
Section 77. Stockholders or members approval. Upon approval by majority vote of each of the board
of directors or trustees of the constituent corporations of the plan of merger or consolidation, the same
shall be submitted for approval by the stockholders or members of each of such corporations at separate
corporate meetings duly called for the purpose. Notice of such meetings shall be given to all stockholders
or members of the respective corporations, at least two (2) weeks prior to the date of the meeting, either
personally or by registered mail. Said notice shall state the purpose of the meeting and shall include a
copy or a summary of the plan of merger or consolidation. The affirmative vote of stockholders
representing at least two-thirds (2/3) of the outstanding capital stock of each corporation in the case of
stock corporations or at least two-thirds (2/3) of the members in the case of non-stock corporations shall
be necessary for the approval of such plan. Any dissenting stockholder in stock corporations may exercise
his appraisal right in accordance with the Code: Provided, That if after the approval by the stockholders
of such plan, the board of directors decides to abandon the plan, the appraisal right shall be
extinguished.
Any amendment to the plan of merger or consolidation may be made, provided such amendment is
approved by majority vote of the respective boards of directors or trustees of all the constituent
corporations and ratified by the affirmative vote of stockholders representing at least two-thirds (2/3) of
the outstanding capital stock or of two-thirds (2/3) of the members of each of the constituent
corporations. Such plan, together with any amendment, shall be considered as the agreement of merger
or consolidation. (n)
Section 78. Articles of merger or consolidation. After the approval by the stockholders or members as
required by the preceding section, articles of merger or articles of consolidation shall be executed by
each of the constituent corporations, to be signed by the president or vice-president and certified by the
secretary or assistant secretary of each corporation setting forth:
1. The plan of the merger or the plan of consolidation;
2. As to stock corporations, the number of shares outstanding, or in the case of non-stock corporations,
the number of members; and
3. As to each corporation, the number of shares or members voting for and against such plan,
respectively. (n)
Section 79. Effectivity of merger or consolidation. The articles of merger or of consolidation, signed
and certified as herein above required, shall be submitted to the Securities and Exchange Commission in
quadruplicate for its approval: Provided, That in the case of merger or consolidation of banks or banking
institutions, building and loan associations, trust companies, insurance companies, public utilities,
educational institutions and other special corporations governed by special laws, the favorable
recommendation of the appropriate government agency shall first be obtained. If the Commission is
satisfied that the merger or consolidation of the corporations concerned is not inconsistent with the
provisions of this Code and existing laws, it shall issue a certificate of merger or of consolidation, at
which time the merger or consolidation shall be effective.
If, upon investigation, the Securities and Exchange Commission has reason to believe that the proposed
merger or consolidation is contrary to or inconsistent with the provisions of this Code or existing laws, it
shall set a hearing to give the corporations concerned the opportunity to be heard. Written notice of the
date, time and place of hearing shall be given to each constituent corporation at least two (2) weeks
before said hearing. The Commission shall thereafter proceed as provided in this Code. (n)
1. Prepare plan of merger, which must contain:
a. Names of constituent corporations
b. Terms that must be changed in AOI of surviving corporation (merger) or what
needs to be stated in new corporation (consolidation), most importantly
i. Who is surviving corporation in merger
ii. Swap ratio (how many shares in the surviving corp the former stockholders
of the absorbed corporation get in exchange for their old shares) e.g. .9 BDO
shares = 1 Equitable share
1. Determined in the negotiations, based on value
iii. Other things
1. Name (keep old name or change the name?)
2. Principal office
c. Terms and conditions to carry out merger
d. Such other matters as necessary to carry out merger or consolidation
2. Approval of Merger/Consolidation Plan by boards of each corporation by a majority of
entire board of each corporation at a meeting called for that purpose required.
3. Submission to stockholders for approval
a. 2/3 OCS, including preferred shares.
b. at a meeting called for that purpose,
i. 2 meetings, one for each corporation. No joint meeting allowed.
c. after notice 2 weeks prior,
d. notice includes the plan of merger
4. Execution of formal contract, called the articles of merger, signed by president and
corpsec of each corporation, which must contain:
a. The plan of the merger or the plan of 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.
d. For banks, building and loan associations, trust companies, insurance companies,
public utilities, educational institutions and other special corporations governed by
special laws requires approval of proper government body.
5. Submission to SEC for approval
6. SEC hearing, if upon investigation, it appears that contrary to or inconsistent with the
code or other laws, upon 2 weeks notice.
7. Issuance of certificate of merger or consolidation
No liquidation procedure because assets and liabilities automatically transferred to the
surviving corp without additional act or deed
b. Effectivity
The merger or consolidation is only effective upon the issuance of the certificate of merger or
consolidation.
While the Monetary Board recognized the merger, the merger is still incomplete without the
issuance of a certificate of merger by the SEC. Such issuance marks the moment when the
consequences of a merger take place. (Mindanao II v. Willkom)
c. Limitations
Nothing provided, but I guess:
Must get approval of appropriate government agencies
Must follow procedure
Must be between 2 corporations. Partnership cannot merge with corporation.
d. Effects of merger or consolidation
Section 80. Effects of merger or consolidation. The merger or consolidation shall have the following
effects:
1. The constituent corporations shall become a single corporation which, in case of merger, shall be the
surviving corporation designated in the plan of merger; and, in case of consolidation, shall be the
consolidated corporation designated in the plan of consolidation;
2. The separate existence of the constituent corporations shall cease, except that of the surviving or the
consolidated corporation;
3. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and
powers and shall be subject to all the duties and liabilities of a corporation organized under this Code;
4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights,
privileges, immunities and franchises of each of the constituent corporations; and all property, real or
personal, and all receivables due on whatever account, including subscriptions to shares and other
choses in action, and all and every other interest of, or belonging to, or due to each constituent
corporation, shall be deemed transferred to and vested in such surviving or consolidated corporation
without further act or deed; and
5. The surviving or consolidated corporation shall be responsible and liable for all the liabilities and
obligations of each of the constituent corporations in the same manner as if such surviving or
consolidated corporation had itself incurred such liabilities or obligations; and any pending claim, action
or proceeding brought by or against any of such constituent corporations may be prosecuted by or
against the surviving or consolidated corporation. The rights of creditors or liens upon the property of
any of such constituent corporations shall not be impaired by such merger or consolidation. (n)
Effects: SC-PAL
1. Constitutent corps. Become the Single corporation.
2. Constituent corps. Cease to exist except surviving corps.
3. Surviving corp can acquire, possess, Properties.
4. Assets of absorbed corp, interests thereto are deemed transferred to surviving.
a. (bar) No liquidation required because the law says without any further act or
deed. (Assoc. Bank v CA)
i. While merger is a form of dissolution, no need to undertake liquidation
procedures.
b. (bar) How about liabilities due after merger? Still payable? TO whom? Yes, still
payable, to surviving corp. (id.)
c. RD refuses to register transfer to surivivng corp, without need to make transfer
deeds. Wrong, based on Sec. 80.
5. Liabilities are assumed by surviving corp.
a. as if incurred directly by surviving corp.
b. Claims for or against
i. Includes garnishment (Citytrust)
ii. Can debtor claim novation? No (Babst v CA)
Although there is a dissolution of the absorbed corporations, there is no winding up of their
affairs or liquidation of their assets, because the surviving corporation automatically
acquires all their rights, privileges and powers, as well as their liabilities. The fact that the
promissory note was executed after the effectivity date of the merger does not militate
against petitioner because the agreement itself clearly provides that all contracts --
irrespective of the date of execution -- entered into in the name of the absorbed corporation
shall be understood as pertaining to the surviving bank, herein petitioner. (Associated
 Bank vs. Court of Appeals and Lorenzo Sarmiento, Jr.,G.R. No. 123793, June 29,
1998)
Citytrust, therefore, upon service of the notice of garnishment and its acknowledgment that
it was in possession of defendants' deposit accounts became a "virtual party" to or a "forced
intervenor" in the civil case. As such, it became bound by the orders and processes issued by
the trial court despite not having been properly impleaded therein. Consequently, by virtue
of its merger with BPI , the latter, as the surviving corporation, effectively became the
garnishee, thus the "virtual party" to the civil case. Bank of Philippine Islands v. Lee,
G.R. No. 190144, August 1, 2012
i. As to employment after merger
Merger in itself is not a ground for termination, but because of the absorption, redundancy will
occur and the latter is a ground for termination.
Terms of employment must be in accordance with CBA of surviving corporation
Includes separation pay.
Not assets or liabilities
Employees are not assets or liabilities; they are human beings. It is contrary to public policy
to declare the former employees of the absorbed corporation as forming part of its assets or
liabilities that were transferred to and absorbed by the surviving corporation in the Articles
of Merger. Assets and liabilities, in this instance, should be deemed to refer only to property
rights and obligations and do not include the employment contracts of its personnel.
The CC does not mandate the absorption of the employees of the non-surviving corporation
by the surviving corporation in the case of a merger.
A corporation cannot unilaterally transfer its employees to another employer like chattel.
Certainly, if the surviving corporation as an employer had the right to choose who to retain
among the employees of the absorbed corporation, the latter employees had the concomitant
right to choose not to be absorbed by the corporation. Even though the employees of the
absorbed corporation had no choice or control over the merger of their employer, they had a
choice whether or not they would allow themselves to be absorbed by the surviving
corporation. Certainly nothing prevented the employees of the absorbed corporation from
resigning or retiring and seeking employment elsewhere instead of going along with the
proposed absorption. (BPI v BPIEU)
NB. on MR, the SC ruled that the employees of the absorbed corporation should be
considered the employees of the sruving corporation even int eh absence of a provision in
the merger.
b. As to obligations and liabilities
5. The surviving or consolidated corporation shall be responsible and liable for all the liabilities and
obligations of each of the constituent corporations in the same manner as if such surviving or
consolidated corporation had itself incurred such liabilities or obligations; and any pending claim, action
or proceeding brought by or against any of such constituent corporations may be prosecuted by or
against the surviving or consolidated corporation. The rights of creditors or liens upon the property of
any of such constituent corporations shall not be impaired by such merger or consolidation. (n)
Surviving Corp. bound to assume obligations and liabilities of each of the constituent
corporations, as if it had itself incurred such liabilities or obligations.
Any pending claims, actions, or proceedings by or against a constituent corporation may be
prosecuted by or against the surviving corporation.
Neither shall the creditors rights or liens be affected by the merger or consolidation.
Even without dissolution, all contracts of the absorbed corporation, regardless of the date of
execution, pertain to the surviving corporation (Assoc Bank v. CA)
 The fact that the obligation was entered into after the effectivity date of the merger does
not militate against petitioner because the agreement itself clearly provides that all
contracts -- irrespective of the date of execution -- entered into in the name of the
absorbed corporation shall be understood as pertaining to the surviving bank (id)
e. De Facto Mergers
Aside from mergers de jure, which conform with all the requirements, corporations may enter
into other combinations, such as:
(1) Stock saleswhere a corporation acquires all the shares of another, and
(2) Asset saleswhere a corporation only acquires all the assets of another.
(3) Business enterprise acquisitionwhere the transferee merely continues the same
business of the transferor since he obtains the earning capability of the venture.
Where the purchase and sale of identified assets between two companies under a Purchase
and Sale Agreement does not constitute a merger, the seller and the purchaser are
considered entities different from one another. Thus, the purchaser company can not be held
liable for the payment of deficiency documentary stamp tax against the seller company.
Commission of Internal Revenue vs, Bank of Commerce, GR No. 180529, November
25, 2013
i. Effects of Stock and Asset sales
The Stock sale does not affect the corporations existence. The only difference is a change in
the controlling stockholder.
In contrast, in an asset sale, a new corporation acquires the assets. As to the selling
corporation, it remains the same. While it sells all its assets, it is not thereby dissolved.
Buyer corporation not bound to absorb liabilities and obligations of seller, except
Merger or consolidation
Stipulated
Bad faith
If piercing the veil applicable.
b. As to employees
Stock sales do not affect the juridical personality. Thu, the employment contracts of the
corporation subsist.
In asset sales, the buyer is under no obligation to hire the employees of the selling
corporation. However, the selling corporation, if it chooses to dissolve, must pay separation
pay to its employees.
4. Involuntary Dissolution
Section 121. Involuntary dissolution. A corporation may be dissolved by the Securities and Exchange
Commission upon filing of a verified complaint and after proper notice and hearing on the grounds
provided by existing laws, rules and regulations. (n)

a. Expiration of term
This happens automatically upon expiration of term without extension.
See supra.
But recall that extension must be made during the lifetime of the corporation. It cannot be
allowed after the term already expires, as by that point there is no corporate existence to
extend. (SEC v. Alhambra Cigar)
b. Failure to organize within 2 years
Section 22. Effects on non-use of corporate charter and continuous inoperation of a corporation. If a
corporation does not formally organize and commence the transaction of its business or the construction
of its works within two (2) years from the date of its incorporation, its corporate powers cease and the
 corporation shall be deemed dissolved. However, if a corporation has commenced the transaction of its
business but subsequently becomes continuously inoperative for a period of at least five (5) years, the
same shall be a ground for the suspension or revocation of its corporate franchise or certificate of
incorporation. (19a)
This provision shall not apply if the failure to organize, commence the transaction of its businesses or the
construction of its works, or to continuously operate is due to causes beyond the control of the
corporation as may be determined by the Securities and Exchange Commission.
Generally, if a corporation fails to formally organize and commence the transaction of its
business within 2 years from the date of its incorporation, its corporate powers cease and
the corporation is deemed dissolved.
However if the failure to organize is for causes beyond its control, as determined by the
SEC, the corporation is not dissolved.
c. Non-user for at least 5 years.
Likewise, and subject to the same exception, if a corporation has commenced its business, but
subsequently becomes continuously inoperative for 5 years, the corporate franchise or
certificate or incorporation may be suspended or revoked.
d. Order of SEC decreeing dissolution(Sec. 22 and PD 902-A)
The SEC may order the dissolution of a corporation on the ff. grounds:
i. Non-submission of by-laws
ii. Fraud in procuring the certificate of incorporation
iii. Failure to file reports reqd by Corpo Code, any law and SEC.
1. F/S, yearly
2. GIS, 30 days from election
3. Affidavit of non-operation
iv. Misrepresentation of purpose
v. Failure to organize business for 2 years after incorporation
vi. Continuous non-operation for 5 years.
vii. Non-compliance with laws and orders of the SEC.
e. Legislative dissolution.
This usually refers to public corporations with original charters, as Congress dissolves them by
repealing the charter.
However, in theory, Congress can dissolve all private corporations by repealing the
Corporation Code.
f. Quo Warranto by OSGjudicial decree
As previously discussed, the OSG may institute a quo warranto proceeding to dissolve a de facto
corporation.
g. Relief of creditors
Creditors cannot petition for dissolution, but can file for insolvency or rehabilitation.
h. Piercing the veil not a ground for dissolution
Piercing the veil is not a ground for dissolution. Only a disregard of separate corporate
existence for a specific transaction. Legal personality subsists after that transaction.
iv. Liquidation
Section 122. Corporate liquidation. Every corporation whose charter expires by its own limitation or is
annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any
other manner, shall nevertheless be continued as a body corporate for three (3) years after the time when
it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and
enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets,
but not for the purpose of continuing the business for which it was established.
At any time during said three (3) years, the corporation is authorized and empowered to convey all of its
property to trustees for the benefit of stockholders, members, creditors, and other persons in interest.
From and after any such conveyance by the corporation of its property in trust for the benefit of its
stockholders, members, creditors and others in interest, all interest which the corporation had in the
property terminates, the legal interest vests in the trustees, and the beneficial interest in the
stockholders, members, creditors or other persons in interest.
Upon the winding up of the corporate affairs, any asset distributable to any creditor or stockholder or
member who is unknown or cannot be found shall be escheated to the city or municipality where such
assets are located.
Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute
any of its assets or property except upon lawful dissolution and after payment of all its debts and
liabilities. (77a, 89a, 16a)
Liquidation is the process by which all the assets of the corporation are converted into cash in
order to facilitate the payment of obligations to creditors. The remaining balance, if any, is to be
distributed to the stockholders or members.
a. Period for dissolution
Generally, the corporation is given 3 years to dissolve, for a period not exceeding 3 years.
However, if, during the 3 years, the corporation conveys its property to trustees, the
liquidation can extend past 3 years.
The trustee of a dissolved corporation may commence a suit which can proceed to final
judgment even beyond the three-year period of liquidation. No reason can be conceived why
a suit already commenced by the corporation itself during its existence, not by a mere
trustee who, by fiction, merely continues the legal personality of the dissolved corporation,
should not also be allowed to proceed to final judgment and execution thereof. (Knecht v.
Rose Packing)
An existing intra-corporate dispute, which does not constitute a continuation of corporate
business, is not affected by the dissolution of the corporation. The dissolution just means
that it cant continue its business, but all the parties in the litigation are still corporate
actors. They are not made strangers by the dissolution, which also does not terminate
existing causes of action. (Aguirre v. FQB+7)
b. Methods of dissolution
Sec. 119, last par. Upon five (5) days notice, given after the date on which the right to file objections as
fixed in the order has expired, the Commission shall proceed to hear the petition and try any issue made
by the objections filed; and if no such objection is sufficient, and the material allegations of the petition
are true, it 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.
(Rule 104, RCa)
(1) By the corporation itself
(2) By a trustee, if property conveyed thereto within 3 years.
(3) By a management committee or rehabilitation receiver appointed by the SEC.
The word "trustee" as used in the corporation statute must be understood in its general
concept which could include the counsel to whom was entrusted in the instant case, the
prosecution of the suit filed by the corporation. The purpose in the transfer of the assets of
the corporation to a trustee upon its dissolution is more for the protection of its creditor and
stockholders. (Carlos Gelano and Guillermina Mendoza De Gelano vs. CA)
During rehabilitation receivership, the assets are held in trust for the equal benefit of all
creditors to preclude one from obtaining an advantage or preference over another by the
 expediency of an attachment, execution or otherwise. For what would prevent an alert
creditor, upon learning of the receivership, from rushing posthaste to the courts to secure
judgments for the satisfaction of its claims to the prejudice of the less alert creditors.
(Alemar'sSibal& Sons, Inc. vs. Honorable Jesus M. Elbinias, in his capacity as the
Presiding Judge of Regional Trial Court, National Capital Region, Branch CXLI
(141), Makati, and G.A. Yupangco& Co., Inc., G.R. No. 75414 June 4, 1990)
The appointment of a receiver operates to suspend the authority of a corporation and its
directors and officers over its property and effects, such authority being reposed in the
receiver. Thus, a corporate officer had no authority to condone a debt. (Victor Yam &Yek
Sun Lent, doing business under the name and style of Philippine Printing Works vs.
the Court of Appeals and Manphil Investment Corporation, G.R. No. 104726,
February 11, 1999)
c. Procedure
1. Inventory assets
2. Liquidate
3. Pay creditors
4. Distibute residuals to stockholders
a. Sometimes preferred shares preferred in liquidating dividends.
b. Specific property can be given to one person as his just share
c. Corporate property can be co-owned by stockholders as their just share
d. However, the SEC CANT take the corporate property.
e. Also, no dividend tax, because while theyre called liquidating dividends, its just a
return of capital and not income.
i. HOWEVER, the GAIN of the stockholder is taxable. (Additional amount
received over investment)
5. No stockholders? Escheat
d. Agents of Liquidation
1. Trustee
a. Appointed by Corporation
b. Assets conveyed to trustee
c. Legal title vests in trustee
d. Importance: 3 year period only applies to vesting assets to trustee. But trustee can
carry out liquidation past the 3-year period.
i. What if no trustee appointed? Corporation itself (SEC v Alhambra Cigar;
Gelano v SEC)
2. Receiver
a. Court appoints receiver.
3. Corporation itself.
3-year period is a dream. It never happens in that time.
e. Jurisdiction over Corporate Liquidation
Under the Financial Rehabiliation and Insolvency Act, the RTC now has jurisdiction over
corporate liquidation.
While the SEC has jurisdiction to order the dissolution of a corporation, jurisdiction over the
liquidation of the corporation now pertains to the appropriate regional trial courts.
This is the correct procedure because the liquidation of a corporation requires the
settlement of claims for and against the corporation, which clearly falls under the
jurisdiction of the regular courts. The trial court is in the best position to convene all the
creditors of the corporation, ascertain their claims, and determine their preferences. (BPI v.
Hong)
 n. Special Corporations
1. Close Corporations
TITLE XII
CLOSE CORPORATIONS
Section 96. Definition and applicability of Title. - A close corporation, within the meaning of this Code, is
one whose articles of incorporation provide that: (1) All the corporations issued stock of all classes,
exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not
exceeding twenty (20); (2) all the issued stock of all classes shall be subject to one or more specified
restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock
exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a
corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its voting stock or
voting rights is owned or controlled by another corporation which is not a close corporation within the
meaning of this Code.
Any corporation may be incorporated as a close corporation, except mining or oil companies, stock
exchanges, banks, insurance companies, public utilities, educational institutions and corporations
declared to be vested with public interest in accordance with the provisions of this Code.
The provisions of this Title shall primarily govern close corporations: Provided, That the provisions of
other Titles of this Code shall apply suppletorily except insofar as this Title otherwise provides.
A close corporation is a corporation whose AOI provides for the features of a close
corporation under Sec. 96 of the CC, namely
(1) All the corporations issued stock of all classes, exclusive of treasury shares, shall be
held of record by not more than a specified number of persons, not exceeding twenty
(20);
(2) All the issued stock of all classes shall be subject to one or more specified restrictions on
transfer permitted by this Title; and
(3) The corporation shall not list in any stock exchange or make any public offering of any of
its stock of any class.
It is not the number of shareholders, but the existence of the characteristics of close corps
under the CC which determines if a corp is a close corp. (San Juan v CA)
Generally, close corporations are subject to the same laws as regular corporations, except
for the special rules to be discussed in this section.
a. When not a close corporation
Even if the 3 characteristics are provided for, the corporation is not a close one if 2/3 of its
voting stock or voting righs are owned and controlled by another corporation, which is
an open corporation.
b. What corporations may not be close corporations
MOSBIPEP:
(1) Mining
(2) Oil
(3) Stock Exchange
(4) Banks
(5) Insurance company
(6) Public Utility
(7) Educational, and
(8) Corporations imbued with public interest.
c. Allowable provisions in the AOI of a close corporation
Section 97. Articles of incorporation. The articles of incorporation of a close corporation may provide:
1. For a classification of shares or rights and the qualifications for owning or holding the same and
restrictions on their transfers as may be stated therein, subject to the provisions of the following section;
2. For a classification of directors into one or more classes, each of whom may be voted for and elected
solely by a particular class of stock; and
3. For a greater quorum or voting requirements in meetings of stockholders or directors than those
provided in this Code.
The articles of incorporation of a close corporation may provide that the business of the corporation shall
be managed by the stockholders of the corporation rather than by a board of directors. So long as this
provision continues in effect:
1. No meeting of stockholders need be called to elect directors;
2. Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed to
be directors for the purpose of applying the provisions of this Code; and
3. The stockholders of the corporation shall be subject to all liabilities of directors.
The articles of incorporation may likewise provide that all officers or employees or that specified officers
or employees shall be elected or appointed by the stockholders, instead of by the board of directors.
The AOI of a close corporation, unlike that of an open one, may provide:
(1) For a classification of shares and qualifications for owning or holding the same
subject to restrictions, infra.
(2) For a classification of directors into one or more classes, each of whom may be
voted for and elected solely by a particular class of stock,
(3) For a greater quorum or voting requiremetns in meetings of stockholders or
directors,
(4) That all officers or employees or specified officers or employees shall be elected or
appointed by the stockholders instead of the directors, and
(5) That the management of the business of the corporation will be managed directly
by the stockholders rather than by a board of directors.
i. Effects of direct management
(1) No stockholders meeting needs to be called to elect directors
(2) Unless the context clearly requires otherwise, the stockholders of the corporation shall
be deemed to be directors for the purposes of the Code, and
(3) The stockholders of the corporation shall be subject to all liabilities of directors.
d. Restrictions on transfers of shares
Section 98. Validity of restrictions on transfer of shares. Restrictions on the right to transfer shares
must appear in the articles of incorporation and in the by-laws as well as in the certificate of stock;
otherwise, the same shall not be binding on any purchaser thereof in good faith. Said restrictions shall
not be more onerous than granting the existing stockholders or the corporation the option to purchase
the shares of the transferring stockholder with such reasonable terms, conditions or period stated
therein. If upon the expiration of said period, the existing stockholders or the corporation fails to exercise
the option to purchase, the transferring stockholder may sell his shares to any third person.
Restrictions on transfer
1. Must be in AOI, BL, and stock certificate
2. Cannot be more onerous than the right of first refusal, subject to terms and conditions
and a period provided therein.
3. If upon the expiration of the period, the existing stockholders or the corporation fail to
exercise the option, the transferring stockholder may sell his shares to any person.
Rules on restrictions:
a. Requiring consent, void. More onerous than RFR
b. Can only disposed of to relatives up to 3rd degree, void.
i. Reconcile with provisions that close corporations can restrict ownership of certain
types of sharesvalid classification of shares means you can impose qualifications for
initial owners, but if there is a restriction of transfer as to who can buy, then void.
c. Pricing proviso, whereby an amount by which an existing SHolder can buy shares to be
transferred, valid.
e. Effect of breach of restrictions of transfer
Section 99. Effects of issuance or transfer of stock in breach of qualifying conditions. -
1. If stock of a close corporation is issued or transferred to any person who is not entitled under any
provision of the articles of incorporation to be a holder of record of its stock, and if the certificate for
such stock conspicuously shows the qualifications of the persons entitled to be holders of record thereof,
such person is conclusively presumed to have notice of the fact of his ineligibility to be a stockholder.
2. If the articles of incorporation of a close corporation states the number of persons, not exceeding
twenty (20), who are entitled to be holders of record of its stock, and if the certificate for such stock
conspicuously states such number, and if the issuance or transfer of stock to any person would cause the
stock to be held by more than such number of persons, the person to whom such stock is issued or
transferred is conclusively presumed to have notice of this fact.
3. If a stock certificate of any close corporation conspicuously shows a restriction on transfer of stock of
the corporation, the transferee of the stock is conclusively presumed to have notice of the fact that he has
acquired stock in violation of the restriction, if such acquisition violates the restriction.
4. Whenever any person to whom stock of a close corporation has been issued or transferred has, or is
conclusively presumed under this section to have, notice either (a) that he is a person not eligible to be a
holder of stock of the corporation, or (b) that transfer of stock to him would cause the stock of the
corporation to be held by more than the number of persons permitted by its articles of incorporation to
hold stock of the corporation, or (c) that the transfer of stock is in violation of a restriction on transfer of
stock, the corporation may, at its option, refuse to register the transfer of stock in the name of the
transferee.
5. The provisions of subsection (4) shall not be applicable if the transfer of stock, though contrary to
subsections (1), (2) or (3), has been consented to by all the stockholders of the close corporation, or if the
close corporation has amended its articles of incorporation in accordance with this Title.
6. The term "transfer", as used in this section, is not limited to a transfer for value.
7. The provisions of this section shall not impair any right which the transferee may have to rescind the
transfer or to recover under any applicable warranty, express or implied.
If the stock certificate shows the qualifications to be a stockholder, the maximum number of
stockholders, or any restrictions on transfer of stock, the transferee thereof is conclusively
presumed to have notice of these restrictions.
If a person is conclusively presumed to have notice of the restrictions, the corporation may
refuse to register the transfer of stock in the name of the transferee.
However, if the transfer is consented to by all stockholders, or the AOI has been
amended, the transfer may be registered.
These rules apply even to transfers not for value.
And they shall not prevent the transferee to rescind the transfer for violation of any
warranties.
f. Agreements by Stockholders.
Section 100. Agreements by stockholders. -
1. Agreements by and among stockholders executed before the formation and organization of a close
corporation, signed by all stockholders, shall survive the incorporation of such corporation and shall
continue to be valid and binding between and among such stockholders, if such be their intent, to the
extent that such agreements are not inconsistent with the articles of incorporation, irrespective of where
the provisions of such agreements are contained, except those required by this Title to be embodied in
said articles of incorporation.
2. An agreement between two or more stockholders, if in writing and signed by the parties thereto, may
provide that in exercising any voting rights, the shares held by them shall be voted as therein provided,
or as they may agree, or as determined in accordance with a procedure agreed upon by them.
3. No provision in any written agreement signed by the stockholders, relating to any phase of the
corporate affairs, shall be invalidated as between the parties on the ground that its effect is to make them
partners among themselves.
4. A written agreement among some or all of the stockholders in a close corporation shall not be
invalidated on the ground that it so relates to the conduct of the business and affairs of the corporation as
to restrict or interfere with the discretion or powers of the board of directors: Provided, That such
agreement shall impose on the stockholders who are parties thereto the liabilities for managerial acts
imposed by this Code on directors.
5. To the extent that the stockholders are actively engaged in the management or operation of the
business and affairs of a close corporation, the stockholders shall be held to strict fiduciary duties to each
other and among themselves. Said stockholders shall be personally liable for corporate torts unless the
corporation has obtained reasonably adequate liability insurance.
These are the rules on agreements by stockholders:
(1) Those entered into before the formation and organization of close corporation binds the
corporation if signed by all the stockholders, and if not inconsistent with the AOI.
(2) Stockholders may agree as to how their shares will be voted, or to a procedure in
determining how they will be voted
(3) Stockholders may also make themselves partners among themselves.
(4) Written agreements may relate to the conduct of the business and thereby restrict or
interfere with the discretion or powers of the board, but the parties thereto are liable for
the managerial acts as if they were directors.
(5) Stockholders who take an active management of the business and affairs of the close
corporations have strict fiduciary duties to each other and among themselves. Thus, they
are personally liable for corporate torts. Unless the corporation has adequate liability
insurance.
g. When Acts done without a board meeting valid.
Section 101. 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.
So in a close corp with a board of directors, acts done without a board meeting are 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.
h. When board meeting improperly held
If a directors meeting is held without proper call or notice, any actions therein are still valid,
unless a director who failed to attend promptly files his written objection with the secretary of
the corporation after having knowledge thereof.
 When a corporation is classified as a close corporation, a board resolution authorizing the
sale or mortgage of the subject property is not necessary to bind the corporation for the
action of its president. At any rate, corporate action taken at a board meeting without proper
call or notice in a close corporation is deemed ratified by the absent director unless the
latter promptly files his written objection with the secretary of the corporation after having
knowledge of the meeting which, in this case, petitioner failed to do. (Dulay v CA)
i. Pre-emptive right in close corporations
Section 102. Pre-emptive right in close corporations. The pre-emptive right of stockholders in close
corporations shall extend to all stock to be issued, including reissuance of treasury shares, whether
for money, property or personal services, or in payment of corporate debts, unless the articles of
incorporation provide otherwise.

j. Amendment to AOI; Conversion

Section 103. Amendment of articles of incorporation. Any amendment to the articles of incorporation
which seeks to delete or remove any provision required by this Title to be contained in the articles of
incorporation or to reduce a quorum or voting requirement stated in said articles of incorporation shall
not be valid or effective unless approved by the affirmative vote of at least two-thirds (2/3) of the
outstanding capital stock, whether with or without voting rights, or of such greater proportion of shares
as may be specifically provided in the articles of incorporation for amending, deleting or removing any of
the aforesaid provisions, at a meeting duly called for the purpose.
A close corporation may be converted to an open one by amending the AOI to delete any
provisions required of a close corporation.
Thus must be approved by a vote of 2/3 of all the OCS., or whatever proportion the AOI sets.
k. Deadlocks.
Section 104. Deadlocks. Notwithstanding any contrary provision in the articles of incorporation or by-
laws or agreement of stockholders of a close corporation, if the directors or stockholders are so divided
respecting the management of the corporations business and affairs that the votes required for any
corporate action cannot be obtained, with the consequence that the business and affairs of the
corporation can no longer be conducted to the advantage of the stockholders generally, the Securities
and Exchange Commission, upon written petition by any stockholder, shall have the power to arbitrate
the dispute. In the exercise of such power, the Commission shall have authority to make such order as it
deems appropriate, including an order: (1) cancelling or altering any provision contained in the articles of
incorporation, by-laws, or any stockholders agreement; (2) cancelling, altering or enjoining any
resolution or act of the corporation or its board of directors, stockholders, or officers; (3) directing or
prohibiting any act of the corporation or its board of directors, stockholders, officers, or other persons
party to the action; (4) requiring the purchase at their fair value of shares of any stockholder, either by
the corporation regardless of the availability of unrestricted retained earnings in its books, or by the
other stockholders; (5) appointing a provisional director; (6) dissolving the corporation; or (7) granting
such other relief as the circumstances may warrant.
A provisional director shall be an impartial person who is neither a stockholder nor a creditor of the
corporation or of any subsidiary or affiliate of the corporation, and whose further qualifications, if any,
may be determined by the Commission. A provisional director is not a receiver of the corporation and
does not have the title and powers of a custodian or receiver. A provisional director shall have all the
rights and powers of a duly elected director of the corporation, including the right to notice of and to vote
at meetings of directors, until such time as he shall be removed by order of the Commission or by all the
stockholders. His compensation shall be determined by agreement between him and the corporation
subject to approval of the Commission, which may fix his compensation in the absence of agreement or in
the event of disagreement between the provisional director and the corporation.
A deadlock occurs when the directors or stockholders are so divided respecting the
management of the corporations business and affairs that the votes required for any corporate
action cannot be obtained, with the consequence that the business and affairs of the
corporation can no longer be conducted to the advantage of the stockholders generally.
In that case, any stockholder may file a written petition with the SEC
i. Powers of the SEC to arbitrate
(1) The SEC will have the power to arbitrate the dispute. In the exercise of such power, the
Commission shall have authority to make such order as it deems appropriate, including
an order:
a. cancelling or altering any provision contained 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 their fair value of shares of any stockholder, either
by the corporation regardless of the availability of unrestricted retained earnings
in its books, or by the other stockholders;
e. appointing a provisional director, infra:
f. dissolving the corporation; or
g. granting such other relief as the circumstances may warrant.
b. Provisional director
A provisional director shall be an impartial person who is
(1) neither a stockholder nor a creditor of the corporation or of any subsidiary or affiliate of
the corporation, and
(2) whose further qualifications, if any, may be determined by the Commission.
A provisional director is not a receiver of the corporation and does not have the title and
powers of a custodian or receiver.
A provisional director shall have all the rights and powers of a duly elected director of the
corporation, including the right to notice of and to vote at meetings of directors, until such
time as he shall be removed by order of the Commission or by all the stockholders.
His compensation shall be determined by agreement between him and the corporation
subject to approval of the Commission, which may fix his compensation in the absence of
agreement or in the event of disagreement between the provisional director and the
corporation.
l. Withdrawal of stockholder or dissolution of a stockholder.
Section 105. Withdrawal of stockholder or dissolution of corporation. In addition and without prejudice
to other rights and remedies available to a stockholder under this Title, any stockholder of a close
corporation may, for any reason, compel the said corporation to purchase his shares at their fair value,
which shall not be less than their par or issued value, when the corporation has sufficient assets in its
books to cover its debts and liabilities exclusive of capital stock: Provided, That any stockholder of a close
corporation may, by written petition to the Securities and Exchange Commission, compel the dissolution
of such corporation whenever any of acts of the directors, officers or those in control of the corporation is
illegal, or fraudulent, or dishonest, or oppressive or unfairly prejudicial to the corporation or any
stockholder, or whenever corporate assets are being misapplied or wasted.
Any stockholder of a close corporation, for any reason, may avail himself of the ff. remedies:
(1) Withdraw from the close corporation by compelling the corporation to purchase
his shares at their fair value
a. The fair value shall not be less than par or issued value.
b. However, in such a case, the corporation must have sufficient assets in its books to
cover its debts and liabilities exclusive of capital stock.
 (2) Compel the dissolution of the corporation, by written petition with the SEC,
on the ground that (a) the acts of the directors, officers, or those in control of the
corporation are illegal, fraudulent, dishonest, oppressive, or unfairly prejudicial to the
corporation or any stockholder, or (b) corporate assets are being misapplied or wasted.
Ordinary Stock Corporation Close corp.
AOI is normal Must provide
1. Not to be held by more than a certain number of
Stockholders, not to exceed 20
2. Transfer restrictions allowed
3. Shall not be listed, and shall not publicly offer
Further, a corporation which is not a close corp. cannot own
more than 75% of the OCS
No limit to number of corporators Not more than 20, according to AOI
allowed by authorized shares.
May list in PSE May not list on PSE
In general, all businesses may be MOSBIPEP (see below) cannot be organized as close corp.
carried out by corporation
Powers exercised by board, elected Stockholders may manage affairs directly, subject to the
by stockholders same rights and liabilities of directors.
Pre-emptive right subject to Sec. 39 No limit to pre-emptive rights. Thus, includes sale of
limitations treasury shares and for acquisition of properties.
Appraisal right must be for reasons Appraisal right can be for any cause. And no need for URE,
listed in the code so long as the corporation would not thereby become
insolvent.
Dissolution must comply with all Any stockholder may petition for dissolution for stated
the requirements grounds.
SEC may not regulate if purpose SEC may intervene in management of corp. in case of
not illegal deadlocks.
No classification of directors May classify directors
BOD elects directors SHolders, as directors, directly elect officers
Must have URE to buy own shares No need for URE to acquire shares if ordered by SEC in
intra-corporate deadlock
No arbitration in case of intra- Arbitration allowed.
corporate deadlock
Participation of Sholders.
Reconcile:
1. If SHolders not directors interfere in management, such sholders shall have rights and
liabilities of directors.
2. But in close corps, sholders acting as directors are liable for corporate torts, unless they
have obtained adequate liability insurance coverage. (Naguiat v NLRC)
If corporate tort, no. 2 applies, but personal rights and liabilities, apply no. 1,
ii. Non-Stock Corporations
NON-STOCK CORPORATIONS
Section 87. Definition. For the purposes of this Code, a non-stock corporation is one where no part of
its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of
this Code on dissolution: Provided, That any profit which a non-stock corporation may obtain as an
incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose
or purposes for which the corporation was organized, subject to the provisions of this Title.
The provisions governing stock corporation, when pertinent, shall be applicable to non-stock
corporations, except as may be covered by specific provisions of this Title. (n)
A non-stock corporation is one where no part of its income is distributable as dividends to its
members, trustees, or officers, except as liquidating dividends.
 Its generally governed by the same rules weve spent over a hundred pages on, except as
were about to discuss.
a. Treatment of profits
Despite the fact that the income of a non-stock corporation cannot be distributed as dividends,
it doesnt mean that it cant make profits.
However, any profit which a non-stock corporation may obtain as an incident to its
operations, shall, whenever necessary or proper, be used for the furtherance of the purposes
for which the corporation was organized. On that.
b. Purposes
Section 88. Purposes. Non-stock corporations may be formed or organized for charitable, religious,
educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes,
like trade, industry, agricultural and like chambers, or any combination thereof, subject to the special
provisions of this Title governing particular classes of non-stock corporations. (n)
Non-stock corporations may be organized for the ff. purposes:
(1) Charitable
(2) Religious
(3) Educational
(4) Professional
(5) Cultural
(6) Fraternal
(7) Literary
(8) Scientific
(9) Social
(10) Civic service, or
(11) Similar purposes, like trade, industrial, agricultural, and like chambers, or
(12) Any combination thereof.
However, a corporation, thanks to the Constitution, cant be formed for political purposes.
So basically, non-stocks can be formed for any purpose except profit and political purposes.
c. Conversion to and from non-stock corporation
A stock corporation can be converted to a non-stock corporation by mere amendment of the
AOI. In that case, the stockholders will become the members of the non-stock corporation and
will no longer have any pecuniary interest therein.
In contrast, a non-stock corporation cannot be converted to a stock corporation, because
the conversion would change the nature from non-profit to profit. This would be tantamount
to distribution of the assets contributed by the members .
Instead, the members can dissolve the non-stock corporation and form a stock corporation
instead.
d. Members
i. Voting rights
CHAPTER I
MEMBERS
Section 89. Right to vote. The right of the members of any class or classes to vote may be limited,
broadened or denied to the extent specified in the articles of incorporation or the by-laws. Unless so
limited, broadened or denied, each member, regardless of class, shall be entitled to one vote.
Unless otherwise provided in the articles of incorporation or the by-laws, a member may vote by proxy in
accordance with the provisions of this Code. (n)
Voting by mail or other similar means by members of non-stock corporations may be authorized by the
by-laws of non-stock corporations with the approval of, and under such conditions which may be
prescribed by, the Securities and Exchange Commission.
Unlike stockholders, members of non-stock corporations:
May be denied the right to vote, or may have that right limited or broadened.
Vote directly, not cumulatively, unless otherwise provided.
May vote by mail or other similar means, except in mergers and consolidations, which must
still be at meetings for the purpose.
b. Non-transferability of membership
Section 90. Non-transferability of membership. Membership in a non-stock corporation and all rights
arising therefrom are personal and non-transferable, unless the articles of incorporation or the by-laws
otherwise provide. (n)
Thus, unlike stockholders, members cannot transfer their membership, unless otherwise
provided by the AOI or the by-laws.
c. Termination of membership
Section 91. Termination of membership. Membership shall be terminated in the manner and for the
causes provided in the articles of incorporation or the by-laws. Termination of membership shall have the
effect of extinguishing all rights of a member in the corporation or in its property, unless otherwise
provided in the articles of incorporation or the by-laws. (n)
Finally, unlike stockholders, membership in a non-stock corporation may be terminated for
causes provided for in the AOI or the by-laws.
Termination of membership shall extinguish all the rights of a member in the corporation or
its property.
For example, a non-stock corporation can terminate a membership for failure to pay
membership dues. (Calatagan v. Clemente)
A religious corporation can kick out a heathen member for teaching against the beliefs of the
church. (Long v. Basa)
e. Trustees and Officers
CHAPTER II
TRUSTEES AND OFFICES
Section 92. Election and term of trustees. Unless otherwise provided in the articles of incorporation or
the by-laws, the board of trustees of non-stock corporations, which may be more than fifteen (15) in
number as may be fixed in their articles of incorporation or by-laws, shall, as soon as organized, so
classify themselves that the term of office of one-third (1/3) of their number shall expire every year; and
subsequent elections of trustees comprising one-third (1/3) of the board of trustees shall be held annually
and trustees so elected shall have a term of three (3) years. Trustees thereafter elected to fill vacancies
occurring before the expiration of a particular term shall hold office only for the unexpired period.
No person shall be elected as trustee unless he is a member of the corporation.
Unless otherwise provided in the articles of incorporation or the by-laws, officers of a non-stock
corporation may be directly elected by the members. (n)
Section 138. Designation of governing boards. The provisions of specific provisions of this Code to the
contrary notwithstanding, non-stock or special corporations may, through their articles of incorporation
or their by-laws, designate their governing boards by any name other than as board of trustees. (n)
First thing first, the board of directors is now the board of trustees.
There can be more than 15 of them.
Also, their terms are 3 years, rather than 1. And theyre supposed to rotate in thirds. So 1/3
of the terms expire every year.
The only qualification is that they have to be members.
However, the non-stock corporations can call the board of trustees something else, like
board of regents or some other stupid name like that.
As to officers, since theres nothing else provided, there must still be a President, Secretary,
Treasurer.
Unless otherwise provided, the officers may be directly elected by the members.
Alternative means of voting are allowed.
Thus, voting by district in a national non-stock religious corporation is valid. (Ao-as v. CA)
The second paragraph of Section 108 of the Corporation Code, although setting the term of
the members of the Board of Trustees at five years, contains a proviso expressly subjecting
the duration to what is otherwise provided in the articles of incorporation or by-laws of the
educational corporation. In AUPs case, its amended By-Laws provided that members of the
Board of Trustees were to serve a term of office of only two years; and the officers, who
included the President, were to be elected from among the members of the Board of
Trustees during their organizational meeting, which was held during the election of the
Board of Trustees every two years. Naturally, the officers, including the President, were to
exercise the powers vested by Section 2 of the amended By-Laws for a term of only two
years, not five years. (PetroniloJ. Barayuga vs. Adventist University of the Philippines)
f. Place of meetings.
Section 93. Place of meetings. The by-laws may provide that the members of a non-stock corporation
may hold their regular or special meetings at any place even outside the place where the principal
office of the corporation is located: Provided, That proper notice is sent to all members indicating the
date, time and place of the meeting: and Provided, further, That the place of meeting shall be within the
Philippines. (n)
So the meetings may be held anywhere, so long as there is notice.
g. Distribution of Assets in Non-stock Corporations
CHAPTER III
DISTRIBUTION OF ASSETS IN NON-STOCK CORPORATIONS
Section 94. Rules of distribution. In case dissolution of a non-stock corporation in accordance with the
provisions of this Code, its assets shall be applied and distributed as follows:
1. All liabilities and obligations of the corporation shall be paid, satisfied and discharged, or adequate
provision shall be made therefore;
2. Assets held by the corporation upon a condition requiring return, transfer or conveyance, and which
condition occurs by reason of the dissolution, shall be returned, transferred or conveyed in accordance
with such requirements;
3. Assets received and held by the corporation subject to limitations permitting their use only for
charitable, religious, benevolent, educational or similar purposes, but not held upon a condition requiring
return, transfer or conveyance by reason of the dissolution, shall be transferred or conveyed to one or
more corporations, societies or organizations engaged in activities in the Philippines substantially similar
to those of the dissolving corporation according to a plan of distribution adopted pursuant to this
Chapter;
4. Assets other than those mentioned in the preceding paragraphs, if any, shall be distributed in
accordance with the provisions of the articles of incorporation or the by-laws, to the extent that the
articles of incorporation or the by-laws, determine the distributive rights of members, or any class or
classes of members, or provide for distribution; and
5. In any other case, assets may be distributed to such persons, societies, organizations or corporations,
whether or not organized for profit, as may be specified in a plan of distribution adopted pursuant to this
Chapter. (n)
The assets of a non-stock corporation, upon dissolution, shall be distributed in the following
order:
(1) Applied to the liabilities and obligations of the corporation
(2) Returned, if subject to a condition thereof upon dissolution
(3) Transferred or conveyed to corporations, societies and organizations formed for the same
purpose, if the assets are only permitted for such purposes
(4) All other assets to be distributed in accordance with the AOI or by-laws.
(5) If no such provision, in accordance with a plan of distribution. On that
i. Plan of Distribution
Section 95. Plan of distribution of assets. A plan providing for the distribution of assets, not
inconsistent with the provisions of this Title, may be adopted by a non-stock corporation in the process of
dissolution in the following manner:
The board of trustees shall, by majority vote, adopt a resolution recommending a plan of distribution and
directing the submission thereof to a vote at a regular or special meeting of members having voting
rights. Written notice setting forth the proposed plan of distribution or a summary thereof and the date,
time and place of such meeting shall be given to each member entitled to vote, within the time and in the
manner provided in this Code for the giving of notice of meetings to members. Such plan of distribution
shall be adopted upon approval of at least two-thirds (2/3) of the members having voting rights present or
represented by proxy at such meeting. (n)
If there is no provision in the AOI and By Laws as to distribution of assets, the board must come
up with a plan of distribution.
It must be approved by a majority vote of the boards, and then by a 2/3 vote of members
having voting rights at a meeting called for that purpose. At that meeting, the voting
members must be present in person or by proxy.
h. Stock v. Non-stock corporations.
Stock Non-Stock
Capital stock divided into shares with authority Nope
to distribute dividends
Stockholders and directors must act in May act by mail or orher similar means, if
meetings in person or by proxy provided in by-laws.
Cumulative voting required by law Cumulative voting only available if provided in
AOI or BL.
15 director max except in merger or May be more than 15
consolidated banks
Term of director 1 year Term is 3 years, 1/3 of the directors must be
elected annually
Meetings must be in city or municipality of May be wherever within the Philippines
principal office, preferably in principal office.
One class must always have complete voting Right to vote of all shares may be denied.
rights
Free transfer of shares. Therefore, membership Nope, unless Articles or by-laws allow it. This is
is not personal to the stockholder. because membership is personal. Transfer
cannot be made without consent of the
corporation.
May always vote by proxy Proxy can be denied.
Upon transfer of share, seller no longer part of Membership may be terminated according to
corporation. Transfer may only be subject to causes provided in by-laws.
restrictions noted down in AOI, BL, and stock
certificate, not more onerous than right of first
refusal.
1. Residual Assets to be distributed to 1. Distributive rights must be spelled out in
stockholder. AOI or approved by 2/3 members.
2. Dissolution in accordance with the Code. Generally, not allowed to participate in
properties.
2. Procedure is different. Properties to be
transferred to other charitable
corporations. Donations to non-stock
conditioned on return upon dissolution
shall be returned.upon dissolution.
.
iii. Foreign Corporations
TITLE XV
FOREIGN CORPORATIONS
Section 123. Definition and rights of foreign corporations. For the purposes of this Code, a foreign
corporation is one formed, organized or existing under any laws other than those of the Philippines and
whose laws allow Filipino citizens and corporations to do business in its own country or state. It shall
have the right to transact business in the Philippines after it shall have obtained a license to transact
business in this country in accordance with this Code and a certificate of authority from the appropriate
government agency. (n)
A foreign corporation is one formed, organized, or existing under laws other than those of the
Philippines.
However, that foreign country must allow Filipino citizens to do business in its country.
It must obtain a license in order to do business in the country.
a. Cf. Philippine National under FIA
Note that under the FIA, a foreign corporation can be a Philippine national, if it is 100% owned
by Filipino citizens.
To be clear, that still makes it a foreign corp, but it can invest as if it were a Filipino
corporation.
b. Bases of Authority over foreign corporations
i. Consent
As you might remember from PRIl, as a rule, a foreign corporation can have no legal existence
or status beyond the bouns of the state or sovereignty in which it was organized.
However, another country, in this case the Philippines, can consent to the existence thereof.
The Philippines consents by granting licenses, infra.
b. Doctrine of doing business
A foreign corporation is subjected to regulation in the Philippines if it is doing business in the
Philippines
Before the FIA, the ff. were the tests of doing business:
(1) The twin characterization test
Under the twin characterization test, the activities of the foreign corporation are scrutinized
under both the
a.) Substance testThe foreign corporation is maintaining or continuing in the Philippines
the body or substance of the business or enterprise for which it was organized or whether it has
substantially retired from it and turned it over to another; and
b.) Continuity test--The foreign corporation is engaged in activities which necessarily imply a
continuity of commercial dealings and arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some of the functions normally incidental to,
and in progressive prosecution of, the purpose and object of its organization. (B. Van Zuiden
Bros., Ltd., v. GTVL Manufacturing Industries, Inc. (G.R. No. 147905, 28 May 2007).
(2) The contract test
In contrast, under the contract test, to be doing or transacting business in the Philippines for
purposes of Section 133 of the Corporation Code, the foreign corporations contracts must be
consummated in the Philippines.
c. FIA definition of doing business
See Foreign Investment Act, infra. For now, this is the list of things that are considered doing
business:
1. Soliciting Orders
 2. Opening offices, whether called branch offices or whatever
3. Appointing distributor or representative in the Philippines domiciled for 180 days or
more.
4. Participating in the management of a domestic corp.
a. ACTIVE participation.
b. If it owns shares in a domestic corporation, not doing business. Thats mere
passive equity investment.
i. The corporation can vote shares, but it cant elect a director to represent it.
5. Any acts that imply commercial dealings to achieve the purpose of its incorporation
c. Necessity for a license to do business
Section 125. Application for a license. A foreign corporation applying for a license to transact business
in the Philippines shall submit to the Securities and Exchange Commission a copy of its articles of
incorporation and by-laws, certified in accordance with law, and their translation to an official language
of the Philippines, if necessary. The application shall be under oath and, unless already stated in its
articles of incorporation, shall specifically set forth the following:
1. The date and term of incorporation;
2. The address, including the street number, of the principal office of the corporation in the country or
state of incorporation;
3. The name and address of its resident agent authorized to accept summons and process in all legal
proceedings and, pending the establishment of a local office, all notices affecting the corporation;
4. The place in the Philippines where the corporation intends to operate;
5. The specific purpose or purposes which the corporation intends to pursue in the transaction of its
business in the Philippines: Provided, That said purpose or purposes are those specifically stated in the
certificate of authority issued by the appropriate government agency;
6. The names and addresses of the present directors and officers of the corporation;
7. A statement of its authorized capital stock and the aggregate number of shares which the corporation
has authority to issue, itemized by classes, par value of shares, shares without par value, and series, if
any;
8. A statement of its outstanding capital stock and the aggregate number of shares which the corporation
has issued, itemized by classes, par value of shares, shares without par value, and series, if any;
9. A statement of the amount actually paid in; and
10. Such additional information as may be necessary or appropriate in order to enable the Securities and
Exchange Commission to determine whether such corporation is entitled to a license to transact business
in the Philippines, and to determine and assess the fees payable.
Attached to the application for license shall be a duly executed certificate under oath by the authorized
official or officials of the jurisdiction of its incorporation, attesting to the fact that the laws of the country
or state of the applicant allow Filipino citizens and corporations to do business therein, and that the
applicant is an existing corporation in good standing. If such certificate is in a foreign language, a
translation thereof in English under oath of the translator shall be attached thereto.
The application for a license to transact business in the Philippines shall likewise be accompanied by a
statement under oath of the president or any other person authorized by the corporation, showing to the
satisfaction of the Securities and Exchange Commission and other governmental agency in the proper
cases that the applicant is solvent and in sound financial condition, and setting forth the assets and
liabilities of the corporation as of the date not exceeding one (1) year immediately prior to the filing of
the application.
Foreign banking, financial and insurance corporations shall, in addition to the above requirements,
comply with the provisions of existing laws applicable to them. In the case of all other foreign
corporations, no application for license to transact business in the Philippines shall be accepted by the
Securities and Exchange Commission without previous authority from the appropriate government
agency, whenever required by law. (68a)
Section 126. Issuance of a license. If the Securities and Exchange Commission is satisfied that the
applicant has complied with all the requirements of this Code and other special laws, rules and
regulations, the Commission shall issue a license to the applicant to transact business in the Philippines
for the purpose or purposes specified in such license. Upon issuance of the license, such foreign
corporation may commence to transact business in the Philippines and continue to do so for as long as it
retains its authority to act as a corporation under the laws of the country or state of its incorporation,
unless such license is sooner surrendered, revoked, suspended or annulled in accordance with this Code
or other special laws.
Within sixty (60) days after the issuance of the license to transact business in the Philippines, the license,
except foreign banking or insurance corporation, shall deposit with the Securities and Exchange
Commission for the benefit of present and future creditors of the licensee in the Philippines, securities
satisfactory to the Securities and Exchange Commission, consisting of bonds or other evidence of
indebtedness of the Government of the Philippines, its political subdivisions and instrumentalities, or of
government-owned or controlled corporations and entities, shares of stock in "registered enterprises" as
this term is defined in Republic Act No. 5186, shares of stock in domestic corporations registered in the
stock exchange, or shares of stock in domestic insurance companies and banks, or any combination of
these kinds of securities, with an actual market value of at least one hundred thousand (P100,000.) pesos;
Provided, however, That within six (6) months after each fiscal year of the licensee, the Securities and
Exchange Commission shall require the licensee to deposit additional securities equivalent in actual
market value to two (2%) percent of the amount by which the licensees gross income for that fiscal year
exceeds five million (P5,000,000.00) pesos. The Securities and Exchange Commission shall also require
deposit of additional securities if the actual market value of the securities on deposit has decreased by at
least ten (10%) percent of their actual market value at the time they were deposited. The Securities and
Exchange Commission may at its discretion release part of the additional securities deposited with it if
the gross income of the licensee has decreased, or if the actual market value of the total securities on
deposit has increased, by more than ten (10%) percent of the actual market value of the securities at the
time they were deposited. The Securities and Exchange Commission may, from time to time, allow the
licensee to substitute other securities for those already on deposit as long as the licensee is solvent. Such
licensee shall be entitled to collect the interest or dividends on the securities deposited. In the event the
licensee ceases to do business in the Philippines, the securities deposited as aforesaid shall be returned,
upon the licensees application therefor and upon proof to the satisfaction of the Securities and Exchange
Commission that the licensee has no liability to Philippine residents, including the Government of the
Republic of the Philippines. (n)
In order to do business in the Philippines, the foreign corporation must acquire a license to do
so.
i. Procedure
(1) A foreign corporation applying for a license to transact business in the Philippines shall
submit to the Securities and Exchange Commission a copy of its articles of
incorporation and by-laws, certified in accordance with law, and their translation to an
official language of the Philippines, if necessary.
(2) The application shall be under oath and, unless already stated in its articles of
incorporation, shall specifically set forth the following:
a. The date and term of incorporation;
b. The address, including the street number, of the principal office of the corporation in
the country or state of incorporation;
c. The name and address of its resident agent authorized to accept summons and
process in all legal proceedings and, pending the establishment of a local office, all
notices affecting the corporation;
d. The place in the Philippines where the corporation intends to operate;
e. The specific purpose or purposes which the corporation intends to pursue in the
transaction of its business in the Philippines: Provided, That said purpose or purposes
are those specifically stated in the certificate of authority issued by the appropriate
government agency;
f. The names and addresses of the present directors and officers of the corporation;
 g. A statement of its authorized capital stock and the aggregate number of shares which
the corporation has authority to issue, itemized by classes, par value of shares, shares
without par value, and series, if any;
h. A statement of its outstanding capital stock and the aggregate number of shares
which the corporation has issued, itemized by classes, par value of shares, shares
without par value, and series, if any;
i. A statement of the amount actually paid in; and
j. Such additional information as may be necessary or appropriate in order to enable the
Securities and Exchange Commission to determine whether such corporation is
entitled to a license to transact business in the Philippines, and to determine and
assess the fees payable.
Attached to the application for license shall be:
a. A duly executed certificate under oath by the authorized official or officials of the
jurisdiction of its incorporation, attesting to the fact that the laws of the country or
state of the applicant allow Filipino citizens and corporations to do business
therein, and that the applicant is an existing corporation in good standing. If such
certificate is in a foreign language, a translation thereof in English under oath of
the translator shall be attached thereto, and
b. A statement under oath of the president or any other person authorized by the
corporation, showing to the satisfaction of the Securities and Exchange
Commission and other governmental agency in the proper cases that the applicant
is solvent and in sound financial condition, and setting forth the assets and
liabilities of the corporation as of the date not exceeding one (1) year immediately
prior to the filing of the application.
Foreign banking, financial and insurance corporations shall, in addition to the above
requirements, comply with the provisions of existing laws applicable to them. In the case of
all other foreign corporations, no application for license to transact business in the
Philippines shall be accepted by the Securities and Exchange Commission without previous
authority from the appropriate government agency, whenever required by law. (68a)
(3) If the SEC is satisfied that the applicant has complied with all the requirements of this
Code and other special laws, rules and regulations, the Commission shall issue a
license to the applicant to transact business in the Philippines for the purpose or
purposes specified in such license.
(4) Within sixty (60) days after the issuance of the license to transact business in the
Philippines, the foreign corporation, except a foreign banking or insurance corporation,
shall deposit securities satisfactory to the Securities and Exchange Commission,
consisting of
bonds or other evidence of indebtedness of the Government of the Philippines, its
political subdivisions and instrumentalities, or of government-owned or controlled
corporations and entities,
shares of stock in "registered enterprises" as this term is defined in Republic Act No.
5186, shares of stock in domestic corporations registered in the stock exchange, or
shares of stock in domestic insurance companies and banks, or any combination of these
kinds of securities, with an actual market value of at least one hundred thousand
(P100,000.) pesos;
the foreign corporation must deposit additional securities every fiscal year.
b. Effect of license to do business on power to sue and
suability of the corporation.
Section 133. Doing business without a license. No foreign corporation transacting business in the
Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in
any action, suit or proceeding in any court or administrative agency of the Philippines; but such
corporation may be sued or proceeded against before Philippine courts or administrative tribunals on any
valid cause of action recognized under Philippine laws. (69a)
Its still a corporation, but it cannot maintain, intervene, or file suit or participate in any judicial
or administrative proceeding in the Philippines.
To summarize:
a) if a foreign corporation does business in the Philippines without a license, it cannot sue
before the Philippine courts;
b) 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
c) if a foreign corporation does business in the Phils with the required license, it can sue before
Phil courts on any transaction.
Being a mere assignee does not constitute doing business in the Philippines. It merely
became an assignee. It is not the lack of license that prevents access to the courts, but doing
business without the license. (MR v. Bajar)
A contract entered into by a foreign corporation not licensed to do business in the
Philippines is not void even as against the erring foreign corporation. The lack of capacity at
the time of the execution of the contracts was cured by the subsequent registration. Thus, a
contract entered into with an unlicensed foreign corporation, is merely voidable and may be
cured by registration, without prejudice to criminal liability. (Home Insurance v. Eastern
Shipping)
c. What a foreign corp NOT licensed to do business can and
cant do:
1. Can be sued
2. Cant participate in ANY suit. Admin case, intervention, whatever.
3. CAN file compulsory counterclaim, but CANT file permissive counterclaim.
a. Permissive counterclaim is another suit.
b. Compulsory counterclaim is just a form of defense.
4. Can enter into a JVA to build a public utility. (JG Summit v. CA)
A right of first refusal given to a foreign corporation to build a port does not violate
Constitutional requirements as to stock ownership because the said stocks can be assigned
to a qualified Filipino entity. Besides, the mere fact that a corporation violates that ratio does
not ipso facto make its ownership of land void. (id)
d. What foreign corporation must allege in any complaint it
files
One of the two ff:
1. License to do business in the Philippines
2. OR suing on an isolated transaction.
a. (RTC ruling) must be credible.
If either is absent, file MTD on lack of personality to sue.
e. When Foreign corp allowed to sue even without license
To summarize, GR: Foreign Corp. cant sue without license
Exceptions:
1. Isolated transactions
a. No hard and fast rule
b. Characterization test
 i. Not number of activities, but whether or not that transaction is of such
nature as to show an intention to prosecute the purpose of its incorporation.
2. IP rights
a. Paris Convention
Foreign corporation can always file an action to protect and enforce IP Rights.(Philip Morris
v. Fortune)
3. Subsequent registration or obtention of license, but without prejudice to criminal liability.
a. One of only 2 provisions (doing business in the Philippines without a license) of the
Corpo Code penal in nature. The other one is refusal to allow a stockholder to
inspect the books.
4. Stipulation as to venue.
5. Co-plaintiff with a plaintiff who filed in the Philippines to prevent multiplicity of suits.
6. Enforce right not arising out of business transaction (tort)
7. Estoppel (asked 3 times in the bar)
a. Domestic corporation, knowing a foreign corp does not have license to do business,
does so anyway and reaps the benefits.
A party is estopped from challenging the personality of a corporation after having
acknowledged the same by entering into a contract with it. The principle is applied to
prevent a person contracting with a foreign corporation from later taking advantage of its
noncompliance with the statutes, chiefly in cases where such person has received the
benefits of the contract. (Global Business Holdings, Inc. vs. Surecomp Software, B.V.,
G.R. No. 173463, October 13, 2010)
8. Recovery of misdelivered property.
d. Resident Agents
Section 127. Who may be a resident agent. A resident agent may be either an individual residing in the
Philippines or a domestic corporation lawfully transacting business in the Philippines: Provided, That in
the case of an individual, he must be of good moral character and of sound financial standing. (n)
Section 128. Resident agent; service of process. The Securities and Exchange Commission shall
require as a condition precedent to the issuance of the license to transact business in the Philippines by
any foreign corporation that such corporation file with the Securities and Exchange Commission a
written power of attorney designating some person who must be a resident of the Philippines, on whom
any summons and other legal processes may be served in all actions or other legal proceedings against
such corporation, and consenting that service upon such resident agent shall be admitted and held as
valid as if served upon the duly authorized officers of the foreign corporation at its home office. Any such
foreign corporation shall likewise execute and file with the Securities and Exchange Commission an
agreement or stipulation, executed by the proper authorities of said corporation, in form and substance
as follows: "xxx
Whenever such service of summons or other process shall be made upon the Securities and Exchange
Commission, the Commission shall, within ten (10) days thereafter, transmit by mail a copy of such
summons or other legal process to the corporation at its home or principal office. The sending of such
copy by the Commission shall be necessary part of and shall complete such service. All expenses incurred
by the Commission for such service shall be paid in advance by the party at whose instance the service is
made.
In case of a change of address of the resident agent, it shall be his or its duty to immediately notify in
writing the Securities and Exchange Commission of the new address. (72a; and n)
The foreign corporation must appoint a resident agent, who is a person on whom any
summons and other legal processes may be served in all actions or other legal proceedings
against such corporation, and service upon whom is valid as if served upon the duly authorized
officers of the foreign corporation at its home office
i. Qualifications
(1) May be an individual or a domestic corporation.
(2) Must be a resident of the Philippines.
(3) If an individual, must be of good moral character and sound financial standing
If the resident agent changes his address, he must immediately notify the SEC of his new
address in writing.
b. How summonses and other processes served
Whenever such service of summons or other process shall be made upon the Securities and
Exchange Commission, the Commission shall, within ten (10) days thereafter, transmit by mail a
copy of such summons or other legal process to the corporation at its home or principal office.
The sending of such copy by the Commission shall be necessary part of and shall complete
such service.
All expenses incurred by the Commission for such service shall be paid in advance by the
party at whose instance the service is made.
However, the resident cannot sign a CNFS unless authorized to do so. (PAL v. CA)
e. Grounds for revocation of license
Section 134. Revocation of license. Without prejudice to other grounds provided by special laws, the
license of a foreign corporation to transact business in the Philippines may be revoked or suspended by
the Securities and Exchange Commission upon any of the following grounds:
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 to the Philippine
Government or any of its agencies or political subdivisions;
7. Transacting business in the Philippines outside of the purpose or purposes for which such corporation
is authorized under its license;
8. 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
9. Any other ground as would render it unfit to transact business in the Philippines. (n)
Section 135. Issuance of certificate of revocation. Upon the revocation of any such license to transact
business in the Philippines, the Securities and Exchange Commission shall issue a corresponding
certificate of revocation, furnishing a copy thereof to the appropriate government agency in the proper
cases.
The Securities and Exchange Commission shall also mail to the corporation at its registered office in the
Philippines a notice of such revocation accompanied by a copy of the certificate of revocation. (n)
The SEC may revoke a license to do business of a foreign corporation upon any of the ff.
grounds:
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 to
the Philippine Government or any of its agencies or political subdivisions;
7. Transacting business in the Philippines outside of the purpose or purposes for which
such corporation is authorized under its license;
8. 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
9. Any other ground as would render it unfit to transact business in the Philippines. (n)
f. Other matters not in bar syllabus, but just read the provisions.
Section 129. Law applicable. Any foreign corporation lawfully doing business in the Philippines shall
be bound by all laws, rules and regulations applicable to domestic corporations of the same
class, except such only as provide for the creation, formation, organization or dissolution of corporations
or those which fix the relations, liabilities, responsibilities, or duties of stockholders, members, or officers
of corporations to each other or to the corporation. (73a)
Section 130. Amendments to articles of incorporation or by-laws of foreign corporations. Whenever the
articles of incorporation or by-laws of a foreign corporation authorized to transact business in the
Philippines are amended, such foreign corporation shall, within sixty (60) days after the amendment
becomes effective, file with the Securities and Exchange Commission, and in the proper cases with the
appropriate government agency, a duly authenticated copy of the articles of incorporation or by-laws, as
amended, indicating clearly in capital letters or by underscoring the change or changes made, duly
certified by the authorized official or officials of the country or state of incorporation. The filing thereof
shall not of itself enlarge or alter the purpose or purposes for which such corporation is authorized to
transact business in the Philippines. (n)
Section 131. Amended license. A foreign corporation authorized to transact business in the Philippines
shall obtain an amended license in the event it changes its corporate name, or desires to pursue in the
Philippines other or additional purposes, by submitting an application therefor to the Securities and
Exchange Commission, favorably endorsed by the appropriate government agency in the proper cases.
(n)
Section 132. Merger or consolidation involving a foreign corporation licensed in the Philippines. One
or more foreign corporations authorized to transact business in the Philippines may merge or consolidate
with any domestic corporation or corporations if such is permitted under Philippine laws and by the law
of its incorporation: Provided, That the requirements on merger or consolidation as provided in this Code
are followed.
Whenever a foreign corporation authorized to transact business in the Philippines shall be a party to a
merger or consolidation in its home country or state as permitted by the law of its incorporation, such
foreign corporation shall, within sixty (60) days after such merger or consolidation becomes effective, file
with the Securities and Exchange Commission, and in proper cases with the appropriate government
agency, a copy of the articles of merger or consolidation duly authenticated by the proper official or
officials of the country or state under the laws of which merger or consolidation was effected: Provided,
however, That if the absorbed corporation is the foreign corporation doing business in the Philippines,
the latter shall at the same time file a petition for withdrawal of its license in accordance with this Title.
(n)
Section 136. Withdrawal of foreign corporations. Subject to existing laws and regulations, a foreign
corporation licensed to transact business in the Philippines may be allowed to withdraw from the
Philippines by filing a petition for withdrawal of license. No certificate of withdrawal shall be issued by
the Securities and Exchange Commission 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.
 o. Provision dump. Matters not in the bar syllabus but which you
should read anyway
TITLE XIII
SPECIAL CORPORATIONS
CHAPTER I - EDUCATIONAL CORPORATIONS
Section 106. Incorporation. Educational corporations shall be governed by special laws and by the
general provisions of this Code. (n)
Section 107. Pre-requisites to incorporation. Except upon favorable recommendation of the Ministry of
Education and Culture, the Securities and Exchange Commission shall not accept or approve the articles
of incorporation and by-laws of any educational institution. (168a)
Section 108. Board of trustees. Trustees of educational institutions organized as non-stock
corporations shall not be less than five (5) nor more than fifteen (15): Provided, however, That the
number of trustees shall be in multiples of five (5).
Unless otherwise provided in the articles of incorporation on the by-laws, the board of trustees of
incorporated schools, colleges, or other institutions of learning shall, as soon as organized, so classify
themselves that the term of office of one-fifth (1/5) of their number shall expire every year. Trustees
thereafter elected to fill vacancies, occurring before the expiration of a particular term, shall hold office
only for the unexpired period. Trustees elected thereafter to fill vacancies caused by expiration of term
shall hold office for five (5) years. A majority of the trustees shall constitute a quorum for the transaction
of business. The powers and authority of trustees shall be defined in the by-laws.
For institutions organized as stock corporations, the number and term of directors shall be governed by
the provisions on stock corporations. (169a)
TITLE XVI
MISCELLANEOUS PROVISIONS
Section 139. Incorporation and other fees. The Securities and Exchange Commission is hereby
authorized to collect and receive fees as authorized by law or by rules and regulations promulgated by
the Commission.1wphi1 (n)
Section 140. Stock ownership in certain corporations. Pursuant to the duties specified by Article XIV of
the Constitution, the National Economic and Development Authority shall, from time to time, make a
determination of whether the corporate vehicle has been used by any corporation or by business or
industry to frustrate the provisions thereof or of applicable laws, and shall submit to the Batasang
Pambansa, whenever deemed necessary, a report of its findings, including recommendations for their
prevention or correction.
Maximum limits may be set by the Batasang Pambansa for stockholdings in corporations declared by it to
be vested with a public interest pursuant to the provisions of this section, belonging to individuals or
groups of individuals related to each other by consanguinity or affinity or by close business interests, or
whenever it is necessary to achieve national objectives, prevent illegal monopolies or combinations in
restraint or trade, or to implement national economic policies declared in laws, rules and regulations
designed to promote the general welfare and foster economic development.
In recommending to the Batasang Pambansa corporations, businesses or industries to be declared vested
with a public interest and in formulating proposals for limitations on stock ownership, the National
Economic and Development Authority shall consider the type and nature of the industry, the size of the
enterprise, the economies of scale, the geographic location, the extent of Filipino ownership, the labor
intensity of the activity, the export potential, as well as other factors which are germane to the realization
and promotion of business and industry.
Section 141. Annual report or corporations. Every corporation, domestic or foreign, lawfully doing
business in the Philippines shall submit to the Securities and Exchange Commission an annual report of
its operations, together with a financial statement of its assets and liabilities, certified by any
independent certified public accountant in appropriate cases, covering the preceding fiscal year and such
other requirements as the Securities and Exchange Commission may require. Such report shall be
submitted within such period as may be prescribed by the Securities and Exchange Commission. (n)
Section 142. Confidential nature of examination results. All interrogatories propounded by the
Securities and Exchange Commission and the answers thereto, as well as the results of any examination
made by the Commission or by any other official authorized by law to make an examination of the
operations, books and records of any corporation, shall be kept strictly confidential, except insofar as the
law may require the same to be made public or where such interrogatories, answers or results are
necessary to be presented as evidence before any court. (n)
Section 143. Rule-making power of the Securities and Exchange Commission. The Securities and
Exchange Commission shall have the power and authority to implement the provisions of this Code, and
to promulgate rules and regulations reasonably necessary to enable it to perform its duties hereunder,
particularly in the prevention of fraud and abuses on the part of the controlling stockholders, members,
directors, trustees or officers. (n)
 p. The Securities and Regulation Code
Only going to put the stuff thats in the bar syllabus. Sorry.
1. State Policy
Section 2. Declaration of State Policy. The State shall establish a socially conscious, free market that
regulates itself, encourage the widest participation of ownership in enterprises, enhance the
democratization of wealth, promote the development of the capital market, protect investors, ensure full
and fair disclosure about securities, minimize if not totally eliminate insider trading and other fraudulent
or manipulative devices and practices which create distortions in the free market. To achieve these ends,
this Securities Regulation Code is hereby enacted.
The rise and fall of stock market indices reflect to a considerable degree the state of the
economy. Securities transactions are impressed with public interest, and are thus subject to
public regulation; in particular, the laws and regulations requiring payment of traded shares
within specified periods are meant to protect the economy from excessive stock market
speculations, and are thus mandatory. (Abacus Securities Corporation vs. Ruben Ampil,
G.R. No. 160016, February 27, 2006)
ii. Definition of Securities
Section 3. Definition of Terms. - 3.1. "Securities" are shares, participation or interests in a corporation or
in a commercial enterprise or profit-making venture and evidenced by a certificate, contract,
instruments, whether written or electronic in character. It includes:
(a) Shares of stocks, bonds, debentures, notes evidences of indebtedness, asset-backed securities;
(b) Investment contracts, certificates of interest or participation in a profit sharing agreement, certifies of
deposit for a future subscription;
(c) Fractional undivided interests in oil, gas or other mineral rights;
(d) Derivatives like option and warrants;
(e) Certificates of assignments, certificates of participation, trust certificates, voting trust certificates or
similar instruments
(f) Proprietary or nonproprietary membership certificates in corporations; and
(g) Other instruments as may in the future be determined by the Commission.
Shares, participation, or interst in a corporation or in a commercial enterprise or profit-making
ventures and evidenced by a certificate, contract or instrument, whether written or electronic
in nature.
a. Kinds (SIFDAPO)
1. Shares of stocks, bonds, debentures, notes, evidences of indebtedness, asset-backed
securities.
2. Investment contracts, certificates of interest or participation in a profit-sharing
agreemtn, certificates of deposit for a future subscription.
3. Fractional undivided interests in oil, gas or other mineral rights,
4. Derivatives like options and warrants
5. Certificates of assignments and participation, trust certificates, voting trust certificates
or similar instruments
6. Proprietary or non-proprietary membership certificates in corporations
7. Other instruments as may in the future be determined by the SEC.
b. Other instruments
Included in other instruments are postdated checks as evidences of indebtedness. While
generally checks are merely negotiable instruments, and their issuance to satisfy isolated
transactions is well within the ambit of a valid corporate act, their issuance to execute an
elaborate scheme to compart to the public to be a pseudo-investment house instead of stocks
or traditional securities is a clear circumvention of the RSA. (Gabionza v. CA).
 Timeshares are securities, and thus must be registered, even if not participating in the
income (proprietary), and only given usage (non-proprietary). (Timeshare Realty v. Lao)
Investment contracts are likewise securities. However, under the Howey Test, the ff. are the
elements of an investment contract: (SEC v. Prosperity.Com)
a. A contract, transaction, or scheme.
b. An investment of money
c. Investment made in a common enterprise
d. Expectation of profits and
e. Profits arising primarily from the efforts of others.
Under this test, down-line marketers did not enter into investment contracts. (id.)
Deposits for future subscription are not equity yet, until converted into shares, but they are
still considered securities
Stock options are securities.
o Put optionoption to sell
o Call optionoption to buy
Certificate of participation in partnership is security
iii. Registration in the SRC
CHAPTER III
REGISTRATION OF SECURITIES
Section 8. Requirement of Registration of Securities. 8.1. Securities shall not be sold or offered for sale
or distribution within the Philippines, without a registration statement duly filed with and approved by
the Commission. Prior to such sale, information on the securities, in such form and with such substance
as the Commission may prescribe, shall be made available to each prospective purchaser.
8.2. The Commission may conditionally approve the registration statement under such terms as it may
deem necessary.
8.3. The Commission may specify the terms and conditions under which any written communication,
including any summary prospectus, shall be deemed not to constitute an offer for sale under this Section.
8.4. A record of the registration of securities shall be kept in Register Securities in which shall be
recorded orders entered by the Commission with respect such securities. Such register and all
documents or information with the respect to the securities registered therein shall be open to public
inspection at reasonable hours on business days.
8.5. The Commission may audit the financial statements, assets and other information of firm applying for
registration of its securities whenever it deems the same necessary to insure full disclosure or to protect
the interest of the investors and the public in general.
Generally, before they may be sold or offered for sale or distribution within the Philippines,
securities must be registered with the SEC.
Prior to such sale, information on the securities will be made available to prospective buyers
in a prospectus.
The issuer must file a registration statement with the SEC, containing all material
information about the issuer corporation and the security to be issued to the public.
The SEC may conditionally approve that statement under terms it may deem necessary.
The registration of securities will be recorded in Register Securities.
The SEC may also audit the financial statements of the firm applying for registration.
a. Purpose of registration
The registration of securities is necessary to prevent the issuance of worthless securities.
If there is public disclosure about the company, the investor can decide whether or not to
invest.
Does not guarantee profit, but guarantees FULL DISCLOSURE to help judgment of investors
in securities.
 b. Procedure for registration
Section 12. Procedure of Registration Securities. - 12.1. All securities required to be registered under
Subsection 8. I shall be registered through the filing by the issuer in the main office of the Commission,
of a sworn registration statement with the respect to such securities, in such form and containing such
information and document as the Commission prescribe. The registration statement shall include any
prospectus required or permitted to be delivered under Subsections 8.2, 8.3, and 8.4.
12.2. In promulgating rules governing the content of any registration statement (including any
prospectus made a part thereof or annex thereto), the Commission may require the registration
statement to contain such information or documents as it may, by rule, prescribe. It may dispense with
any such requirements, or may require additional information or documents, including written
information from an expert, depending on the necessity thereof or their applicability to the class of
securities sought to be registered.
12.3. The information required for the registration of any kind, and all securities, shall include, among
others, the effect of the securities issue on ownership, on the mix of ownership, especially foreign and
local ownership.
12.4. The registration statement shall be signed by the issuers executive officer, its principal operating
officer, its principal financial officer, its comptroller, its principal accounting officer, its corporate
secretary, or persons performing similar functions accompanied by a duly verified resolution of the board
of directors of the issuer corporation. The written consent of the expert named as having certified any
part of the registration statement or any document used in connection therewith shall also be filed.
Where the registration statement shares to be sold by selling shareholders, a written certification by such
selling shareholders as to the accuracy of any part of the registration statement contributed to by such
selling shareholders shall be filed.
12.5. (a) Upon filing of the registration statement, the issuer shall pay to the Commission a fee of not
more than one-tenth (1/10) of one per centum (1%) of the maximum aggregate price at which such
securities are proposed to be offered. The Commission shall prescribe by the rule diminishing fees in
inverse proportion the value of the aggregate price of the offering.
(b) Notice of the filing of the registration statement shall be immediately published by the issuer, at its
own expense, in two (2) newspapers of general circulation in the Philippines, once a week for two (2)
consecutive weeks, or in such other manner as the Commission by the rule shall prescribe, reciting that a
registration statement for the sale of such securities has been filed, and that aforesaid registration
statement, as well as the papers attached thereto are open to inspection at the Commission during
business hours, and copies thereof, photostatic or otherwise, shall be furnished to interested parties at
such reasonable charge as the Commission may prescribe.
12.6. Within forty-five (45) days after the date of filing of the registration statement, or by such later date
to which the issuer has consented, the Commission shall declare the registration statement effective or
rejected, unless the applicant is allowed to amend the registration statement as provided in Section 14
hereof. The Commission shall enter an order declaring the registration statement to be effective if it finds
that the registration statement together with all the other papers and documents attached thereto, is on
its face complete and that the requirements have been complied with. The Commission may impose such
terms and conditions as may be necessary or appropriate for the protection of the investors.
12.7. Upon affectivity of the registration statement, the issuer shall state under oath in every prospectus
that all registration requirements have been met and that all information are true and correct as
represented by the issuer or the one making the statement. Any untrue statement of fact or omission to
state a material fact required to be stated herein or necessary to make the statement therein not
misleading shall constitute fraud.
1. Filing of sworn registration statement with regard to the securities with the SEC,
including the prospectus.
a. the registration statement must contain such information or documents as the SEC
may prescribe, but should, among others:
i. include the effect of the securities on ownership, and on the mix of
ownership, especially foreign and local ownership.
 ii. Be signed by the issuers executive officer, its principal operating officer, its
principal financial officer, its comptroller, its principal accounting officer,
and its corporate secretary.
b. The filing must be accompanied by filing of 0.1% fees, based on the maximum
aggregate price at which the securities are proposed to be offered.
2. Notice of the filing of the registration statement will be published by its issuer, at its
own expense, in 2 newspapers of general circulation in the Philippines, once a week for
2 consecutive weeks.
3. Within 45 days after the filing of the registration statement, or whatever date to which
the issuer has consented, the SEC shall enter an order declaring the securities either
effective or rejected.
a. If the registration statement, together with the other documents required, is on its
face complete and the requirements have been complied with, the SEC shall
declare the securities effective.
b. They will be rejected if there are present any of the
c. Grounds for rejection or revocation of the Registration of Securities
Section 13. Rejection and Revocation of Registration of Securities. 13.1. The Commission may reject a
registration statement and refuse registration of the security there-under, or revoke the affectivity of a
registration statement and the registration of the security there-under after the due notice and hearing
by issuing an order to such effect, setting forth its finding in respect thereto, if it finds that:
(a) The issuer:
(i) Has been judicially declared insolvent;
(ii) Has violated any of the provision of this Code, the rules promulgate pursuant thereto, or any order of
the Commission of which the issuer has notice in connection with the offering for which a registration
statement has been filed
(iii) Has been or is engaged or is about to engage in fraudulent transactions;
(iv) Has made any false or misleading representation of material facts in any prospectus concerning the
issuer or its securities;
(v) Has failed to comply with any requirements that the Commission may impose as a condition for
registration of the security for which the registration statement has been filed; or
(b) The registration statement is on its face incomplete or inaccurate in any material respect or includes
any untrue statements of a material fact required to be stated therein or necessary to make the statement
therein not misleading; or
(c) The issuer, any officer, director or controlling person performing similar functions, or any under writer
has been convicted, by a competent judicial or administrative body, upon plea of guilty, or otherwise, of
an offense involving moral turpitude and /or fraud or is enjoined or restrained by the Commission or
other competent or administrative body for violations of securities, commodities, and other related laws.
For the purposes of this subsection, the term "competent judicial or administrative body" shall include a
foreign court of competent jurisdiction as provided for under Rules of Court.
The registration of securities may be rejected on the ff. grounds:
(1) The issuer:
(a)Is judicially declared insolvent
(b) Has violated the SRC, its rules, or any order of the Commission in connection with
the offering
(c)Has engaged or is about to engage in fraudulent transactions
(d) Has made any false or misleading representation of material facts in any
prospectus, or
(e)Fails to comply with any requirements that the SEC may impose as a condition for the
registration of the security.
(2) The registration statement is on its face incomplete or inaccurate in any material respect,
or includes and untrue statement of a material fact, or
(3) The issuer, officer, director, any controlling person, or underwriter has been convicted of
an offense involving moral turpitude or fraud, or is enjoined or restrained by any competent
or administrative body, including foreign courts, for violations of securities, commodities,
and other related laws.
d. Security that may not be registered at all
Section 11. Commodity Futures Contracts. - No person shall offer, sell or enter into commodity futures
contracts except in accordance with the rules, regulations and orders the Commission may prescribe in
the public interest. The Commission shall promulgate rules and regulations involving commodity futures
contracts to protect investors to ensure the development of a fair and transparent commodities market.
The trading contract signed by the parties is a contract for the sale of products for future
delivery, in which either seller or buyer may elect to make or demand delivery of goods agreed
to be bought and sold, but where no such delivery is actually made. The written trading
contract in question is not illegal but the transaction between the parties purportedly to
implement the contract is in the nature of a gambling agreement; it is not buying and selling
and is illegal as against public policy. (Onapal Philippines Commodities, Inc. vs. Court of
Appeals, G.R. No. 90707, February 1, 1993)
iv. Securities that need not be registered
Preliminarily, there are 3 kinds of securities
1. Non-exempt
2. Exempt securities
3. Securities sold under exempt transactions.
a. Exempt securities
Section 9. Exempt Securities. 9.1. The requirement of registration under Subsection 8.1 shall not as a
general rule apply to any of the following classes of securities:
(a) Any security issued or guaranteed by the Government of the Philippines, or by any political
subdivision or agency thereof, or by any person controlled or supervised by, and acting as an
instrumentality of said Government.
(b) Any security issued or guaranteed by the government of any country with which the Philippines
maintains diplomatic relations, or by any state, province or political subdivision thereof on the basis of
reciprocity: Provided, That the Commission may require compliance with the form and content for
disclosures the Commission may prescribe.
(c) Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper
adjudicatory body.
(d) Any security or its derivatives the sale or transfer of which, by law, is under the supervision and
regulation of the Office of the Insurance Commission, Housing and Land Use Rule Regulatory Board, or
the Bureau of Internal Revenue.
(e) Any security issued by a bank except its own shares of stock.
9.2. The Commission may, by rule or regulation after public hearing, add to the foregoing any class of
securities if it finds that the enforcement of this Code with respect to such securities is not necessary in
the public interest and for the protection of investors.
The ff. securities are exempt. That means that they dont need to be registered ever, even if the
issuance is public:
(1) Government Securities of the Philippines, such as treasury bills;
(2) Government Securities of foreign countries with whom the Philippines maintains
diplomatic relations, or on the basis of reciprocity
(3) Certificates issued by a receiver or trustee in bankruptcy proceedings, as approved by
the proper adjudicatory body.
(4) A security or the derivatives thereof under the supervision and regulation of the
Insurance Commission, HLURB, or the BIR
 (5) Any security of a bank, except its shares of stock. Examples include certificates of
deposit., and
(6) Other such securities as the SEC may determine.
Common denominator: issued by government or already supervised by another government
agency
b. Exempt Transaction
Section 10. Exempt Transactions. 10.1. The requirement of registration under Subsection 8.1 shall not
apply to the sale of any security in any of the following transactions:
(a) At any judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in insolvency
or bankruptcy.
(b) By or for the account of a pledge holder, or mortgagee or any of a pledge lien holder selling of offering
for sale or delivery in the ordinary course of business and not for the purpose of avoiding the provision of
this Code, to liquidate a bonafide debt, a security pledged in good faith as security for such debt.
(c) An isolated transaction in which any security is sold, offered for sale, subscription or delivery by the
owner therefore, or by his representative for the owners account, such sale or offer for sale or offer for
sale, subscription or delivery not being made in the course of repeated and successive transaction of a
like character by such owner, or on his account by such representative and such owner or representative
not being the underwriter of such security.
(d) The distribution by a corporation actively engaged in the business authorized by its articles of
incorporation, of securities to its stockholders or other security holders as a stock dividend or other
distribution out of surplus.
(e) The sale of capital stock of a corporation to its own stockholders exclusively, where no commission or
other remuneration is paid or given directly or indirectly in connection with the sale of such capital stock.
(f) The issuance of bonds or notes secured by mortgage upon real estate or tangible personal property,
when the entire mortgage together with all the bonds or notes secured thereby are sold to a single
purchaser at a single sale.
(g) The issue and delivery of any security in exchange for any other security of the same issuer pursuant
to a right of conversion entitling the holder of the security surrendered in exchange to make such
conversion:Provided, That the security so surrendered has been registered under this Code or was, when
sold, exempt from the provision of this Code, and that the security issued and delivered in exchange, if
sold at the conversion price, would at the time of such conversion fall within the class of securities
entitled to registration under this Code. Upon such conversion the par value of the security surrendered
in such exchange shall be deemed the price at which the securities issued and delivered in such
exchange are sold.
(h) Brokers transaction, executed upon customers orders, on any registered Exchange or other trading
market.
(i) Subscriptions for shares of the capitals stocks of a corporation prior to the incorporation thereof or in
pursuance of an increase in its authorized capital stocks under the Corporation Code, when no expense is
incurred, or no commission, compensation or remuneration is paid or given in connection with the sale or
disposition of such securities, and only when the purpose for soliciting, giving or taking of such
subscription is to comply with the requirements of such law as to the percentage of the capital stock of a
corporation which should be subscribed before it can be registered and duly incorporated, or its
authorized, capital increase.
(j) The exchange of securities by the issuer with the existing security holders exclusively, where no
commission or other remuneration is paid or given directly or indirectly for soliciting such exchange.
(k) The sale of securities by an issuer to fewer than twenty (20) persons in the Philippines during any
twelve-month period.
(l) The sale of securities to any number of the following qualified buyers:
(i) Bank;
(ii) Registered investment house;
(iii) Insurance company;
(iv) Pension fund or retirement plan maintained by the Government of the Philippines or any political
subdivision thereof or manage by a bank or other persons authorized by the Bangko Sentral to engage in
trust functions;
(v) Investment company or;
(vi) Such other person as the Commission may rule by determine as qualified buyers, on the basis of such
factors as financial sophistication, net worth, knowledge, and experience in financial and business
matters, or amount of assets under management.
10.2. The Commission may exempt other transactions, if it finds that the requirements of registration
under this Code is not necessary in the public interest or for the protection of the investors such as by the
reason of the small amount involved or the limited character of the public offering.
In contrast to exempt securities, exempt transactions are exempted from registration only in
the named instances. The securities involved, if otherwise transacted, must be registered.
Thus, securities subject to the ff. transactions are exempt from registration:
JF IS Selling Capital Stock, Issuing Bonds, BEST Quality.
1. Judicial sale
2. Foreclosure of mortgage or pledge
3. Isolated Transactions
4. Stock dividends
5. Sale of Capital Stock without commission
6. Issuance of bonds and notes secured by mortgages to single purchaser at single sale
7. Brokers Transaction
8. Exchange for another security of the same issuer (conversion)
9. Exchange for another class of security
10.Subscription of Capital Stock
11.Twenty (Less than) in one calendar year
12.Qualified buyers
13.Other securities as may be qualified
Common denominator: Limited nature and character of the offering. Does not involve the
public.
Notes on the above transactions:
i. Isolated transactions
Refer to sale of securities not in the course of repeated and successive transactions of a like
character by the owner, who is not the underwriter of the security.
b. When Conversion is Exempt
The conversion of stocks is only exempt if the stocks converted were registered, or exempted
from registration, and if the security delivered in exchange is registrable.
More importantly, the securities exchanged must be from the same issuer
c. Brokers Transaction
This refers to transactions entered into by a stock broker, on the orders of his customer.
d. Subscriptions
Are exempt if there is no expense, and no commission, compensation or remuneration is
paid.
Further, the purpose for soliciting, giving or taking of such subscription is to comply with the
requirements of such law as to the percentage of the capital stock of a corporation which
should be subscribed before it can be registered and duly incorporated, or its authorized,
capital increase.
e. Private issuance
The key number here is 20 persons in a 12 month period. any number of buyers below that
is exempt.
f. Qualified Buyers
The sale of securities to any of the ff. qualified buyers, in whatever number, is exempt from
registration
(1) Banks
(2) Registered Investment Houses
 (3) Insurance Companies
(4) Pension funds or retirement plans maintained by the Government of the Philippines
(5) Investment companies, or
(6) Such others as the SEC may determine
However, the exemption from registration of the securities issued by banking or financial
institutions does not mean that it is also exempt from registration required of listed
corporations. (Unionbank v. SEC)
g. Other exempt transcations
Under the ruling issued by the SEC, an issuance of previously authorized but still unissued
capital stock may, in a particular instance, be held to be an exempt transaction by the SEC
under Section 6(b) so long as the SEC finds that the requirements of registration under the
Revised Securities Act are "not necessary in the public interest and for the protection of the
investors" by reason, inter alia, of the small amount of stock that is proposed to be issued or
because the potential buyers are very limited in number and are in a position to protect
themselves. (Nestle Philippines, Inc. vs. Court of Appeals, G.R. No. 86738, November
13, 1991)
c. Procedure for claiming exemption of Exempt Transactions
10.3. Any person applying for an exemption under this Section, shall file with the Commission a notice
identifying the exemption relied upon on such form and at such time as the Commission by the rule may
prescribe and with such notice shall pay to the Commission fee equivalent to one-tenth (1/10) of one
percent (1%) of the maximum value aggregate price or issued value of the securities.
Issuer only has to pay filing fees and file notice of exemption.
No need to get approval or register.
o But if you make a mistake, you have to pay the filing fees and surcharges.
o If in doubt, get confirmation from the SEC
v. Prohibitions on Fraud, Manipulation, and insider trading
a. Manipulation of Security Devices
CHAPTER VII
PROHIBITIONS AND FRAUD, MANIPULATION AND INSIDER TRADING
Section 24. Manipulation of Security Prices; Devices and Practices. 24.1 It shall be unlawful for any
person acting for himself or through a dealer or broker, directly or indirectly:
(a) To create a false or misleading appearance of active trading in any listed security traded in an
Exchange of any other trading market (hereafter referred to purposes of this Chapter as "Exchange"):
(i) By effecting any transaction in such security which involves no change in the beneficial ownership
thereof;
(ii) By entering an order or orders for the purchase or sale of such security with the knowledge that a
simultaneous order or orders of substantially the same size, time and price, for the sale or purchase of
any such security, has or will be entered by or for the same or different parties; or
(iii) By performing similar act where there is no change in beneficial ownership.
(b) To affect, alone or with others, a securities or transactions in securities that: (I) Raises their price to
induce the purchase of a security, whether of the same or a different class of the same issuer or of
controlling, controlled, or commonly controlled company by others; or (iii) Creates active trading to
induce such a purchase or sale through manipulative devices such as marking the close, painting the
tape, squeezing the float, hype and dump, boiler room operations and such other similar devices.
(c) To circulate or disseminate information that the price of any security listed in an Exchange will or is
likely to rise or fall because of manipulative market operations of any one or more persons conducted for
the purpose of raising or depressing the price of the security for the purpose of inducing the purpose of
sale of such security.
(d) To make false or misleading statement with respect to any material fact, which he knew or had
reasonable ground to believe was so false or misleading, for the purpose of inducing the purchase or sale
of any security listed or traded in an Exchange.
(e) To effect, either alone or others, any series of transactions for the purchase and/or sale of any security
traded in an Exchange for the purpose of pegging, fixing or stabilizing the price of such security; unless
otherwise allowed by this Code or by rules of the Commission.
This provision prohibits entering into transactions that manipulate security prices. According
to this provision, that includes:
a. Creating a false or misleading appearance of active trading, in order to raise or lower prices,
including:
Acts where there is no change in beneficial ownership
1. Wash Sale
a. Buy and sell securities at the samex time
b. No change in beneficial ownership
2. Matched Order
a. Corresponding sale and purchase transactions for the same amount of the same
kind of secuirity by different parties.
b. Peg amount of security
3. Any other acts where there is no change in beneficial ownership
Acts designed to raise prices, such as
4. Raising prices to induce purchases
5. Other means of creating active trading to induce a purchase or sale, such as:
a. Boiler roomhigh pressure tactics to induce purchase
b. Marking the closebuy at the end of the trading session
c. Painting the tapeembellish facts about the corporation
d. Hype and washincrease the price, then dump it.
e. Squeezing the floatcontrol supply of security
Material Information
6. Circulating information that the price of a listed security will rise or fall because or
market operations.
7. Making false or misleading statement with respect to any material fact, which he knew or
had reasonable ground to believe was so false or misleading, for the purpose of inducing
the purchase or sale of any security listed or traded in an Exchange.
8. (e) To effect, either alone or others, any series of transactions for the purchase and/or
sale of any security traded in an Exchange for the purpose of pegging, fixing or
stabilizing the price of such security; unless otherwise allowed by this Code or by rules of
the Commission.
9. Short-swing sale
a. Purchase a security, then sell within 6 months by director or stockholder owning
more than 10% of equity
b. Does not apply to brokers or dealer
c. Profit inures to benefit of issuer
d. Stockholder can file suit in behalf of corp to recover the profit within 60 days from
demand but not to exceed 2 years from realization of profits.
10.Over-the-counter transactions
Sales made outside the PSE.
Not absolutely prohibited. What is prohibited is creating your own securities market.
b. Short Sales
24.2. No person shall use or employ, in connection with the purchase or sale of any security any
manipulative or deceptive device or contrivance. Neither shall any short sale be effected nor any stop-
loss order be executed in connection with the purchase or sale of any security except in accordance with
such rules and regulations as the Commission may prescribe as necessary or appropriate in the public
interest for the protection of investors.
Short sales are sales of security by those other than the owner.
It is not allowed, unless otherwise provided by the SEC.
 c. Fraudulent Transactions
Section 26. Fraudulent Transactions. It shall be unlawful for any person, directly or indirectly, in
connection with the purchase or sale of any securities to:
26.1. Employ any device, scheme, or artifice to defraud;
26.2. Obtain money or property by means of any untrue statement of a material fact of any omission to
state a material fact necessary in order to make the statements made, in the light of the circumstances
under which they were made, not misleading; or
26.3. Engage in any act, transaction, practice or course of business which operates or would operate as a
fraud or deceit upon any person.
It is unlawful for any person to:
(1) Employ any fraudulent device, scheme, or artifice;
(2) Obtain money or property by means of any untrue statement of a material fact or any
omission to supply such facts., or
(3) Engaging in any act which would operate as a fraud or deceit upon any person.
d. Insider Trading
3.8. "Insider" means (a) the issuer; (b) a director or officer (or any person performing similar functions)
of, or a person controlling the issuer; gives or gave him access to material information about the issuer or
the security that is not generally available to the public; (d) A government employee, director, or officer
of an exchange, clearing agency and/or self-regulatory organization who has access to material
information about an issuer or a security that is not generally available to the public; or (e) a person who
learns such information by a communication from any forgoing insiders.
Section 27. Insiders Duty to Disclose When Trading. 27.1. It shall be unlawful for an insider to sell or
buy a security of the issuer, while in possession of material information with respect to the issuer or the
security that is not generally available to the public, unless: (a) The insider proves that the information
was not gained from such relationship; or (b) If the other party selling to or buying from the insider (or
his agent) is identified, the insider proves: (I) that he disclosed the information to the other party, or (ii)
that he had reason to believe that the other party otherwise is also in possession of the information. A
purchase or sale of a security of the issuer made by an insider defined in Subsection 3.8, or such insiders
spouse or relatives by affinity or consanguinity within the second degree, legitimate or common-law, shall
be presumed to have been effected while in possession of material nonpublic information if transacted
after such information came into existence but prior to dissemination of such information to the public
and the lapse of a reasonable time for market to absorb such information:Provided, however, That this
presumption shall be rebutted upon a showing by the purchaser or seller that he was aware of the
material nonpublic information at the time of the purchase or sale.
27.2. For purposes of this Section, information is "material nonpublic" if: (a) It has not been generally
disclosed to the public and would likely affect the market price of the security after being disseminated to
the public and the lapse of a reasonable time for the market to absorb the information; or (b) would be
considered by a reasonable person important under the circumstances in determining his course of
action whether to buy, sell or hold a security.
27.3. It shall be unlawful for any insider to communicate material nonpublic information about the issuer
or the security to any person who, by virtue of the communication, becomes an insider as defined in
Subsection 3.8, where the insider communicating the information knows or has reason to believe that
such person will likely buy or sell a security of the issuer whole in possession of such information.
Insider Tradings buying and selling of securities by an insider while in possession of material
non-public information.
It consists of
a. Buying or selling of securities
b. By insiders
c. While in possession of material non-public information.
The only one of those things which doesnt require any explanation is buying or selling of
securities.
1. Insiders may refer to:
 a. Issuer corporation
b. Director, officer (any, not just corporation), controlling person (significant
shareholder) thereof
c. Any person whose past relationship gives him such information
i. Lawyers
ii. Investment managers
iii. Investment banks
d. Government officer of a regulatory agency who has access to the info.
i. SEC
ii. PSE
e. Any person who receives info from the above insiders
i. Therefore:
1. Actual insider (tipper)
2. Constructive insider (tippee)
The term insiders now includes persons whose relationship or former relationship to the
issuer gives or gave them access to a fact of special significance about the issuer or the
security that is not generally available, and one who learns such a fact from an insider
knowing that the person from whom he learns the fact is such an insider. Insiders have the
duty to disclose material facts which are known to them by virtue of their position but which
are not known to persons with whom they deal and which, if known, would affect their
investment judgment. (SEC v. Interport)
A. Protection of Investors

2. While in the possession of material, non-public information

Information is material nonpublic" if:
(a) It has not been generally disclosed to the public and would likely affect the market price of
the security after being disseminated to the public and the lapse of a reasonable time for the
market to absorb the information; or
(b) would be considered by a reasonable person important under the circumstances in
determining his course of action whether to buy, sell or hold a security.
Not judged by amount,
But whether or not it will likely influence the decision of the public to buy or sell the
security.
Nonpublichas not been disclosed, or has been disclosed, but has not been given a
reasonable time for the public to absorb the information.
Under the law, the insider is only liable if he had reason to believe the person to whom the
insider gives the info would buy or would likely buy the securities.
If the buying or selling is done by the spouse, whether legitimate or common-law spouse,
or relatives to the 2nd degree, it will be considered done by the insider.
vi. Measures to protect minority stockholders
a. Tender Offer
3. Relief from Mandatory Tender Offer Requirement
a. The Commission, upon written application, and consistent with the policies set forth in Section 2 of the
Code and pursuant to its powers under Section 72.1 thereof, may exempt from the requirement to make a
mandatory tender offer the following proposed purchases of equity shares of a public company:
i. the purchase of newly issued shares from unissued capital stock;
ii. in connection with foreclosure proceeding involving a duly constituted pledge or security arrangement
where the acquisition is made by the debtor or creditor;
iii. purchases in connection with privatization undertaken by the government of the Philippines; or
iv. purchases in connection with corporate rehabilitation under court supervision.
 b. Purchasers who are granted an exemption are required to comply with disclosure and other
obligations under SRC Rule 18, SRC Rule 23, and Section 23 of the Code: Provided however, an
exemption under paragraph 3(a) of this Rule shall not become effective until publicly disclosed by the
purchaser in a newspaper of general circulation. Such disclosure shall describe the proposed transaction
and indicate the subsection of paragraph 3(a) above under which exemption was claimed. Any person
seeking an exemption under this paragraph may not rely upon the grant of a previous exemption and
shall separately apply for such relief.
c. Equity shares of a public company acquired through open market purchases at the prevailing market
price shall be automatically exempted from mandatory tender offer requirements provided that such
purchaser complies with disclosure requirements under Sections 18 and 23 of the Code and rules
adopted thereunder. (a) Any solicitation or recommendation to the holders of such a security to accept or
reject a tender offer or request or invitation for tenders shall be made in accordance with such rules and
regulations as may be prescribe.
(b) Securities deposited pursuant to a tender offer or request or invitation for tenders may be withdrawn
by or on behalf of the depositor at any time throughout the period that tender offer remains open and if
the securities deposited have not been previously accepted for payment, and at any time after sixty (60)
days from the date of the original tender offer to request or invitation, except as the Commission may
otherwise prescribe.
(c) Where the securities offered exceed that which person or group of persons is bound or willing to take
up and pay for, the securities that are subject of the tender offers shall be taken up us nearly as may be
pro data, disregarding fractions, according to the number of securities deposited to each depositor. The
provision of this subject shall also apply to securities deposited within ten (10) days after notice of
increase in the consideration offered to security holders, as described in paragraph (e) of this subsection,
is first published or sent or given to security holders.
(d) Where any person varies the terms of a tender offer or request or invitation for tenders before the
expiration thereof by increasing the consideration offered to holders of such securities, such person shall
pay the increased consideration to each security holder whose securities are taken up and paid for
whether or not such securities have been taken up by such person before the variation of the tender offer
or request or invitation.
19.2. It shall be lawful for any person to make any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements made in the light of the circumstances under
which they are made, not mis-leading, or to engaged to any fraudulent, deceptive or manipulative acts or
practices, in connection with any tender offer or request or invitation for tenders, or any solicitation for
any security holders in opposition to or in favor of any such favor of any such offer, request, or invitation.
The Commission shall, for the purposes of this subsection, define and prescribe means reasonably
designed to prevent, such acts and practices as are fraudulent, deceptive and manipulative.
Tender offer means a publicly announced intention by a person acting alone or in concert with
other persons (hereinafter referred to as "person") to acquire outstanding equity securities of a
public company as defined in SRC Rule 3, or outstanding equity securities of an associate or
related company of such public company which controls the said public company.
The tender offer rule requires that someone taking control of a corporation must offer to buy
all the rest of the stock at the same price or such price as supported by a fairness opinion
determined by an independent 3rd party. (let existing stockholder tender the shares)
i. When Mandatory
SRC IRR, Rule 19.2 (which amended the tender offer rule)
Mandatory Tender Offers
19.2.1. Any person or group of persons acting in concert, who intends to acquire fifteen percent (15 %) of
equity securities in a public company in one or more transactions within a period of twelve (12) months,
shall file a declaration to that effect with the Commission.
19.2.2. Any person or group of persons acting in concert, who intends to acquire thirty five percent (35%)
of the outstanding voting shares or such outstanding voting shares that are sufficient to gain control of
the board in a public company in one or more transactions within a period of twelve (12) months, shall
disclose such intention and contemporaneously make a tender offer for the percentage sought to all
holders of such securities within the said period. If the tender offer is oversubscribed, the aggregate
amount of securities to be acquired at the close of such tender offer shall be proportionately distributed
across selling shareholders with whom the acquirer may have been in private negotiations and other
shareholders. For purposes of SRC Rule 19.2.2, the last sale that meets the threshold shall not be
consummated until the closing and completion of the tender offer]
19.2.3. Any person or group of persons acting in concert, who intends to acquire thirty five percent (35%)
of the outstanding voting shares or such outstanding voting shares that are sufficient to gain control of
the board in a public company through the Exchange trading system shall not be required to make a
tender offer even if such person or group of persons acting in concert acquire the remainder through a
block sale if, after acquisition through the Exchange trading system, they fail to acquire their target of
thirty five percent (35%) or such outstanding voting shares that is sufficient to gain control of the board.4
19.2.4. Any person or group of persons acting in concert, who intends to acquire thirty five percent (35%)
of the outstanding voting shares or such outstanding voting shares that are sufficient to gain control of
the board in a public company directly from one or more stockholders shall be required to make a tender
offer for all the outstanding voting shares. The sale of shares pursuant to the private transaction or block
sale shall not be completed prior to the closing and completion of the tender offer.
19.2.5. If any acquisition that would result in ownership of over fifty percent (50%) of the total
outstanding equity securities of a public company, the acquirer shall be required to make a tender offer
under this Rule for all the outstanding equity securities to all remaining stockholders of the said company
at a price supported by a fairness opinion provided by an independent financial advisor or equivalent
third party. The acquirer in such a tender offer shall be required to accept all securities tendered.
A person is required to make a tender offer for equity shares of a public company when:
1. When a person or group of persons seeks to buy, either in a single acquisition or creeping
acquisition, more than 35% of the OCS.
2. Even if less than 35% or more than 1 year, if it will result in holding more than 51% of the
OCS.
If less than 35% offer, must buy. If more than 35% offer, he must buy 35%, prorated
among the rest of the available stocks.
Publicly declared intention to buy the equity of a publicly-listed company.
Publicly-listed company:
Rationale is to give minority stockholders a chance to get out when control changes.
i. Public Company
The tender offer rule only applies to public companies.
Under the SRC, a public company is any corporation:
(1) With a class of equity securities listed on an Exchange, or
(2) With assets in excess of Fifty Million Pesos (PhP 50,000,000.00) and has two
hundred (200) or more holders each holding at least one hundred (100) shares
of a class of its equity securities
Even if shares are only available to certain persons, the fact that it has more than P50M
assets and 200 or more stockholders holding at least 100 shares makes it a public company.
(PVB v. Callangan)
b. Exceptions to tender offer rule:
1. Foreclosure
2. Issuance of unissued shares
3. Increase of OCS
4. Privatization
5. Rehabilitation
6. Open market at prevailing market price
7. Merger or consolidiation
c. Insider trading before tender offer
27.4. (a) It shall be unlawful where a tender offer has commenced or is about to commence for:
(i) Any person (other than the tender offeror) who is in possession of material nonpublic information
relating to such tender offer, to buy or sell the securities of the issuer that are sought or to be sought by
such tender offer if such person knows or has reason to believe that the information is nonpublic and has
been acquired directly or indirectly from the tender offeror, those acting on its behalf, the issuer of the
securities sought or to be sought by such tender offer, or any insider of such issuer; and
(ii) Any tender offeror, those acting on its behalf, the issuer of the securities sought or to be sought by
such tender offer, and any insider of such issuer to communicate material nonpublic information relating
to the tender offer to any other person where such communication is likely to result in a violation of
Subsection 27.4 (a)(I).
(b) For purposes of this subsection the term "securities of the issuer sought or to be sought by such
tender offer" shall include any securities convertible or exchangeable into such securities or any options
or rights in any of the foregoing securities.
It is unlawful for:
(1) Any person in possession of material nonpublic information relating to a tender offer that
has commenced or is about to commence, to buy or sell the securities of the issuer if the
person knows or has reason to believe that the information is nonpublic and has been
acquired from the issuer.
(2) For the tender offeror or issuer to communicate material nonpublic information to any
other person where the communication is like to result to violation of (1)
b. Proxy solicitiation
Section 20. Proxy solicitations. - 20.1. Proxies must be issued and proxy solicitation must be made in
accordance with rules and regulations to be issued by the Commission;
20.2. Proxies must be in writing, signed by the stockholder or his duly authorized representative and file
before the scheduled meeting with the corporate secretary.
20.3. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is
intended. No proxy shall be valid only for the meting for which it is intended. No proxy shall be valid and
effective for a period longer than five (5) years at one time.
20.4. No broker or dealer shall give any proxy, consent or any authorization, in respect of any security
carried for the account of the customer, to a person other than the customer, without written
authorization of such customer.
20.5. A broker or dealer who holds or acquire the proxy for at least ten percent (10%) or such percentage
as the commission may prescribe of the outstanding share of such issuer, shall submit a report identifying
the beneficial owner of ten days after such acquisition, for its own account or customer, to the issuer of
security, to the exchange where the security is traded and to the Commission.
Requirements of proxies Corpo Code, as mirrored by SRC
1. In writing
2. Signed by stockholder
3. Filed with corpsec
4. Valid only for meeting extended, and in no case for a period longer than 5 years.
However, the SRC provides for
i. Additional limitations
1. Broker should not give proxy of beneficial owner to another person other than the
customer without the consent of such beneficial owner
2. Broker or dealer who holds or acquires the proxy for at least 10% of the OCS of the
issuer must Must comply with rules and regulations of the SEC, including the submission
of:
a. A Proxy statement identifying the beneficial owner within 10 days after the
acquisition, to the owner, to the exchange, and to the Commission.
b. A proxy form, in compliance with regs, to be attached thereto, and
c. A statement of intention to solicit proxies.
While the right of a stockholder to vote by proxy is generally established by the Corpo Code,
the form and use of proxies, including proxy solicitation and validation, are governed by the
 SRC. Here, the controversy as to the solicitation of proxy, even if it ostensibly raised the
violation of SEC rules on proxy solicitation, is properly considered an election
controversy within the original and exclusive jurisdiction of the RTC, as special
commercial court. by virtue of the SRC. (GSIS v. CA)
However, a CDO that does not specify the ground for issuance of CDO is void. Further, 3 out
of 5 commissioners must sign CDO.
c. Disclosure Rule
CHAPTER V
REPORTORIAL REQUIREMENTS
Section 17. Periodic and Other Reports of Issuer. 17.1. Every issuer satisfying the requirements in
Subsection 17.2 hereof shall file with the Commission:
17.2. The reportorial requirements of Subsection 17.1 shall apply to the following:
(a) An issuer which has sold a class of its securities pursuant to a registration under section 12
hereof:Provided however, That the obligation of such issuer to file reports shall be suspended for any
fiscal year after the year such registration became effective if such issuer, as of the first day of any such
fiscal year, has less than one hundred (100) holder of such class securities or such other number as the
Commission shall prescribe and it notifies the Commission of such;
(b) An issuer with a class of securities listed for trading on an Exchange; and
(c) An issuer with assets of at least Fifty million pesos (50,000,000.00) or such other amount as the
Commission shall prescribe, and having two hundred (200) or more holder each holding at least one
hundred (100) share of a class of its equity securities: Provided, however, That the obligation of such
issuer to file report shall be terminate ninety (90) days after notification to the Commission by the issuer
that the number of its holders holding at least one hundred (100) share reduced to less than one hundred
(100).
17.3. Every issuer of a security listed for trading on an Exchange a copy of any report filed with the
Commission under Subsection 17.1. hereof.
17.4. All reports (including financial statements) required to be filed with the Commission pursuant to
Subsection 17.1 hereof shall be in such form, contain such information and be filed at such times as the
Commission shall prescribe, and shall be in lieu of any periodical or current reports or financial
statements otherwise required to be filed under the Commission shall prescribe.
17.5. Every issuer which has a class of equity securities satisfying any of the requirements in Subsection
17.2 shall furnish to each holder of such equity security an annual report in such form and containing
such information as the Commission shall prescribe.
17.6. Within such period as the Commission may prescribe preceding the annual meeting of the holders
of any equity security of a class entitled to vote at such meeting , the issuer shall transmit to such holders
an annual report in conformity with subsection 17.5.
IRR
17.1.1.1. The public and reporting companies shall file with the Commission:
17.1.1.1.1. An annual report on SEC Form 17-A for the fiscal year in which the registration statement was
rendered effective by the Commission, and for each fiscal year thereafter, within one hundred five (105)
calendar days after the end of the fiscal year.
17.1.1.1.2. A quarterly report on SEC Form 17-Q within forty five (45) calendar days after the end of each
of the first three quarters of each fiscal year. The first quarterly report of the Issuer shall be filed either
within forty five (45) calendar days after the effective date of the registration statement or on or before
the date on which such report would have been required to be filed if the Issuer had been required
previously to file reports on SEC Form 17-Q, whichever is later.
17.1.1.1.3(a). A current report on SEC Form 17-C, as may be necessary, to make a full, fair and accurate
disclosure to the public of every material fact or event that occurs which would reasonably be expected
to affect the investors' decisions in relation to those securities. In the event a news report appears in the
media involving an alleged material event, a current report shall be made within the period prescribed
herein in order to clarify the said news item which may create public speculation if not officially denied or
clarified by the concerned company.
I 7.1.1.1.3(b). The disclosure required by SRC Rule 17.I.I.I.3(a) shall be made by the company in
accordance with the following guidelines:
17.1.1.1.3(b).I. Promptly to the public through the news media;
17.1.1.1.3(b).2. If the Issuer is listed on an Exchange, to that Exchange and to the Commission within ten
(10) minutes after the occurrence of the event and prior to its release to the public through the news
media; Provided that, disclosure by the Issuer to the Exchange may be deemed as filing with the
Commission pursuant to a Memorandum of Agreement between the Exchange and the Commission;
Provided further that, the Memorandum of Agreement shall provide for the ability of the Commission to
download and upload the same information made available to the Exchange;
17.1.1.1.3(b).3. If the issuer is not listed on an Exchange, to the Commission through SEC Form 17-C
within five (5) calendar days after the occurrence of the event reported, unless substantially similar
information as that required by Form 17-C has been previously reported to the Comm ission by the Issuer.
Public and Reporting companies are those that:
a) Has at least 100 holders of its securities, or
b) Are public companies as previously discussed.
Under the IRR of the SRC, public and reporting companies are required to submit the ff.
reports:
(1) An Annual report within 104 days after the end of the fiscal year
(2) Quarterly reports within 45 days after the end of each quarter, and
(3) A current report, which must make a full, fair and accurate disclosure to the
public of every material fact or event that occurs which would reasonably be expected to
affect the investors' decisions in relation to those securities. (Disclosure Rule)
a. In the event a news report appears in the media involving an alleged material
event, a current report shall be made within the period prescribed herein in order
to clarify the said news item which may create public speculation if not officially
denied or clarified by the concerned company.
b. The disclosure must be made required by SRC Rule 17.I.I.I.3(a) shall be made by
the company in accordance with the following guidelines:
i. Must be given promptly to the public through the news media;
ii. If the Issuer is listed on an Exchange, must be disclosed to that Exchange
and to the Commission within ten (10) minutes after the occurrence of the
event and prior to its release to the public through the news media, unless
there are MOAs which provide that notice to the exchange is notice to the
Commission.
Such a MOA must provide for the ability of the Commission to download
and upload the same information made available to the Exchange;
(4) If the issuer is not listed on an Exchange, to the Commission through SEC Form
17-C within five (5) calendar days after the occurrence of the event reported,
Section 27 (SRC) penalizes an insiders misuse of material and non-public information about
the issuer, for the purpose of protecting public investors; Section 26 widens the coverage of
punishable acts, which intend to defraud public investors through various devices,
misinformation and omissions. Section 23 imposes upon (1) a beneficial owner of more than
ten percent of any class of any equity security or (2) a director or any officer of the issuer of
such security, the obligation to submit a statement indicating his or her ownership of the
issuers securities and such changes in his or her ownership thereof. (Securities and
Exchange Commission vs. Interport Resources Corporation, et. al., G.R. No. 135808,
October 6, 2008)
Under the law, what is required to be disclosed is a fact of special significance
which may be (a) a material fact which would be likely, on being made generally
available, to affect the market price of a security to a significant extent, or (b) one
which a reasonable person would consider especially important in determining his
course of action with regard to the shares of stock. (id)
 vii. Civil Liabilities in case of violation of SRC/Remedies (Bar):
a. Administrative
a. SEC may revoke permit to sell security
b. Impose sanctions on erring director
c. Cease and desist order (CDO), infra. )
b. Civil (please just read)
i. For False Registration Statement
Section 56. Civil Liabilities on Account of False Registration Statement. 56.1. Any person acquiring a
security, the registration statement of which or any part thereof contains on its effectivity an untrue
statement of a material fact or omits to state a material fact required to be stated therein or
necessary to make such statements not misleading, and who suffers damage, may sue and recover
damages from the following enumerated persons, unless it is proved that at the time of such acquisition
he knew of such untrue statement or omission:
(a) The issuer and every person who signed the registration statement:
(b) Every person who was a director of, or any other person performing similar functions, or a partner in,
the issuer at the time of the filing of the registration statement or any part, supplement or amendment
thereof with respect to which his liability is asserted;
(c) Every person who is named in the registration statement as being or about to become a director of, or
a person performing similar functions, or a partner in, the issuer and whose written consent thereto is
filed with the registration statement;
(d) Every auditor or auditing firm named as having certified any financial statements used in connection
with the registration statement or prospectus.
(e) Every person who, with his written consent, which shall be filed with the registration statement, has
been named as having prepared or certified any part of the registration statement, or as having prepared
or certified any report or valuation which is used in connection with the registration statement, with
respect to the statement, report, or valuation, which purports to have been prepared or certified by him.
(f) Every selling shareholder who contributed to and certified as to the accuracy of a portion of the
registration statement, with respect to that portion of the registration statement which purports to have
been contributed by him.
(g) Every underwriter with respect to such security.
56.2. If the person who acquired the security did so after the issuer has made generally available to its
security holders an income statement covering a period of at least twelve (12) months beginning from the
effective date of the registration statement, then the right of recovery under this subsection shall be
conditioned on proof that such person acquired the security relying upon such untrue statement in the
registration statement or relying upon the registration statement and not knowing of such income
statement, but such reliance may be established without proof of the reading of the registration
statement by such person.
b. In connection with Prospectus, Communications and
Reports.
Section 57. Civil Liabilities Arising in Connection With Prospectus, Communications and Reports. 57.1.
Any person who:
(a) Offers to sell or sells a security in violation of Chapter III, or
(b) Offers to sell or sells a security, whether or not exempted by the provisions of this Code, by the use of
any means or instruments of transportation or communication, by means of a prospectus or other written
or oral communication, which includes an untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements, in the light of the circumstances under which they were
made, not misleading (the purchaser not knowing of such untruth or omission), and who shall fail in the
burden of proof that he did not know, and in the exercise of reasonable care could not have known, of
such untruth or omission, shall be liable to the person purchasing such security from him, who may sue
to recover the consideration paid for such security with interest thereon, less the amount of any income
received thereon, upon the tender of such security, or for damages if he no longer owns the security.
57.2. Any person who shall make or cause to be made any statement in any report, or document filed
pursuant to this Code or any rule or regulation thereunder, which statement as at the time and in the
light of the circumstances under which it was made false or misleading with respect to any material fact,
shall be liable to any person who, not knowing that such statement was false or misleading, and relying
upon such statement shall have purchased or sold a security at a price which was affected by such
statement, for damages caused by such reliance, unless the person sued shall prove that he acted in good
faith and had no knowledge that such statement was false or misleading.
c. For fraud in connection with Securities transactions
Section 58. Civil Liability of Fraud in Connection with Securities Transactions. Any person who engages
in any act or transaction in violation of Sections 19.2, 20 or 26, or any rule or regulation of the
Commission thereunder, shall be liable to any other person who purchases or sells any security, grants or
refuses to grant any proxy, consent or authorization, or accepts or declines an invitation for tender of a
security, as the case may be, for the damages sustained by such other person as a result of such act or
transaction.
d. For Manipulation of Security Prices
Section 59. Civil Liability for Manipulation of Security Prices. Any person who willfully participates in
any act or transaction in violation of Section 24 shall be liable to any person who shall purchase or sell
any security at a price which was affected by such act or transaction, and the person so injured may sue
to recover the damages sustained as a result of such act or transaction.
e. With Respect to commodity futures contracts and pre-
need plans.
Section 60. Civil Liability with Respect to Commodity Futures Contracts and Pre-need Plans. 60.1. Any
person who engages in any act or transactions in willful violation of any rule or regulation promulgated
by the Commission under Section 11 or 16, which the Commission denominates at the time of issuance as
intended to prohibit fraud in the offer and sale of pre-need plans or to prohibit fraud, manipulation,
fictitious transactions, undue speculation, or other unfair or abusive practices with respect to commodity
future contracts, shall be liable to any other person sustaining damages as a result of such act or
transaction.
60.2. As to each such rule or regulation so denominated, the Commission by rule shall prescribe the
elements of proof required for recovery and any limitations on the amount of damages that may be
imposed.
f. For insider trading
Section 61. Civil Liability on Account of Insider Trading. 61.1. Any insider who violates Subsection 27.1
and any person in the case of a tender offer who violates Subsection 27.4 (a)(I), or any rule or regulation
thereunder, by purchasing or selling a security while in possession of material information not generally
available to the public, shall be liable in a suit brought by any investor who, contemporaneously with the
purchase or sale of securities that is the subject of the violation, purchased or sold securities of the same
class unless such insider, or such person in the case of a tender offer, proves that such investor knew the
information or would have purchased or sold at the same price regardless of disclosure of the information
to him.
61.2. An insider who violates Subsection 27.3 or any person in the case of a tender offer who violates
Subsection 27.4 (a), or any rule or regulation thereunder, by communicating material nonpublic
information, shall be jointly and severally liable under Subsection 61.1 with, and to the same extent as,
the insider, or person in the case of a tender offer, to whom the communication was directed and who is
liable under Subsection 61.1 by reason of his purchase or sale of a security.
g. Lmitation of Actions
Section 62. Limitation of Actions. 62.1. No action shall be maintained to enforce any liability created
under Section 56 or 57 of this Code unless brought within two (2) years after the discovery of the
untrue statement or the omission, or, if the action is to enforce a liability created under Subsection
57.1 (a), unless, brought within two (2) yeas after the violation upon which it is based. In no event shall
an such action be brought to enforce a liability created under Section 56 or Subsection 57.1 (a) more
than five (5) years after the security was bona fide offered to the public, or under Subsection 57.1 (b0
more than five (5) years after the sale.
62.2. No action shall be maintained to enforce any liability created under any other provision of this Code
unless brought within two (2) years after the discovery of the facts constituting the cause of action
and within five (5) years after such cause of action accrued.
h. Damages to be awarded
Section 63. Amount of Damages to be Awarded. 63.1. All suits to recover damages pursuant to Sections
56, 57, 58, 59, 60 and 61 shall be brought before the Regional Trial Court, which shall have exclusive
jurisdiction to hear and decide such suits. The Court is hereby authorized to award damages in an
amount not exceeding triple the amount of the transaction plus actual damages.
Exemplary damages may also be awarded in cases of bad faith, fraud, malevolence or wantonness in
the violation of this Code or the rules and regulations promulgated thereunder.
The Court is also authorized to award attorneys fees not exceeding thirty percentum (30%) of the award.
63.2. The persons specified in Sections 56, 57, 58, 59, 60 and 61 hereof shall be jointly and severally
liable for the payment of damages. However, any person who becomes liable for the payment of such
damages may recover contribution from any other person who, if sued separately, would have been liable
to make the same payment, unless the former was guilty of fraudulent representation and the latter was
not.
63.3. Notwithstanding any provision of law to the contrary, all persons, including the issuer, held liable
under the provisions of Sections 56, 57, 58, 59, 60 and 61 shall contribute equally to the total liability
adjudged herein. In no case shall the principal stockholders, directors and other officers of the issuer or
persons occupying similar positions therein, recover their contribution to the liability from the issuer.
However, the right of the issuer to recover from the guilty parties the amount it has contributed under
this Section shall not be prejudiced.
i. Cease and Desist order
Section 64. Cease and Desist Order. 64.1. The Commission, after proper investigation or
verification, motu proprio or upon verified complaint by any aggrieved party, may issue a cease and desist
order without the necessity of a prior hearing if in its judgment the act or practice, unless restrained, will
operate as a fraud on investors or is otherwise likely to cause grave or irreparable injury or prejudice to
the investing public.
64.2. Until the Commission issue a cease and desist order, the fact that an investigation has been
initiated or that a complaint has been filed, including the contents of the complaint, shall be confidential.
Upon issuance of a cease and desist order, the Commission shall make public such order and a copy
thereof shall be immediately furnished to each person subject to the order.
64.3. Any person against whom a cease and desist order was issued may, within five (5) days from receipt
of the order, file a formal request for a lifting thereof. Said request shall be set for hearing by the
Commission not later than fifteen (15) days from its filing and the resolution thereof shall be made not
later than ten (10) days from the termination of the hearing. If the Commission fails to resolve the
request within the time herein prescribed, the cease and desist order shall automatically be lifted.
A cease and desist order is an order enjoining the Issuer and underwriter or selling agent
from further offering for sale the subject commercial papers.
It may issue on the ff. grounds:
i. 5.1; prevent grave and irreparable injury to the public.
ii. 53.3.: Fradulent transactions
iii. 64.1: Act will operate as fraud
1. All in accordance with power of SEC to issue CDO to prevent
fraudulent act.
Shotgun CDO is void. (GSIS v CA
d. GSIS v CA (2009)
There are three distinct bases for the issuance by the SEC of the cease and desist order
( CDO ). The first, allocated by Section 5(i) of the SRC, is predicated on a necessity to
prevent fraud or injury to the investing public. No other requisite or detail is tied to this
CDO authorized under Section 5(i).
 The second basis, found in Section 53.3, involves a determination by the SEC that any
person has engaged or is about to engage in any act or practice constituting a violation of any
provision of this Code, any rule, regulation or order thereunder, or any rule of an Exchange,
registered securities association, clearing agency or other self-regulatory organization. The
provision additionally requires a finding that there is a reasonable likelihood of continuing [or
engaging in] further or future violations by such person. The maximum duration of the CDO
issued under Section 53.3 is ten (10) days.
The third basis for the issuance of a CDO is Section 64. This CDO is founded on a
determination of an act or practice, which unless restrained, will operate as a fraud on
investors or is otherwise likely to cause grave or irreparable injury or prejudice to the investing
public. Section 64.1 plainly provides three segregate instances upon which the SEC may issue
the CDO under this provision: (1) after proper investigation or verification, (2) motu proprio, or
(3) upon verified complaint by any aggrieved party. While no lifetime is specified under Section
64, the respondent to the CDO may file a formal request for the lifting thereof, which the SEC
must hear within fifteen (15) days from filing and decide within ten (10) days from the hearing.
It appears that the CDO under Section 5(i) is similar to the CDO under Section 64.1. Both
require a common finding of a need to prevent fraud or injury to the investing public. At the
same time, no mention is made whether the CDO defined under Section 5(i) may be issued ex-
parte, while the CDO under Section 64.1 requires grave and irreparable injury, language
absent in Section 5(i). Notwithstanding the similarities between Section 5(i) and Section 64.1, it
remains clear that the CDO issued under Section 53.3 is a distinct creation from that under
Section 64.
The CDO as contemplated in Section 53.3 or in Section 64, may be issued ex-parte
(under Section 53.3) or without necessity of hearing (under Section 64.1). Nothing in these
provisions impose a requisite hearing before the CDO may be issued thereunder. Nonetheless,
there are identifiable requisite actions on the part of the SEC that must be undertaken before
the CDO may be issued either under Section 53.3 or Section 64. In the case of Section 53.3, the
SEC must make two findings: (1) that such person has engaged in any such act or practice, and
(2) that there is a reasonable likelihood of continuing, (or engaging in) further or future
violations by such person. For Section 64, the SEC must adjudge that the act, unless restrained,
will operate as a fraud on investors or is otherwise likely to cause grave or irreparable injury or
prejudice to the investing public.
A singular CDO could not be founded on Section 5.1, Section 53.3 and Section 64
collectively. At the very least, the CDO under Section 53.3 and under Section 64 have their
respective requisites and terms. It is an error on the part of the SEC in granting the CDO
without stating which kind of CDO as it is an act that contravenes due process of law.
Also, the fact that the CDO was signed, much less apparently deliberated upon, by only by
one commissioner likewise renders the order fatally infirm.The SEC is a collegial body
composed of a Chairperson and four (4) Commissioners. In order to constitute a quorum to
conduct business, the presence of at least three (3) Commissioners is required. (GSIS v. CA)
c. Criminal (not in syllabus)
Doctrine of primary jurisdiction
SEC cannot direct prosecutor to file case for violation of SRC.
i. Can only investigate, then refer matter to DOJ.
ii. Neither can citizen file directly with DOJ. Must give it to SEC first, under the doctrine
of primary jurisdiction.
Under the doctrine of primary jurisdiction, courts will not determine a controversy involving
a question within the jurisdiction of the administrative tribunal, where the question demands
the exercise of sound administrative discretion requiring the specialized knowledge and
 expertise of said administrative tribunal. The Securities Regulation Code is a special law. Its
enforcement is particularly vested in the SEC. Hence, all complaints for any violation of the
Code and its implementing rules and regulations should be filed with SEC. Where the
complaint is criminal in nature, SEC shall indorse the complaint to the DOJ for preliminary
investigation and prosecution. (Baviera v. Standard Chartered)
Nope. The primary jurisdiction rule only applies to criminal complaints for violation of the
SRC, not to civil complaints like this one. (Pua v. Citibank)
Prescriptive Period
1. Civil suit2 years from discovery of fraud, but not more than 5 years from issuance of
security.
d. Criminal suitprescriptive period based on special period.
The SRC, Sec. 62 provides for 2 different periods. The enforcement of civil liability must be
brought within 2 years after the violation upon which it is based and within 5 years after the
security was bona fide offered to the public or after the sale. These limits only apply,
however, to civil liability, and not to criminal liability. Rather, Act 3326 applies. As the
penalty is imprisonment from 7-21 years, the prescriptive period is 12 years. (Citibank NA v.
Tanco-Gabaldon)
A person is liable for violation of Section 28 of the SRC where, acting as a broker, dealer or
salesman is in the employ of a corporation which sold or offered for sale unregistered
securities in the Philippines. The transaction initiated by the investment consultant of a
corporation is an investment contract or participation in a profit sharing agreement that falls
within the definition of lawan investment in a common venture premised on a reasonable
expectation of profits to be derived from the entrepreneurial or managerial efforts of others.
(Securities and Exchange Commission vs. Oudine Santos, G.R. No. 195542, March
19, 2014)
viii. SEC jurisdiction (not in syllabus)
1. Intra-corporate dispute now with RTC acting as special commercial court.
2. If filed in the wrong RTC, remedy is not reraffle but to dismiss case based on lack of
jurisdiction.
a. Intracorporate disputes: DIEDI
Should be filed in city where principal office of corporation is located in RTC acting as special
commercial court:
1. D evices or scheme resulting in fraud to the investing public
a. E.g. Ponzi schemes
2. I ntra-corporate relations (Both tests must concur)
a. Relationship test
b. Nature of controversy (Gulfo v. Ancheta)
3. E lection of directors and corporate officers
a. Any issue involving election of directors and corporate officers. is considered intra-
corporate.
4. D erivative suit
5. I nspection of corporate books.
Intracorporate dispute?
1. Ownership dispute between stockholders? No
2. Challenge as to election of directors? No
There are 2 tests to determine whether a case is an intra-corporate dispute:
1. Under the Relationship Test, the relationship should be
[a] between the corporation, partnership or association and the public;
[b] between the corporation, partnership or association and its stockholders, partners,
members, or officers;
[c] between the corporation, partnership or association and the [S]tate [insofar] as its
franchise, permit or license to operate is concerned; and
[d] among the stockholders, partners or associates themselves
Relationship alone does not ipso facto make the dispute intra-corporate; the mere existence of
an intra-corporate relationship does not always give rise to an intra-corporate controversy. The
incidents of that relationship must be considered to ascertain whether the controversy itself is
intra-corporate. This is where the Controversy Test becomes material.
2. Under the controversy test, the dispute must be rooted in the existence of an intra-
corporate relationship, and must refer to the enforcement of the parties' correlative
rights and obligations under the Corporation Code, as well as the internal and intra-
corporate regulatory rules of the corporation, in order to be an intra-corporate dispute.
These are essentially determined through the allegations in the complaint which
determine the nature of the action. Here, while there was an intra-corporate relationship,
there was no intracorporate controversy. Thus, the RTC had jurisdiction. (Gulfo v.
Ancheta)
To invoke the special commercial jurisdiction, the allegations should not merely be
conclusions of law like alleging fraud without particularity. There must be sufficient nexus
showin htat the corporations nature, structur or powers were used to facilitate the
fraudulent device or scheme. fraud in intra-corporate controversies must be based on
devises and schemes employed by, or any act of, the board of directors, business associates,
officers or partners, amounting to fraud or misrepresentation which may be detrimental to
the interest of the public and/or of the stockholders, partners, or members of any
corporation, partnership, or association. (Guy v. Guy)
b. Are the ff. within the jurisdiction of the special commercial courts?
Payment of dues in a subdivision? No, HLURB.
Non-payment of dues in a condominium? Yes, RTC
Dam
The propriety and legality of the sale of the condominium unit is different from the propriety
and legality of the unpaid assessment dues. The latter partakes of the nature of an intra-
corporate dispute. (Chateau v. Moreno)
Recall of erroneously issued stock and transfer book? SEC (Provident v. Venus)
3. Whether or not the transfer book entries are correct? Intra-corporate.
4. Issuance of CDO? Yes, supra.
5. Annulment of foreclosure sale? Yes. (Lisam v. BDO)
Misrepresentations in flyer? Yes
Most of the functions have been transferred to RTCs acting as a special commercial court.
However, SEC retains administrative jurisdiction and supervision over Corporations,
Partnerships and Associations. (Go v. Distinction)
o For non-compliance with Corpo Code, etc., that are not intra-corporate disputes.
o NB. Dissolution no longer under SEC.
HLURB Jurisdiction
Intra-corporate, but jurisdiction is with HLURB.
Cf. Condominium Corps
Intra-corporate, with RTC as Special Commercial Court.