Whatever you asked for in prayer, believe that you have received it and

it will be yours. –Mark 11:24

CHAPTER 2: DEFINITION AND ATTRIBUTES

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. (Sec 2)
Attributes:
1. Artificial being;
2. Created by operation of law;
3. Right of succession; and
4. Powers, attributes and properties expressly authorized by law or incident to its existence.

A corporation may claim for moral damages under Art. 2219 (7) of the Civil Code in cases of libel, slander or
any form of defamation. (Filipinas Broadcasting Network vs. Ago Medical and Educational Center)

Advantages of corporate form of business:

1. Capacity to act as a single unit;
2. Limited shareholder’s liability;
3. Continuity in existence;
4. Feasibility of greater undertaking;
5. Transferability of shares;
6. Centralized management; and
7. Standardized method of organization, management and finance
Disadvantage of corporate form of business:
1. To have valid and binding corporate act, formal proceedings, such as board meetings are required.
2. The business transactions of a corporation is limited to the State of its incorporation and may not
act as such corporation in other jurisdiction unless it has obtained a license or authority from the
foreign state.
3. The shareholders‟ limited liability tends to limit the credit available to the corporation as a separate
legal entity.
4. By the very nature of shares of stock which are personal properties, transferable at will by the
owners thereof, transfers of share may result to uniting incompatible and conflicting interests.
5. The minority shareholders have practically no say in the conduct of corporate affairs.
6. In large scale enterprises, stockholders‟ voting rights may become merely fictitious and theoretical
because of disinterest in management, wide-scale ownership and inaccessible place of meeting.
7. Double taxation may be imposed on corporate income.
8. Corporations are subject to governmental regulations supervision and control including submission
of reportorial requirements not otherwise imposed in other business form.

Salipsip and Rubin Notes as Updated by ZGB

Arellano University School of Law Page 1
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

Distinctions between a corporation and a partnership

CORPORATION PARTNERSHIP
1. Created by law or operation of law 1. Created by mere agreement of the
Parties
2. Generally there must be at least 5 2. May be formed by 2 or more natural
incorporators Persons
3. Can exercise only such powers and 3. Can do anything by agreement of the
functions expressly granted to it by law parties provided only that it is not
and those necessary or incident to its contrary to law, morals, good customs,
existence public policy and public order
4. Unless validly delegated expressly or 4. In absence of agreement to the contrary,
impliedly, must transact its business any one of the partners may validly bind
through the board of directors the partnership
5. Has the right of succession which 5. Based on mutual trust and confidence
presupposes that it continues to exist such that the death, incapacity,
despite the death, withdrawal, incapacity insolvency, civil interdiction or mere
or civil interdiction of the stockholders or withdrawal of one partner would result in
members it dissolution
6. Any stockholder can ordinarily transfer, 6. A partner cannot transfer his rights or
sell or assign his shares of stock without interest in the partnership so as to make
the consent of the other stockholders the transferee a partner without the
consent of the other partners
7. The liability of the stockholders or 7. All partners are liable pro rata with all
members in is limited to the extend of their property and after all the partnership
their subscription or their promised property has been exhausted, for all
contribution partnership liability
8. Term of existence is limited only to 50 8. May exist for an indefinite period
years unless extended
9. Consent of the State is necessary for its 9. Partners may dissolve at will
dissolution

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Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

CHAPTER 3: CLASSIFICATION OF CORPORATIONS

Classes of corporations:
1. Stock (Sec 3)
2. Non-stock (Sec 87)

Requisites to be classified as a stock corporation:

3. That they have a capital stock divided into shares; and
4. That they are authorized to distribute dividends or allotments as surplus profits to its stockholders
on the basis of the shares held by them
Non-stock corporations – no part of their income is distributable as dividends to its members, trustees or
officers subject to the provisions on dissolution. (Sec. 87)
The plain and ordinary meaning of a business is restricted to activities or affairs where profit is the purpose or
livelihood is the motive, and the term business when used without qualification, should be construed in its
plain and ordinary meaning, restricted to activities for profit or livelihood. (CIR vs. Club Filipino, Inc.)
Remember: While non-stock corporations primarily exist for purposes other than for profit, it does not
follow that they cannot make profits as an incident to their operations.
Corporations created by special law or charter owe their existence not by virtue of their compliance with the
requirements of registration under the Corporation Code but by virtue of the law specially creating them.
They are primarily governed by the special law creating them. (Sec 4)

The test in determining whether a government owned or controlled corporation is subject to the Civil Service
Law is the manner of its creation, such that government corporations created by special charter are subject to
its provisions while those incorporated under the General Corporation Law are not within its coverage.
(PNOC-EDC vs. NLRC)

Other classes of corporations:

1. Public and Private. Query: Are special corporations a public corporation? Some are, but not all.
a. Public corporations – those created, formed or organized for political or governmental purposes
with political powers to be exercised for purposes connected with the public good in the
administration of civil government. (NCC vs CIR)
b. Private corporations – those formed for some private purpose, benefit, aim or end.
2. Ecclesiastical (religious societies or corporation sole) and Lay (eleemosynary or civil).

a. Ecclesiastical or religious corporations – those composed exclusively of ecclesiastics organized

for spiritual purposes or for administering properties held for religious ones. They are further
classified as religious societies or corporation sole.
b. Lay corporations – those established for the purposes other than religion. They are further
classified as eleemosynary or civil. Eleemosynary corporations are created for charitable and
benevolent purposes. Civil corporations are organized not for the purpose of public charity but
for the benefit, pecuniary or otherwise, of its members.
3. Aggregate and Sole.
a. Aggregate corporations – those composed of a number of individuals vested with corporate
powers.
b. Corporations sole – those that consist of one person or individual only and who are made as
bodies corporate and politic in order to give them some legal capacity and advantage which, as
natural persons, they cannot have.
4. Close and Open.
a. Close corporations – those whose shares of stock are held by limited number of persons.
b. Open corporations – those formed to openly accept outsiders as stockholders or investors.
5. Domestic and Foreign.

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a. Domestic corporations – those that are organized or created under or by virtue of the Philippine
laws. Note: issues of intra-corporate nature are governed by Philippine law.
b. Foreign corporations – those 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.

6. Parent or Holding Companies and Subsidiaries and Affiliates.

a. Holding corporations – corporations that confine their activities to owning stock in, and
supervising management of other companies.
b. Subsidiary corporations – those which another corporation owns at least a majority of the
shares, and thus have control.
c. Affiliates – those corporations which are subject to common control and operated as part of a
system.
7. Quasi-public.
a. Quasi-public corporations – private corporations which have accepted from the State the grant
of a franchise or contract involving the performance of public duties (public service
corporations).

8. Quasi corporations.

a. Quasi corporations – public bodies or municipal societies such as townships, counties, school
districts, road or highway districts which, though not vested with the general powers of
corporations, are organized by statutes or immemorial usage, as persons or aggregate
corporations with precise duties which may be enforced, and privileges which may be
maintained, by suits of law.
9. De jure corporations.
a. De jure corporations – juridical entities created or organized in strict or substantial compliance
with the statutory requirements of incorporation and whose right to exist as such cannot
be successfully attacked even by the State in a quo warranto proceeding.
10. De facto corporations.

a. De facto corporations – those which exist by virtue of an irregularity or defect in the

organization or constitution or from some other omission to comply with the conditions
precedent by which corporations de jure are created, but there was colorable compliance
with the requirements of the law under which they might be lawfully incorporated for the
purposes and powers assumed, and user of the rights claimed to be conferred by law.
11. Corporations by estoppel.
a. Corporations by estoppel – those which are so defectively formed as not to be either de jure or
de facto corporations but which are considered as corporations in relation only to those
who cannot deny their corporate existence due to their agreement, admission or conduct.
The mere fact that the government happens to be a majority stockholder does not make it a public
corporation. (National Coal vs. CIR)

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 4
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

CHAPTER 4: FORMATION AND ORGANIZATION

Stages in the life of a corporation:
1. Creation
2. Reorganization or quasi-reorganization
3. Dissolution and winding up
Steps in creation:
1. Promotional stage
2. Process of incorporation
3. Organization and commencement of business
PROMOTIONAL STAGE

A promoter acting for a proposed corporation has 3 options:

1. He may make a continuing offer on behalf of the corporation, which, if accepted after
incorporation, will become a contract. In this case, the promoter does not assume any personal
liability, whether or not the corporation will accept the offer.
2. The promoter may make a contract at the time binding himself, with the understanding that if the
corporation, once formed, accepts or adopts the contract, he will be relieved of responsibility.
3. The promoter may bind himself personally and assume the responsibility of looking to the proposed
corporation, when formed, for reimbursement.

Remember: As to the liability of the promoter. The promoter will be held personally liable on contracts
made by him for the benefit of a corporation he intends to organize. The personal liability will continue even
after the contemplated corporation is formed and has received the benefits of the contract UNLESS there is a
novation or other agreement to release him from liability. He is not relieved from his liability even after the
corporation ratifies the contract and assumes its own liability.
PROCESS OF INCORPORATION
Process of incorporation:
1. Drafting the articles of incorporation
2. Preparation and submission of additional and supporting documents
3. Filing with the SEC
4. Subsequent issuance of certificate of incorporation
Contents of the articles of incorporation
1. Name
2. Purpose
3. Principal office
4. Term
5. Incorporators
6. Number of directors/trustees
7. Names, nationalities and residences of directors/trustees
8. If a stock corporation, amount of authorized capital stock, number of shares, par value, original
subscribers
9. If a non-stock corporation, amount of capital, contributors
10. Such other matters not inconsistent with law and which the incorporator may deem necessary and
convenient

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Whatever you asked for in prayer, believe that you have received it and
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11. Treasurer’s certificate

CORPORATE NAME
A corporation cannot use a name which is:
1. identical or deceptively or confusingly similar to that of any existing corporation or to any other
name protected by law; or
2. patently deceptive, confusing or contrary to law.
The law gives a corporation no express or implied authority to assume another name that is unappropriated;
still less that of another corporation, which is expressly set apart from it and protected by law. (Red Line
Transportation Co. vs. Rural Transit Co.)
A word or phrase originally incapable of exclusive appropriation with reference to an article on the market,
because geographically or otherwise descriptive, might nevertheless have been used so long and so
exclusively by one producer with reference to his article that, in that trade and to that branch of the
purchasing public, the word or phrase has come to mean that the article was his product. (Doctrine of
secondary meaning, Lyceum of the Philippines, Inc. vs.CA)
A corporation's right to use its corporate and trade name is a property right, a right in rem, which it may
assert and protect against the world in the same manner as it may protect its tangible property, real or
personal, against trespass or conversion. It is regarded, to a certain extent, as a property right and one which
cannot be impaired or defeated by subsequent appropriation by another corporation in the same field. (Philips
Export B.V. vs. CA)
To come within the scope of the prohibition of Sec. 18, two requisites must be proven, namely:
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. (Philips Export B.V. vs. CA)
In determining the existence of confusing similarity in corporate names, the test is whether the similarity is
such as to mislead a person using ordinary care and discrimination. Proof of actual confusion need not be
shown. It suffices that confusion is probably or likely to occur. (Philips Export B.V. vs. CA)
A corporation has an exclusive right to the use of its name, which may be protected by injunction upon a
principle similar to that upon which persons are protected in the use of trademarks and tradenames. (Philips
Export B.V. vs. CA)
Remember: Section 8 is applicable also to or against foreign corporation.
A mere change in the name of a corporation, either by the legislature or by the corporators or stockholders
under legislative authority, does not, generally speaking, affect the identity of the corporation, nor in any way
affect the rights, privileges or obligations previously acquired or incurred by it.
Remember: Any change upon a corporate name or identity does not affect the rights of the corporation or
lessen or adds to its obligation. The corporation upon such change in its name is on no sense a new
corporation, nor successor of the original corporation. It is the same corporation with a different name, and its
character is in no respect changed.
PURPOSE CLAUSE
Doctrine of Limited Capacity. A corporation has only such powers as are expressly granted to it by law and
by its articles of incorporation including those which are incidental to such conferred powers, those
reasonably necessary to accomplish its purpose and those which may be incidental to its existence.
Reasons for requiring a statement of purposes or objects:
1. In order that the stockholder who contemplates on an investment in a business enterprise shall
know within what lines of business his money is to be put at risk.
2. So that the board of directors and management may know within what lines of business they are
authorized to act.
3. So that anyone who deals with the company may ascertain whether a contract or transaction into
which he contemplates entering is one within the general authority of the management.
If the corporate purpose or objective includes any purpose under the supervision of another government
agency, prior clearance and/or approval of the concerned government agencies or instrumentalities will be
required.

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Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

Remember: If the corporation has more than one purpose, the primary and secondary purpose must be
indicated in the Article of Incorporation.
Remember: Take note of the limitations as provided by special laws.
General limitations on the purpose clause:
1. The purpose must be lawful.
2. The purpose must be specific or stated concisely although in broad or general terms.
3. If there is more than one purpose, the primary as well as the secondary ones must be specified.
4. The purpose must be capable of being lawfully combined.

THE PRINCIPAL OFFICE

The residence of the corporation is the place of its principal office as may be indicated in its articles of
incorporation and may, therefore, be sued only at that place. (CRS vs. Antillon)
Importance:
- Venue of meetings
- Service of summons
- Registration of chattel mortgage
- Venue of action
XPN: When there is a written contract and there is a stipulation on the venue of action.
Remember: There must be only ONE principal office which must be located within the Philippines.

TERM OF EXISTENCE
Sec. 11. Corporate term. - A corporation shall exist for a period not exceeding fifty (50) years 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 (50) years 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 (5) years prior to the original or subsequent expiry date(s) unless
there are justifiable reasons for an earlier extension as may be determined by the Securities and Exchange
Commission.

Remember the following important points:

- Section 122 of the Corporation Code provides that a corporation shall nevertheless be continued as
a body corporate for three years, after the time when it would have been dissolved, for the purpose
of liquidation and winding up.
- Extension prior or earlier than 5 years is allowed ONLY if there is justifiable reason.

- On the day of the expiration of corporate term, extension is still allowed. However, after the
expiration of its term, extension is no longer allowed for the corporate ceases to exist already and
there is nothing to extend.

INCORPORATORS
Sec. 10. Number and qualifications of incorporators. - Any number of natural persons not less than five (5)
but not more than fifteen (15), 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 subscriber to at least one (1) share of the capital stock of the corporation.
Remember: There is no nationality requirement, only residence. However, subject to limitations as provided
for by Nationalization Laws.
General Rule: Only natural persons can be incorporators.
Exception: Cooperatives and corporations primarily organized to hold equities in rural banks and may
rightfully become incorporators thereof.
Minors are not qualified to become incorporators, for they do not have legal capacity.

THE DIRECTORS/TRUSTEES

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Whatever you asked for in prayer, believe that you have received it and
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Section 138 of the Corporation Code provides that 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.
General Rule: There must be at least 5 but not more than 15 directors or trustees in a private corporation.
Exceptions:
1. Educational corporations registered as a non-stock corporation whose number of trustees, though
not less than 5 and not more than 15 should be divisible by 5;
2. In close corporations where all the stockholders are considered as members of the board of
directors thereby effectively allowing 20 members in the board; and
3. Corporation sole.
The by-laws may provide for additional qualifications and disqualifications. However, it may not do away
with the minimum disqualifications laid down by the Code.
Qualifications:
1. Directors must own at least one (1) share of the capital stock of the corporation. Trustees must be
members.
2. A majority of the directors or trustees must be residents of the Philippines.

Remember: The code requires mere residency. Unless provided for by other laws, even aliens
may be elected as director.
Disqualifications:
1. Conviction 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 election or
appointment.
2. Other disqualifications under applicable special laws.

Remember: A minor, having no legal capacity, cannot be a director for they cannot bind the corporation nor
represent the same.
A by-laws may validly provide that no person may be elected as director unless he owns a specified number
of shares required for the directorate qualification.
It may likewise disqualify a stockholder from being elected into office if he has a substantial interest in a
competitor corporation to avoid any possible adverse effects of conflicting interest of a director.
In order to be eligible as a director, what is material is the legal title to, not beneficial ownership, of the stock
as appearing on the books of the corporation. (Lee vs. CA)
If no election is conducted or no qualified candidate is elected, the incumbent director shall continue to act as
such in a hold over capacity until the election is held and a qualified candidate is so elected. (Detective and
Protective Bureau vs. Cloribel)

CAPITALIZATION
Authorized capital – the maximum amount fixed in the articles to be subscribed and paid-in or secured to be
paid by the subscribers.
Subscribed capital stock – the total number of shares and its total value for which there are contracts for their
acquisition or subscription.
Paid-up capital stock – the actual amount or value which has been actually contributed or paid to the
corporation in consideration of the subscriptions made thereon.
Remember: For purpose of incorporation, subscribed capital stock must be 25% of authorized capital stock
while paid-up capital stock shall be 25% of subscribed capital stock. Note however, that it does not
necessarily mean to be 25% of each subscription.
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 ff:
1. Actual cash paid to the corporation;

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2. Property, tangible or intangible, actually received by the corporation and necessary or convenient
for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock
issued;
3. Labor performed or services actually rendered to the corporation;
4. Previously incurred indebtedness by the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital; and
6. Outstanding shares in exchange for stocks in the event of reclassification or conversion.
Stocks shall not be issued in exchange of promissory notes or future services.
Shares of stock and their classification
Shares of stock designate the interest or right which the stockholder has in the management of the
corporation, and in the surplus profits and, in case of distribution, in all assets remaining after the payment of
its debts.
Stock certificate is a document or instrument evidencing the interest of a stockholder in the corporation.
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.
Purpose of classification:
1. To specify and define the rights and privileges of the stockholders.
2. For regulation and control of the issuance of sale of corporate securities for the protection of
purchasers and stockholders.
3. As a management control device.
4. To comply with statutory requirements.
5. To better insure return on investment.
6. For flexibility in price.
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.
Remember: If there is no specification of rights, privilege or advantage of a class over the other, they are
considered as equal. That any privilege or advantage of preferred shares over other shares must be indicated
in the Articles of Incorporation, by-laws or stock certificate, as required by law.

Common and preferred shares

Common stock – a stock which entitles its owner to an equal pro-rata division of profits, if there be any, but
without any preference or advantage in that respect over any other stockholder or class of stockholders.
Preferred stock – a stock that gives the holder a preference over the holder of common stocks with respect to
the payment of dividends and/or with respect to distribution of capital upon liquidation.
Limitations on preferred stock:
1. Must be issued with a stated par value; and
2. The preferences must be stated in the articles of incorporation and in the certificate of stock,
otherwise, each share shall be, in all respect, equal to every other share.
The guarantee to preference as to dividends does not create a relation of debtor and creditor between the
corporation and the holders of such stock. The board has the discretion to determine whether or not to declare
dividends.
Remember: BoD cannot be compelled to declare dividends as provided in Sec 43. However, it depends on
the type of preference share.
Preferred shares are presumed to be non-participating and non-cumulative.
Participating preferred shares – the holders thereof are still given the right to participate with the common
stockholders in dividends beyond their stated preference.

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Cumulative preferred share – those that entitle the owner thereof to payment not only of current dividends but
also back dividends not previously paid whether or not, during the past years, dividends were declared or
paid.
In absence of express stipulation, preferred shares are presumed to be non-cumulative.
Non-cumulative preferred shares – those which grant the holders of such shares only to the payment of
current dividends but not back dividends, when and if dividends are paid, to the extent agreed upon before
any other stockholders are paid the same.
Types of non-cumulative preferred shares:
1. Discretionary dividend type – gives the holder of such shares the right to have dividends paid
thereon in a particular year depending on the judgment or discretion of the board of directors.
2. Mandatory if earned type – impose a positive duty on directors to declare dividends every year
when profits are earned. Mandatory if there is profit.
3. Earned cumulative or dividend credit – gives the holder thereof the right to arrears in dividends if
there were profits earned during the previous years but dividends were not declared. Cumulative if
there is profit.
Unless the right to vote is clearly withheld, a preferred stockholder has the right to vote.
Preference upon liquidation must be clearly indicated otherwise they shall be placed on equal footing with
other shares. Such fact must be stipulated in the contract of subscription.

Par and no par value shares

Par value shares – those whose value are fixed in the articles of incorporation.
Par value shares cannot be issued nor sold by the corporation at less than par.
No par value shares – those whose issued price are not stated in the certificate of stock but which may be
fixed in the articles of incorporation, or by the board of directors when so authorized by the said articles or by
the by-laws, or in the absence thereof, by the stockholders themselves.
Limitations of no par value shares:
1. Such shares, once issued, are deemed fully paid and thus, non assessable;
2. The consideration for its issuance should not be less than P5.00;
3. The entire consideration for its issuance constitutes capital, hence, not available for dividend
declaration;
4. They cannot be issued as preferred stock; and
5. They cannot be issued by banks, trust companies, insurance companies, public utilities and building
and loan associations.
Advantages to the issuance of no par value shares:
1. Flexibility in price;
2. Evasion of the danger of liability upon watered stock; and
3. Disappearance of personal liability on the part of the holder thereof for unpaid subscription.

Voting and non-voting shares

Voting shares – gives the holder thereof the right to vote and participate in the management of the
corporation through the exercise of such right, either at the election of the board of directors, or in any
manner requiring the stockholder’s approval.
Non-voting shares – do not grant the holder thereof the right to vote except under the penultimate paragraph
of Sec. 6.

Only preferred and redeemable shares may be denied the right to vote.
There must always be a class or series of shares which have complete voting rights.

Non-voting shares shall nevertheless be entitled to vote on the following matters:

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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 penultimate paragraph of Sec. 6, 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.
Founders’ shares
Sec. 7. Founders‟ shares. - Founders' shares classified as such in the articles of incorporation may be given
certain rights and privileges not enjoyed by the owners of other stocks, provided that where the exclusive
right to vote and be voted for in the election of directors is granted, it must be for a limited period not to
exceed five (5) years subject to the approval of the Securities and Exchange Commission. The five-year
period shall commence from the date of the aforesaid approval by the Securities and Exchange Commission.
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.
Treasury shares (Note that treasury shares do not form part of Capital Stock as provided in Section 137)
Treasury shares are shares of stock which have been issued and fully paid for, but subsequently reacquired by
the issuing corporation by purchase, redemption, donation or through some other lawful means. Such shares
may again be disposed of for a reasonable price fixed by the board of directors.
Treasury shares may again be issued for a price less than par.
Treasury shares have no voting and dividend rights. Such rights are only granted to outstanding shares of
stock. (CIR vs. Manning)
Remember: All redeemable shares become treasury shares but not all treasury shares come from redeemable shares.

CAPITAL REQUIREMENT
Sec. 12. Minimum capital stock required of stock corporations. - 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.
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 (25%) per cent 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 (P5,000.00)
pesos.
RESTRICTIONS AND PREFERENCES ON TRANSFER OF SHARES
General Rule: Corporations may or may not provide for restrictions and preferences regarding the transfer,
sale or assignment of shares in the articles of incorporation. It is discretionary.
Exception: Close corporations are required to subject their shares to specified restrictions as required in Sec.
96.

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 11
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

General Rule: Restrictions or preferences must be contained in the articles of incorporation and in all stock
certificates to be issued by the corporation.

Exception: In close corporations, such restrictions and preferences must also be embodied in the by-laws.
NO TRANSFER CLAUSE (The purpose is to protect or guarantee compliance with nationalization laws)
No transfer of stock or interest which will reduce the ownership of Filipino citizens to less than the required
percentage of the capital stock as provided by existing laws shall be allowed or permitted to be recorded in
the books of the corporation and this restriction shall be indicated in all of the stock certificates to be issued
by the corporation.

GROUNDS FOR DISAPPROVAL

Only substantial and not strict compliance is required.
Grounds for disapproval:
1. The articles of incorporation or any amendment thereto is not substantially in accordance with the
form prescribed;
2. The purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or
contrary to government rules and regulations;
3. The Treasurer’s Affidavit concerning the amount of capital stock subscribed and/or paid is false;
4. The percentage of ownership of the capital stock to be owned by citizens of the Philippines has not
been complied with as required by existing laws or the Constitution,
5. The articles of incorporation of corporations subject to government supervision are not
accompanied by a favorable recommendation from the appropriate government agency.
The grounds are not exclusive. (Capital requirement)
Remember: If there is no valid ground for disapproval, SEC is duty bound to approve the same,
constitutional right to association.
COMMENCEMENT OF CORPORATE EXISTENCE
General Rule: It is only from the time of the issuance of the certificate of incorporation that a corporation
acquires juridical personality and legal existence.
Exceptions:
- Special Corporation, as provided for in the law creating them.
- Corporate Sole, from the time of filing the articles of incorporation.
- Other special provisions of the law which provide otherwise.
Prior to incorporation, a corporation has no juridical personality to enter into contracts. (Cagayan Fishing
Development vs. Sandiko)
Kinds of Defectively Formed Corporations

1. De Facto Corporation
2. Corporation by Estoppel

DE FACTO CORPORATION
De facto corporation – one that is so defectively created as not to be a de jure corporation but nevertheless
exists, for all practical purposes, as a corporate body, by virtue of its bona fide attempt to incorporate under
existing statutory authority, coupled with the exercise of corporate powers.
Requisites:
1. There is a valid law under which the corporation could have been created as a de jure corporation;
2. An attempt, in good faith, to form a corporation according to the requirements of law (colorable
compliance);
3. A user of corporate powers; and
4.
Good faith in claiming to be and doing business as a corporation. Rules on collateral and direct

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it will be yours. –Mark 11:24

attack against corporate existence:

1. The corporate existence of a de jure corporation cannot be directly attacked either directly or
collaterally, even by the State.
2. The corporate existence of a de facto corporation can be directly attacked on a quo warranto
proceeding.
3. The corporate existence of a de facto corporation is not subject to collateral attack by any party.
A municipal corporation created by an unconstitutional law cannot be cannot exist as a de facto corporation
unless there is some other valid law giving corporate vitality to the organization. An unconstitutional law
confers no rights. (Municipality of Malabang vs. Benito)
Without having obtained a certificate of incorporation, a corporation – even its stockholders – may not claim
in good faith to be a corporation. They are aware of the non-issuance, or pending of issuance, of the
certificate of registration (Hall vs. Piccio)

CORPORATION BY ESTOPPEL
Sec. 21. Corporation by estoppel. - All persons who assume to act as corporation knowing it 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.
The doctrine of corporation by estoppel may apply to the alleged corporation or to a third party transacting
with the former.
The principle of estoppel cannot be invoked in favor of a person who is a member of the association and
therefore must be presumed to know that it is not a corporation. (Lozano vs. De Los Santos)
The principle of estoppel applies when persons assume to form a corporation and exercise corporate
functions and enter into business relations with third persons. Where there is no third person involved and the
conflict arises only among those assuming to form a corporation, who therefore know that it has not been
registered, there is no corporation by estoppel. (Lozano vs. De Los Santos)
One who has induced another to act upon his willful misrepresentation that a corporation was duly organized
and existing under the law, cannot, thereafter set up against his victim the principle of corporation by
estoppel. Such persons becomes liable for the contracts entered into by such ostensible corporation. (Albert
vs. University Publishing Co., Inc.)
A person who has contracted or dealt with an association in such a way as to recognize its existence as a
corporate body is estopped from denying the same in an action arising out of such transaction or dealing, yet
this doctrine may not be held to be applicable where fraud takes part in the said transaction. (Salvatierra vs.
Garlitos)

Persons who have continuously and for a long period misrepresented themselves as a corporation as estopped
from denying such personality to defeat claims against it. (Chiang Kai Shek School vs. CA)
In the absence of fraud, a person who has contracted or dealt with an association in such a way as to
recognize and in effect admit its legal existence as a corporate body is thereby estopped to deny its corporate
existence in an action leading out of or involving such contract or dealing, unless the existence is attacked for
causes which have arisen since making the contract or other dealing relied on as an estoppel. (Asia Banking
Corp. vs. Standard Products Co., Inc.)
The doctrine of estoppel applies to a third party only when he tries to escape liability on a contract from
which he has benefited. It does not apply when the third party is the one claiming from the contract.
(International Express Travel & Tours Services, Inc. vs. CA)
The doctrine of estoppel applies to foreign as well as domestic corporations. Foreign corporations doing
business in the Philippines may sue in Philippine courts although not authorized to do business here against
the Philippine citizen who had contracted with and been benefited by said corporation. (Georg Grotjahn
GMBH & Co. vs. Isnani)
If a corporation by estoppel exists and enters into a contract or transacts business with a third party, the latter
has three remedies:
1. He may file a suit against the ostensible corporation to recover from the corporate properties;
2. He may file the case directly against the associates personally who held out the association a
corporation; and
3. Against both the ostensible corporation and persons forming it, jointly and severally.

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 13
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

As regards the liability of the associates of the alleged corporation, only those who actively participated in
holding out the association as a corporation should be held personally liable.
ORGANIZATION AND COMMENCEMENT OF BUSINESS
Sec. 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.
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.
Organization – the election of officers, providing for the subscription and payment of capital stock, the
adoption of by-laws, and such other steps as are necessary to endow the legal entity with the capacity to
transact the legitimate business for which it was created.
Failure of the corporation to organize within the prescribed period would result in its automatic dissolution,
unless its failure to do so is due to causes beyond its control.
Substantial compliance is sufficient.
Subsequent inoperation is merely a ground for suspension or revocation of corporate franchise. Dissolution is
not automatic.
CHAPTER 5: THE CORPORATE CHARTER AND ITS AMENDMENTS
CORPORATE CHARTER

Corporate charter – an instrument or authority from the sovereign power, bestowing rights and power.
The corporate charter is a three-fold contract:
1. Between the corporation and the state insofar as it concerns its primary franchise to be and act as a
corporation;
2. Between the corporation and the stockholders or members insofar as it governs their respective
rights and obligations; and
3. Between and among the stockholders or members themselves as far as their relationship with one
another is concerned.
The charter of corporations created under the Corporation Code consists of the articles of incorporation and
the Corporation Code inclusive of the by-laws adopted thereunder and all pertinent provisions of any statute
governing them.
The charter of corporations created by special laws consists of the special law creating the same and any and
all laws, rules and regulations affecting or applicable to them.
Franchise – the right or privilege itself to be and act as a corporation or to do a certain act.

Kinds of franchises:
1. Primary franchise – the right or privilege of being a corporation which the state confers upon the
applicant for this faculty.
2. Secondary franchise – the powers and privileges vested in, and to be exercised by the corporate
body as such.

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 14
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

CORPORATE ENTITY THEORY

The corporation is possessed with a personality separate and distinct from the individual stockholders or
members.

A corporation is a distinct legal entity to be considered as separate and apart from the individual stockholders
or members who compose it, and is not affected by the personal rights, obligations and transactions of its
stockholders or members. Conversely, a corporation has no interest in the individual property of its
stockholders unless transferred to the corporation, even in case of a one-man corporation. (Sulo ng Bayan,
Inc. vs. Gregoria Araneta, Inc.)
A bona fide corporation should alone be liable for its corporate acts as duly authorized by its directors and
officers. (Caram vs. CA)
The president and manager of a corporation who entered into and signed a contract in his official capacity,
cannot be made liable thereunder in his individual capacity in the absence of stipulation to that effect due to
the personality of the corporation being separate and distinct from the person composing it. (Rustan Pulp and
Paper Mills, Inc. vs. IAC)
A corporation has a personality distinct and separate from its individual stockholders or members. The mere
fact that one is president of a corporation does not render the property he owns and possesses the property of
the corporation, since the president, as an individual, and the corporation are separate entities. (Cruz vs.
Dalisay)
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. (Palay Inc.
vs. Clave)
In a right of action against the corporation, the officers may not be held personally liable as long as they act
within the scope of their authority. (Soriano vs. CA)
PIERCING THE VEIL OF CORPORATE FICTION
Piercing the veil of the corporate fiction is resorted to only in cases where the corporation is used or being
used to defeat public convenience, justify wrong, protect fraud, defend crime, confuse legitimate issues, or to
circumvent the law or perpetuate deception, or an alter-ego, adjunct or business conduit for the sole benefit of
a stockholder or a group of stockholders or another corporation.
Test in determining the applicability of the doctrine of piercing the veil of corporation fiction:
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
plaintiff's legal rights; and
3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss
complained of. (Instrumentality Rule, Concept Builders, Inc. vs. NLRC)
WHEN PIERCING THE CORPORATE FICTION IS NOT JUSTIFIED
Corporate fiction cannot be disregarded in the absence of intent to defraud in corporate transactions. (Remo,
JR vs. IAC)
For the separate juridical personality of a corporation to be disregarder, the wrongdoing must be clearly and
convincingly established. (Del Rosario vs. NLRC)
Mere corporate ownership of all the stocks of another corporation will not justify their being treated as single
entity. (PNB vs. Ritratto)
There being not the least indication that the second corporation is a dummy or serves as a client of the first
corporation, the fiction of separate and distinct corporate entities cannot be disregarder and brushed aside.
(Yu vs. NLRC)

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 15
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

AMENDMENT OF THE CORPORATE CHARTER

Steps to be followed for an effective amendment of the articles of incorporation:
1. Resolution by at least a majority of the board of directors or trustees.
2. Vote or written assent of the stockholders representing at least 2/3 of the outstanding capital stock
or 2/3 of the members in case of non-stock corporation.
3. Submission and filing of the amendments with the SEC as follows:
a. The original and amender articles together shall contain all the provisions required by law
to be set out in the articles of incorporation. Such articles, as amended, shall be indicated
by underscoring the change or changes made.
b. A copy thereof, duly certified under oath by the corporate secretary and a majority of the
directors or trustees stating the fact that such amendments have been duly approved by
the required vote of the stockholders or members.
c.Favorable recommendation of the appropriate government agency concerned in the case
where the corporation is under its supervision.
Time when the amendments shall take effect:
1. Upon approval of the SEC; or
2. From the date of filing with the SEC if not acted upon with 6 months from the date of filing for a
cause not attributable to the corporation. (Note: not applicable to special amendments)
Special amendments:
1. Extension or shortening of corporate term (Sec. 37)
2. Increase or decrease of capital stock (Sec. 38)
3. Incurring, creating or increasing bonded indebtedness (Sec. 38)
PROVISIONS SUBJECT TO AMENDMENT
Matters which are fait accompli are not subject to change.
A change in the name of the corporation does not affect the identity of the corporation, nor in any way affect
the rights, privileges, or obligations previously acquired or incurred by it. (Philippine First Insurance Co. vs.
Hartigan)
AMENDMENT OF THE CORPORATE TERM
Procedure to amend the corporate term:
1. Approval by a majority vote of the board or directors or trustees.
2. Written notice of the proposed action and the time and place of meeting shall be served to each
stockholder or member either by mail or by personal service.
3. Ratification by the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of
the members in case of non-stock corporations.
4. In case of extension of corporate term, the extension should be for periods not exceeding 50 years
in any single instance, and provided that no extension can be made earlier than 5 years prior to the
original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as
may be determined by the SEC.
5. In cases of extension of corporate term, a dissenting stockholder may exercise his appraisal rights.

Extension may be made only before the term provided in the corporate charter expires. (Alhambra Cigar &
Cigarette Mfg. Co., Inc. vs. SEC)

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 16
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

CHAPTER 6: BOARD OF DIRECTORS/TRUSTEES AND OFFICERS

POWERS OF THE BOARD
Sec. 23. The board of directors and trustees. - Unless otherwise provided in the 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.

The authority of the board of directors does not extend to the fundamental changes in the corporate charter.
The board may delegate the exercise of corporate powers.
A corporation is bound by the acts of its corporate officers if they act within the scope of the 5 classifications
of powers of corporate agents:
1. Those expressly conferred or those granted by the articles of incorporation, the corporate by-laws
or by the official act of the board of directors.
2. Those that are incidental or those acts as are naturally and ordinarily done which are reasonable and
necessary to carry out the corporate purpose or purposes.
3. Those that are inherent or acts that go with the office.
4. Those that are apparent or those acts which although not actually granted, the principal knowingly
allows or permits it to be done.
5. Powers arising out of customs, usage or emergency.
Where a corporation seeks to evade liability on a contract on the ground of lack of authority on the part of the
person who assumed to act for it, such defense should be specially pleaded. Failure to make an issue as to
such authority eliminates any questions regarding it. (Ramirez vs. Orientalist Co.)
The fact that the power to make corporate contracts is thus vested in the board of directors does not signify
that a formal vote of the board must always be taken before contractual liability can be fixed upon a
corporation; for the board can create liability, like an individual, by other means than by a formal expression
of its will. (Ramirez vs. Orientalist Co.)
The power to make corporate contracts resides primarily in the company's board of directors; but the board
may ratify an unauthorized contract made by an officer of the corporation. Ratification in this case is held to
have occurred when the board, with knowledge that the contract had been made, adopted a resolution
recognizing the existence of the contract and directing that steps be taken to enable the corporation to utilize
its benefits. (Ramirez vs. Orientalist Co.)
Where a corporate contract has been effected with the approval of the board of directors, a resolution adopted
at a meeting of stockholders refusing to recognize the contract or repudiating it is without effect. (Ramirez vs.
Orientalist Co.)
Contracts between a corporation and third persons must be made by or under the authority of its board of
directors and not of its stockholders. (Barreto vs. La Previsora)
QUALIFICATIONS AND DISQUALIFICATIONS
Qualifications:
1. Directors must own at least one (1) share of the capital stock of the corporation. Trustees must be
members.
2. A majority of the directors or trustees must be residents of the Philippines.

Disqualifications:
1. Conviction 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 election or
appointment.
2. Other disqualifications under applicable special laws.
In order to be eligible as a director, what is material is the legal title to, not beneficial ownership, of the stock
as appearing on the books of the corporation. (Lee vs. CA)
If no election is conducted or no qualified candidate is elected, the incumbent director shall continue to act as
such in a hold-over capacity until the election is held and a qualified candidate is so elected. (Detective and
Protective Bureau vs. Cloribel)

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Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

ELECTION AND VOTING

In stock corporations, the majority of the outstanding capital stock, in person or by representative authorized
to act by written proxy, must be present at the election of directors.
In non-stock corporations, a majority of the members entitled to vote, in person or by proxy, if allowed in its
articles of incorporation or by-laws, must be present in the election.
The election may be adjourned if, for any reason, no election is held, or if the required quorum is not
obtained. However, it may not be adjourned indefinitely.
The election must be by ballot if requested by any voting stockholder or member.
Candidates receiving the highest number of votes shall be declared elected.
In stock corporations, cumulative voting is a matter of right.
In non-stock corporations, cumulative voting is not available unless provided for in the articles of
incorporation or by-laws. I.e., a member may cast as many votes as there are trustees to be elected but may
not cast more than one vote for one candidate.
In stock corporations, the stockholder may:
1. Vote such number of shares for as many persons as there are directors to be elected;
2. 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;
3. Distribute them on the same principle among as many candidates as he shall see fit.
No delinquent stock shall be voted.
Officers to be elected
1. President, who shall be a director
2. Treasurer, who may or may not be a director
3. Secretary, who shall be a resident and citizen of the Philippines
4. 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 officers shall hold office for one (1) year until their successors are elected and qualified.
VALIDITY AND BINDING EFFECT OF ACTIONS OF CORPORATE OFFICERS
General rule: the quorum requirement for a valid board meeting is the majority of the number of the directors
or trustees as fixed in the articles of incorporation.
Exception: The articles of incorporation or the by-laws may provide for a greater majority.
General rule: To have a valid corporate act, the decision of at least a majority of the directors or trustees
present at a meeting at which there is a quorum is required.

Exception: The election of corporate officers requires the vote of a majority of all the members.
General rule: Individual directors cannot bind the corporation by their individual acts.
Exceptions:
1. By delegation of authority;
2. Where expressly conferred; or
3. Where the officer or agent is clothed with actual or apparent authority.
Although an officer or agent acts without, or in excess of, his actual authority if he acts within the scope of an
apparent authority with which the corporation has clothed him by holding him out or permitting him to appear as
having such authority, the corporation is bound thereby in favor of a person who deals with him in good faith in
reliance on such apparent authority, as where an officer is allowed to exercise a particular authority with respect to
the business, or a particular branch of it, continuously and publicly, for a considerable time. Also, if a private
corporation intentionally or negligently clothes its officers or agents with apparent power to perform acts for it, the
corporation will be estopped to deny that such apparent authority is real, as to innocent third persons dealing in
good faith with such officers or agents. This apparent authority may result from (1) the general manner by which
the corporation holds out an officer or agent as having power to act or, in other words, the apparent authority with
which it clothes him to act in general, or (2) the acquiescence in his acts of a particular nature, with actual or

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Whatever you asked for in prayer, believe that you have received it and
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constructive knowledge thereof, whether within or without the scope of his ordinary powers. (Yao Ka Sin Trading
vs. CA)

Any action of the board without a meeting and without the required voting and quorum requirement will not bind
the corporation unless subsequently ratified, expressly or impliedly. (Lopez vs. Fontecha)
Where a general business manager of a corporation is clothed with apparent authority to borrow money and the
amount borrowed does not exceed the ordinary requirements of the business, the authority is implied and that the
corporation is bound. (Pua Casim & Co. vs. Neumark and Co.)
An invalid contract may be validated by the ratification only of the board of directors; the president has no
authority to ratify such contract. (Yu Chuck vs. Kong Li Po)
Silence coupled with acceptance of benefits constitutes a binding ratification. (Francisco vs. GSIS)
A corporate officer entrusted with the general management and control of its business, has implied authority to
make any contract or do any other act which is necessary or appropriate to the conduct of the ordinary business of
the corporation. As such officer, he may, without any special authority from the Board of Directors, perform all
acts of an ordinary nature, which by usage or necessity are incident to his office, and may bind the corporation by
contracts in matters arising in the usual course of business. 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. (Board of liquidators vs. Kalaw)
Lack of repudiation, acquiescence and acceptance of benefits are equivalent to an implied ratification by the Board
of Directors and binds the corporation even without formal resolution passed and recorded. (Buenaseda vs. Bowen
& Co., Inc.)
Express ratification: through formal board action.
Implied ratification:
1. Silence or acquiescence;
2. Acceptance and/or retention of benefits; or
3. By recognition or adoption.

REMOVAL AND FILLING UP OF VACANCIES

Requirements and procedure:
1. The removal should take place at a general or special meeting duly called for that purpose;
2. The removal must be a vote of the stockholders representing at least 2/3 of the outstanding capital
stock or 2/3 of the members in case of non-stock corporations;
3. Prior notice of the proposed removal must be made stating the time and place of meeting either by
publication or by written notice.
The special meeting must be called by the secretary, on order of the president or on the written demand of the
stockholders representing a majority of the outstanding capital stock, or 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
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 signing the demand.
General rule: Directors or trustees may be removed with or without just cause.
Exception: Removal without just cause may not be used to deprive minority stockholders or members of the
right of representation to which they may be entitled under Sec. 24.
PD 902-A grants the court the power and authority to remove or oust a director and it can do so, even motu
propio by the appointment of a management committee.
In case of a deadlock in a close corporation, the SEC is authorized to issue an order cancelling, altering, or
enjoining any resolution or other act of the corporation or its board of directors or directing or prohibiting any
act of the corporation or the board of directors thereby effectively taking away the rights of the directors to
act as managers of the corporation.
Vacancies to be filled by the stockholders or members in a regular or special meeting:
1. Vacancy due to removal;
2. Vacancy due to expiration of term;
3. Vacancy due to an increase in the number of board of directors; and
4. Vacancy due to other causes when the remaining directors or trustees do not constitute a quorum.
Vacancy due to removal may be filled by an election at the same meeting without further notice.

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 19
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

Any change in the constitution of the board of directors or trustees must be reported to the SEC.
The tenure of the director filling up the vacancy shall only be for the unexpired term of his predecessor in
office.

If the successor is not qualified, the predecessor shall hold office in a hold-over capacity until such successor
is duly elected and qualified. (Detective and Protective Bureau vs. Cloribel)
COMPENSATION OF DIRECTORS

General rule: Directors shall not receive any compensation, as such directors, except for reasonable per
diems.
Exceptions:
1. When there is a provision in the by-laws fixing their compensation;
2. When the stockholders, by a majority vote the outstanding capital stock grant the same; and
3. If the director renders extra-ordinary or unusual service.
In no case shall the total yearly compensation of directors, as such directors, exceed 10% of the net income
before income tax of the corporation during the preceding year.
If there is wastage of corporate assets, the courts may be justified to look into the reasonableness and fairness
of the compensation despite the fact that the grant thereof is authorized pursuant to the by-laws and by the
vote of the majority of the holders of the outstanding capital stock of the corporation.
The board may not grant compensation upon itself without authorization of the by-laws or in contravention of
the by-laws. (Central Cooperative Exchange vs. Tibe, Jr.)
Members of the board of directors may receive compensation, in addition to reasonable per diems, when they
render services to the corporation in a capacity other than as directors or trustees. (Western Institute of
Technology, Inc. vs. Salas)
The fact that the amount paid as compensation to directors under a by-law provision has increased beyond
what would probably be necessary to secure adequate service from them is a matter that cannot be corrected
by the court. The remedy is in the hands of the stockholders who have the power at any lawful meeting to
change the rule. (Govt. vs. El Hogar Filipino)
LIABILITY OF CORPORATE OFFICERS
The general rule is that unless the law specifically provides, a corporate officer or agent is not civilly or
criminally liable for acts done by him as such officer or agent.
Personal liability of a corporate director, trustee or officer along with the corporation may validly attach, as a
rule, only when:
1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith, gross negligence in
directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its
stockholders or other persons;
2. He consents to the issuance of watered stocks or who, having knowledge thereof, does not
forthwith file with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made, by specific provision of law, to personally answer for his corporate action. (Tramat
Mercantile, Inc. vs. CA)
Where a check is drawn by a corporation, company or entity, the person or persons who actually signed the
check in behalf of such drawer shall be liable under this Act. (Sec. 1, BP 22)

In labor cases, corporate directors and officers are solidarily liable with the corporation for the termination of
employment of corporate employees done with malice or in bad faith. (Uichico vs. NLRC)

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Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

THREE-FOLD DUTY OF DIRECTORS

Three-fold duty of directors:
1. Obedience
2. Diligence
3. Loyalty
Solidarily liability for all damages suffered by the corporation, its stockholders or members or other persons
shall be imposed upon directors or trustees:
1. Who willfully and knowingly vote for or assent to patently unlawful acts of the corporation;
2. Who are guilty of gross negligence or bad faith in directing the affairs of the corporation; or
3. Who acquire any personal property or pecuniary interest in conflict with their duty as such directors
or trustees.
Business judgment rule – directors are not liable for losses due to imprudence or honest error of judgment.
Questions of policy and management are left solely to the honest decision of the board of directors and the
courts are without authority to substitute its judgment as against the former.
Resolutions passed in good faith by the board of directors are valid and binding, and whether or not it will
cause losses or decrease in profits are not subject to the review of the court. (Montelibano vs. Bacolod Murcia
Milling, Co., Inc.)

General rule: A director is not liable for misconduct of co-directors or other officers.
Exceptions:
1. He connives or participates in it; or
2. He is negligent in not discovering or acting to prevent it.
The duty of loyalty is violated in the following instances:
1. When a director or trustee acquires any personal or pecuniary interest in conflict with his duty as
such director or trustee;
2. When he attempts to acquire or acquires, in violation of his duty, any interest adverse to the
corporation in respect to 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; and
3. When he, by virtue of his office, acquires for himself a business opportunity which should belong
to the corporation, thereby obtaining profit to the prejudice of such corporation.
Corporate opportunity doctrine – It places a director of a corporation in the position of a fiduciary and
prohibits him from seizing a business opportunity and/or developing it at the expense and with the facilities
of the corporation. He cannot appropriate to himself a business opportunity which in fairness should belong
to the corporation.
Distinction between Secs. 31 & 34:
1. Sec. 31, where a director is liable to account for profits if he attempts to acquire or acquires any
interest adverse to the corporation in respect to any matter reposed in him in confidence as to which
equity imposes a disability upon him to deal in his own behalf is not subject to ratification by the
stockholders.
2. Sec. 34, where the director acquires for himself a business opportunity which should belong to the
corporation, he is bound to account for such profits unless his act is ratified by the stockholders
owning or representing at least 2/3 of the outstanding capital stock.
Directors are liable for fraud committed by concealment of information as to the state and probable result of
the negotiations for the sale of corporate assets which may affect the price of the corporation‟s stock. (Strong
vs. Repide)

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SELF-DEALING DIRECTORS
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 of 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, provided:
1. The contract is 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
2. Such ratification is made at a meeting called for that purpose;
3. Full disclosure of the adverse interest of the directors or trustees involved is made; and
4. The contract is fair and reasonable under the circumstances.
In the absence of express delegation, a contract entered into by the president, on behalf of the corporation,
may bind the corporation if the board should ratify the same expressly or impliedly. Furthermore, the
president as such may bind the corporation by a contract in the ordinary course of business, provided the
same is reasonable under the circumstances. These rules only apply where the president or other officer,
purportedly acting for the corporation, is dealing with a third person, i.e., person outside the corporation. It
does not apply to self-dealing directors or officers. (Prime White Cement Corp. vs. IAC)
A director or officer may in good faith and for an adequate consideration purchase from a majority of the
directors or stockholders the property even of an insolvent corporation. (Mead vs. Mc Cullough)
INTERLOCKING DIRECTORS
Sec. 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.

A director who owns a substantial interest in one corporation dealing with another where he has a nominal
interest is a regarded as a self-dealing director in so far as the latter corporation is concerned.
DERIVATIVE SUIT
Suits that stockholders may bring against erring directors or officers:
1. Individual or personal suit – one brought by the shareholders for direct injury to his rights, such as
denial of his right to inspect corporate books and records or pre-emptive right;
2. Representative of class suit - ; and
3. Derivative suit – an action based on injury to the corporation – to enforce a corporate right
– wherein the corporation is joined as a necessary party, and recovery is in favor of the corporation.
A stockholder in a corporation who was not such at the time of the transactions complained of, or whose
shares had not devolved upon him since by operation of law, can not maintain a derivative suit unless such
transactions continue and are injurious to the stockholder, or affect him specifically in some other way.
(Pascual vs. Orozco, et al.)
When the board is under the complete control of the principal defendants in the case, demand upon such
board to institute action and prosecute the same is not required. The law does not require litigants to do
useless acts. (Everett vs. Asia Banking Corporation)
The corporation should be made a party, in order to make the court‟s judgment binding upon it, and thus bar
future relitigation of the issue. On what side the corporation appears is not important. (Republic Bank vs.
Cuaderno)

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The minority shareholder who is suing for and in behalf of the corporation must allege in his complaint
before the proper forum that he is suing on a derivative cause of action on behalf of the corporation and all
other shareholders similarly situated who wish to join. This is necessary to vest jurisdiction upon the tribunal
in line with the rule that it is the allegations in the complaint that vest jurisdiction upon the court or quasi-
judicial body concerned over the subject matter and nature of the action. (Western Institute of Technology,
Inc. vs. Salas)
The bona fide ownership by a stockholder of stock in his own right suffices to invest him with standing to
bring a derivative action for the benefit of the corporation. The number of his shares is immaterial since he is
not suing in his own behalf, or for the protection or vindication of his own particular right, or the redress of a
wrong committed against him, individually, but in behalf and for the benefit of the corporation. (SMC vs.
Khan)
Where corporate directors are guilty of breach of trust – not mere error of judgment or abuse of discretion –
and intra-corporate remedy is futile or useless, a stockholder may institute a suit in behalf of himself and
other stockholders and for the benefit of the corporation, to bring about a redress of the wrong inflicted
directly upon the corporation and indirectly upon the stockholders. (Reyes vs. Tan, et al.)
The stockholders in a derivate suit cannot allege or vindicate their own individual interests or prejudice.
(Gamboa vs. Victoriano, et al.)
In a derivative suit, the injury complained of is primarily to the corporation, so that the suit for the damages
claimed should be by the corporation rather than by the stockholders. The stockholders may not directly
claim those damages for themselves for that would result in the appropriation by, and the distribution among
them of part of the corporate assets before the dissolution of the corporation and the liquidation of its debts
and liabilities. (Evangelista vs. Santos)
Rules, requirements and procedure so that a derivative suit may proceed or prosper:
1. The party bringing the action should be a stockholder as of the time the act or transaction
complained of took place, or whose shares have evolved upon him since by operation of law. This
rule, however, does not apply if such act or transaction continues and is injurious to the stockholder
or affects him specifically in some other way. The number of shares is immaterial.

2. He has tried to exhaust intra-corporate remedies, i.e. he has made a demand on the board of
directors for the appropriate relief but the latter had failed or refused to heed his plea. Demand,
however, is not required if the company is under the complete control of the directors who are the
very ones to be sued (or where it becomes obvious that a demand upon them would have been futile
and useless) since the law does not require a litigant to perform useless acts.
3. The stockholder bringing the suit must allege in his complaint that he is suing on a derivative cause
of action on behalf of the corporation and all other stockholders similarly situated, otherwise, the
case is dismissible.
4. The corporation should be made a party, either as party-plaintiff or defendant, in order to make the
court‟s judgment binding upon it.
5. Any benefit or damages recovered shall pertain to the corporation.

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EXECUTIVE COMMITTEE
An executive committee may be created when authorized by the by-laws.
General rule: The executive committee may act, by majority vote of all its members, on such specific matters
within the competence of the board, as may be delegated to it in the by-laws or on a majority vote of the
board.
Exceptions:
1. Approval of any action for which shareholders' approval is also required;
2. The filling 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.

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Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

CHAPTER 7: CORPORATE POWERS AND AUTHORITY

Remember: A corporation merely exists by virtue of a grant by the State and may, therefore, only exercise
such powers, authority or functions that the State allows it to do.
Classification:
1. Those expressly granted or authorized by law inclusive of the corporate charter or articles of
incorporation
2. Those impliedly granted as are essential or reasonably necessary to the carrying out of the express
powers
3. Those that are incidental to its existence.

The statement of the objects, purpose or powers in the Articles of Incorporation results practically in defining
the scope of the authorized corporate enterprise or undertaking. This statement both confers and also limits
the actual authority of the corporation.

Powers expressly granted

1. Power to sue and be sued (Sec. 36)
2. Power of succession (Sec. 36)
3. Power to adopt and use a corporate seal (Sec. 36)
4. Power to amend its articles of incorporation (Sec. 36)
5. Power to adopt, amend or repeal by-laws (Sec. 36)
6. Power to issue or sell stocks/ to admit members (Sec. 36)
7. Power to acquire or alienate real or personal property (Sec. 36)
8. Power to enter into merger or consolidation (Sec. 36)
9. Power to make reasonable donations (Sec. 36)
10. Power to establish pension, retirement, and other plans (Sec. 36)
11. Power to extend or shorten corporate term (Sec. 37)
12. Power to increase or decrease capital stock (Sec. 38)
13. Power to incur, create or increase bonded indebtedness (Sec. 38)
14. Power to deny pre-emptive right (Sec. 39)
15. Power to sell or dispose corporate assets (Sec. 40)
16. Power to acquire own shares (Sec. 41)
17. Power to invest corporate funds in another corporation or business or for any other purpose (Sec.
42)
18. Power to declare dividends (Sec. 43)
19. Power to enter into management contract (Sec. 44)
POWER TO SUE AND BE SUED
The residence of the corporation is the place of its principal office as may be indicated in its articles of
incorporation and may, therefore, be sued only at that place. (CRS vs. Antillon)
General Rule: Service of summons upon a corporation must be made upon:
1. President,
2. Managing partner,
3. General manager,

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4. Corporate secretary,
5. treasurer, or
6. In-house counsel
Exception: In cases of intra-corporate disputes or controversies, or internal disputes within the corporation,
service of summons may be serve to any of the directors or interested parties. The above enumeration shall be
applicable ONLY in cases when the corporation is sued or made a party to an action instituted by third
persons.
Strict compliance with the mode of service is necessary to confer jurisdiction of the court over a corporation.
The officer upon whom service is made must be one who is named in the statute; otherwise the service is
insufficient. (Delta Motor Sales Corp. vs. Mangosing)
Under the new rules, service of summons upon an agent of the corporation is no longer authorized. (E.B.
Villarosa & Partner Co., LTD. vs. Benito)

POWER OF SUCCESSION
Right of succession – a corporation persists to exist despite the death, incapacity, civil interdiction or
withdrawal of the stockholders or members thereof.

POWER TO ADOPT AND USE COMMON SEAL

Statutes empowering corporations to make and own a seal are not mandatory but merely permissive.
POWER TO AMEND ARTICLES OF INCORPORATION
General Rule: Amendment of the articles of incorporation is a matter of right (Note: procedure differs for
special amendments)
Exception: Corporations created by special law
POWER TO ADOPT BY-LAWS
A corporation, once formed is required to adopt its by-laws, not contrary to law, morals or public policy,
within one month from receipt of official notice of the issuance of certificate of incorporation or registration.
POWER TO ISSUE/SELL STOCKS OR ADMIT MEMBERS
The power of a corporation to issue or sell stock is an inherent right except where it sells or issues stocks of
other corporations (Securities Regulation Code).
POWER TO ACQUIRE/ALIENATE PROPERTY
Real or personal properties must be acquired, held or conveyed as the transaction of the lawful business of
the corporation may reasonably and necessarily require. Furthermore, it shall be subject to the limitations
imposed by law and the Constitution.
A corporation cannot undertake acquisition of property which would have no purpose and would have no
necessary connection with its legitimate business. (Luneta Motors Co. vs. A.D. Santos, Inc.)
A corporation whose business may properly conducted in a populous center may acquire an appropriate lot
and construct thereon an edifice with facilities in excess of its own immediate requirements. (Govt. vs. El
Hogar)
General Rule: A corporation cannot acquire land.
Exception: A corporation may register alienable public lands if it has been held by it, personally or through
its predecessor-in-interest, openly, continuously and publicly within the prescribed statutory period of 30
years under the Public Land Law, as amended, since it is converted into private property by mere lapse of
completion of said period. (Dir. of Lands vs. CA)
POWER TO MAKE REASONABLE DONATIONS
Only reasonable donations are allowed since it is not for the corporation to be generous with other people’s
property or money. (Ladia)
Limitations imposed upon corporate donations:
1. The donation must be reasonable;
2. It must be for public welfare, or for hospital, charitable, scientific, cultural or similar purpose;
3. It shall not be in aid of any political party or candidate, or for purpose of partisan political activity.

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POWER TO ESTABLISH PENSION, RETIREMENT AND OTHER PLANS

While as a rule an ultra vires act is one committed outside the object for which a corporation is created as
defined by law of its organization and therefore beyond the powers conferred upon it by law, there are
however certain corporate acts that may be performed outside of the scope of the powers expressly conferred
if they are necessary to promote the interest or welfare of the corporation. (Republic vs. Acoje Mining Co.,
Inc.)

POWER TO EXERCISE SUCH OTHER POWERS ESSENTIAL OR NECESSARY TO CARRY OUT ITS
PURPOSES (IMPLIED POWERS)
Classification of implied powers:
1. Acts in the usual course of business
2. Acts to protect debts owing to the corporation

3. Embarking on a different business

4. Acts in part or wholly to protect or aid employees
5. Acts to increase business
A corporation has authority to do what will legitimately tend to effectuate the express purposes and objects;
that it may ordinarily do all things that are convenient, suitable or necessary to enable it to fully perform the
undertaking designated in its charter, and for which it is organized.
There must be a logical and necessary relation of the act to the corporate purpose. (NPC vs. Vera)
If the act is one which is lawful in itself and not otherwise prohibited, and is done for the purpose of serving
corporate ends, and reasonably contributes to the promotion of those ends in a substantial and not in a remote
and fanciful sense, it may be fairly considered within the corporation’s charter powers. (NPC vs. Vera)
Remember the test in determining implied powers:
Whether the act in question is in direct and immediate furtherance of the corporation’s business,
fairly incident to the express powers and reasonably necessary to their exercise, then the
corporation may do it, otherwise it is beyond the scope of their authority.
Examples:
1. Operation and maintenance of an electric plant for a cement factory. (Teresa Electric Power Co.,
Inc. vs. PSC)
2. NPC’s undertaking of stevedoring services for its power plant. (NPC vs. Vera)
3. International School’s imposition of a development fee for expansion and maintenance.
(Powers vs. Marshall)

Incidental Powers are those that attach to the corporation from the date of its incorporation which may
likewise be said to be inherent.
POWER TO EXTEND/SHORTEN CORPORATE TERM
Requirements and procedure: (Section 37)
1. Approval by the majority vote of the board of directors or trustees;
2. Ratification by the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of
the members in case of non-stock corporations;
3. The ratification must be at a meeting duly called for that purpose;
4. Prior written notice of the proposal to extend or shorten the corporate term must be made stating
the time and place of meeting addressed to each stockholder or member at his place of residence,
either by mail or personal service;
5. In case of extension, the same cannot be made earlier than five (5) years prior to the original or
subsequent expiry date unless there are justifiable reasons for an earlier extension;
6. In case of extension, the same must be made during the lifetime of the corporation;
7. Any dissenting stockholder may exercise his appraisal right;

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8. Submission of the amended articles with the SEC; and

9. Approval thereof by the SEC.
POWER TO INCREASE/DECREASE CAPITAL; INCUR, CREATE OR INCREASE BONDED
INDEBTEDNESS (Section 38)

Requirements and procedure:

1. Approval by the majority vote of the board of directors or trustees;
2. Ratification by the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of
the members in case of non-stock corporations;
3. The ratification must be at a meeting duly called for that purpose;
4. Prior written notice of the proposed action must be made stating the time and place of meeting
addressed to each stockholder or member at his place of residence, either by mail or personal
service;
5. A certificate in duplicate must be signed by a majority of the directors of the corporation,
countersigned by the chairman and the secretary of the stockholder’s meeting, setting forth the
matters contained in subsection 1 to 7 of Sec. 38;

6. In case of increase in capital stock, 25% of such increased capital must be subscribed and that at
least 25% of the amount subscribed must be paid either in cash or property;
7. In case of decrease in capital stock, the same must not prejudice the right of the creditors;
8. Filing of the certificate of increase and amended articles with the SEC; and
9. Approval thereof by the SEC.

3 ways of increasing the capital stock:

1. Increasing the par value of the existing number of shared without increasing the number of shares;
2. Increasing the number of existing shares without increasing the par value thereof; and
3. Increasing the number of existing shares and at the same time increasing the par value of the shares.
Existence of unissued or unsubscribed share out of the original capital stock will not prohibit the increase of
capital stock.
Reasons for decreasing capital stock:
1. To reduce or wipe out existing deficit where no creditors would thereby be affected;
2. When capital is more than what is necessary to procreate the business or reduction of capital
surplus; or
3. To write down the value of its fixed assets to reflect the present actual value in case where there is a
decline in the value of the fixed assets of the corporation.
Remember: Varied reasons such as business expansion or financing activities may be the basis for
increasing capital stock. Nevertheless, in case of decreasing capital stock, there must be no prejudice to third
persons or creditors.
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 law. Moreover, strict
compliance with the statutory regulations is necessary. (Philippine Trust Company vs. Rivera)
Trust Fund Doctrine. Subscriptions to capital stock of the corporation constitute a fund which the creditors
have a right to look into for the satisfaction of their claims.
A reduction of capital stock may not be used as a subterfuge, a deception as it were, to camouflage the fact
that a corporation has been making profits to obviate a just sharing to labor. (Madrigal & Co. vs. Zamora)
Remember: Reduction of the capital stock shall not be approved by the SEC if its effect shall prejudice the
rights of corporate creditors.
A corporation which has the power to borrow or raise money, to contract for labor or services, or otherwise

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contract a debt has the implied power to issue bonds in payment or as a security provided it violates no
prohibition or restriction in its charter or any other statutes.
Corporate bonds must be registered and approved by the SEC before they are issued.
Bonds are obligation of the State, its subdivision or private corporation, represented by a certificate or an
instrument for the principal and by detachable coupons for the payment of interests.
POWER TO DENY PRE-EMPTIVE RIGHTS
Pre-emptive right – is a right granted by law to all existing stockholders of a stock corporation to subscribe to
all issues or disposition of shares of any class, in proportion to their respective stockholdings, subject only to
the limitations imposed under Sec. 39. Also known us the Right of First Refusal.
The basis for the grant of this right is the preservation, unimpaired and undiluted, of the old stockholders’
relative and proportionate voting strength and control, that is, the existing ratio of their proprietary interest
and voting power in the corporation. To avoid dilution of the holdings of the shareholders.
General Rule: 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.
Exceptions:
1. Shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership
by the public; or

2. 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.

Exception to the exceptions: The exceptions do not apply to stockholders of a close corporation. In effect,
pre-emptive right in a close corporation is generally absolute UNLESS denied in the Articles of
Incorporation.

The right may be lost by waiver, expressly or impliedly by inability or failure to exercise it after having been
notified.

The pre-emptive right covers all issues or disposition of share of any class. It includes new share issued
pursuant to an increase in capital stock, unissued shares which form part of the original capital stock and
treasury shares.

POWER TO SELL/DISPOSE ASSETS

There is a sale or other disposition of substantially all the corporate property and assets if the corporation
would thereby be rendered incapable of continuing the business or accomplishing the purpose for which it
was incorporated.
Conditions for the valid exercise of this right:
1. Resolution by the majority vote of the board of directors or trustees;
2. Authorization from the stockholders representing at least 2/3 of the outstanding capital stock or 2/3
of the members in case of non-stock corporations;
3. The ratification must be at a meeting duly called for that purpose;
4. Prior written notice of the proposed action must be made stating the time and place of meeting
addressed to each stockholder or member at his place of residence, either by mail or personal
service;
5. The sale of the assets shall be subject to the provisions of existing laws on illegal combinations and
monopolies; and
6. Any dissenting stockholder shall have the option to exercise his appraisal right.

7. (Note: 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
such transaction.)
Exception to application of the procedure and requirements:

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1. The sale, lease, exchange, mortgage, pledge or other dispose of property and assets is
necessary in the usual and regular course of business of the corporation; or

2. The proceeds of the sale or other disposition of property and assets are appropriated for
the conduct of the corporation’s remaining business.

The sale or other disposition of all or substantially all of the corporate property or assets must be voted for by
the legitimate board and concurred in by the bona fide stockholders or members. (IDP vs. CA)
General Rule: Where a corporation sells or otherwise transfers all of its assets to another corporation, the
latter is not liable for the debts and liabilities of the transferor.
Exceptions:
1. Where the purchaser expressly or impliedly agrees to assume such debts;
2. Where the transaction amounts to a consolidation or merger of the corporations;
3. Where the purchasing corporation is merely a continuation of the selling corporation; and
4. Where the transaction is entered into fraudulently in order to escape liability for such debts.
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: (Examples of legitimate purpose)
1. To eliminate fractional shares arising out of stock dividends (No longer allowed in our
jurisdiction);
2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in
a delinquency sale, and to purchase delinquent shares sold during said sale;
3. To pay dissenting or withdrawing stockholders entitled to payment for their shares; and
4. To redeem redeemable shares.

5. To eliminate capital surplus

General rule: the corporation must have unrestricted retained earnings before it can acquire its own shares.
Exceptions:
1. Redemption of redeemable shares; and
2. Stockholder’s right to compel a close corporation to purchase his shares when the corporation has
sufficient assets to cover its debts and liabilities.
The acquisition of shares must be made in good faith, free from fraud, actual or constructive, and that the
corporation is not insolvent or in the process of dissolution and that the rights of creditors and other
stockholders are in no way injuriously affected.
Creditors of a corporation have the right to assume that so long as there are outstanding debts and liabilities,
the board of directors will not use the assets of the corporation to purchase its own stock, and that it will not
declare dividends to stockholders when the corporation is insolvent. (Steinberg vs Velasco)
POWER TO INVEST FUNDS
The right refers to investment in the form of money, stock, bonds and other liquid assets and does not include
real properties or other fixed assets.
Requirements and procedure:
1. Resolution by the majority vote of the board of directors or trustees;
2. Ratification by the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of
the members in case of non-stock corporations;
3. The ratification must be at a meeting duly called for that purpose;
4. Prior written notice of the proposed investment and the time and place of meeting shall be made,
addressed to each stockholder or member at his place of residence, either by mail or personal
service;

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5. Any dissenting stockholder shall have the option to exercise his appraisal right.
The approval of the stockholders or members is not required where the investment is reasonably necessary to
accomplish its primary purpose.
Remember: Primary purpose lang ang hindi need ng stockholder’s approval, all other purpose requires the
approval of the stockholders. But if there is a logical connection with the primary purpose and then the
stockholder’s approval is not needed anymore, kasi it is considered as incidental to the primary purpose.
An unauthorized investment which is not illegal or void ab initio or not contrary to law, morals, public order
or public policy, is merely voidable and may become binding and enforceable when ratified by the
stockholders. (Gokongwei, Jr. vs. SEC)

POWER TO DECLARE DIVIDENDS

Dividends are corporate profits set aside, declared and ordered by the Board of Directors to be paid to the
stockholders.
Dividends can only be declared out of Unrestricted Retained Earnings (URE). This is the undistributed
earnings of a corporation which have not been allocated for any managerial, contractual or legal purpose and
which are free for distribution to the stockholders as dividends. It is the surplus profits of the corporation.
Types of dividends:
1. Cash dividend – those that are payable in lawful money.
2. Property dividend – those that take form of bonds, notes, evidences of indebtedness or stock in
other corporations.
3. Stock dividends – refer to the corporation’s shares of stock.
Remember: Sabi sa Sec 43, sa delinquent lang merong lien, kapag unpaid subscription pa lang, no lien, the
dividends will not be applied to the unpaid portion, Sec 72.
Rules on dividends due on delinquent stock:
1. Cash dividend – first applied to the unpaid balance on subscription costs and expenses.

2. Stock dividend – withheld until subscription is fully paid.

General Rule: Walang obligation to declare ang BOD except for those shares na mandatory ang pagreceive
ng dividends. Discretion ng BOD on business judgment, they cannot be compelled to declared dividends.
Exception: Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-
in capital stock. They can be compelled.
Exceptions to the Exceptions:
1. When justified by definite corporate expansion projects or programs approved by the board of
directors; or
2. When the corporation is prohibited under any loan agreement with any financial institution or
creditor, whether local or foreign, from declaring dividends without its/his consent, and such
consent has not yet been secured; or
3. When it can be clearly shown that such retention is necessary under special circumstances
obtaining in the corporation, such as when there is need for special reserve for probable
contingencies.
General rule: The board of directors exercise exclusive authority in declaring dividends.
Exception: In declaring stock dividends, the approval of the stockholders representing at least 2/3 of the
outstanding capital stock is required.
The judgment of the board of directors in the matter of declaring dividends is conclusive except when they
act in bad faith, or for a dishonest purpose or act fraudulently, oppressively, unreasonably or unjustly or
abuse of discretion can be shown so as to impair the rights of the complaining stockholders to their just
proportion of corporate profits.
The essential test of bad faith is to determine if the policy of the directors is dictated by their personal interest
rather than the corporate welfare.
Remember: Not all forms of dividends would have an effect of decrease in the corporate assets. In effect,
cash and property dividends lang ang may effect sa corporate assets, because stock dividends is just a form of

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 31
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

capitalization of URE. (Ladia)

Dividends, regardless of the form they are declared are valued at the amount of the declared dividends.
(PLDT vs NTC)
The right of the stockholders to be paid dividends vest as soon as they have been lawfully and finally
declared by the Board of Directors.
No revocation of dividend may be had unless it has not been officially communicated to the stockholders or
is in the form of stock dividends which is revocable at any time prior to distribution.

Stock dividends cannot be issued to a person who is not a stockholder. (Neilson & Co., Inc. vs. Lepanto
Consolidated Mining Co.)
Directors are not liable for declaration of dividend contrary to law, unless attended with bad faith, gross
negligence or willful and knowing assent. (Ladia)
POWER TO ENTER INTO MANAGEMENT CONTRACTS
Requirements and procedure:
1. Resolution by the board of directors or trustees;
2. Approval by the stockholders representing a majority of the outstanding capital stock or majority of
the members in case of non-stock corporations;
3. The approval must be at a meeting duly called for that purpose;

4. The contract shall not be for a period longer than 5 years for any one term, except those which
relate to exploration, development or utilization of natural resources which may be entered into for
such periods as may be provided by pertinent laws and regulations.
When approval of the stockholders of the managed corporation owning at least 2/3 of the outstanding capital
stock or 2/3 of the members in case of non-stock corporations are required:
Where a stockholder or stockholders representing the same interest of both the managing and the
managed corporations own or control more than 1/3 of the total outstanding capital stock entitled to
vote of the managing corporation;
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; or
Where the contract would constitute the management or operation of all or substantially all of the
business of another corporation, whether such contracts are called service contracts, operating
agreements or otherwise.
ULTRA-VIRES ACTS

Those acts that cannot be executed or performed by a corporation because they are not within its express,
inherent or implied powers as defined by its charter or articles of incorporation and neither are they necessary
nor incidental thereto.

Basis: Doctrine of Limited Capacity.

Remember: An ultra-vires act may not necessarily be illegal but merely beyond the power of the corporation
to perform.

Test: Whether there is a logical relation with the act done, and the purpose of the corporation.

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 32
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

Consequences of ultra-vires acts:

1. On the corporation itself – the proper forum may suspend or revoke, after proper notice and
hearing, the franchise or certificate of registration of the corporation for serious misrepresentation
as to what the corporation can do or is doing to the great damage or prejudice of the general public.
2. On the rights of the stockholders – a stockholder may either an individual or derivative suit to
enjoin a threatened ultra-vires act or contract.
3. On the immediate parties – (a) if the contract is fully executed on both sides, the contract is
effective; (b) if the contract is executory on both sides, neither party can maintain an action for its
non-performance; and (c) if the contract is executory on one side only, and has been fully
performed on the other, the party who has received the benefits is estopped to set up that the
contract is ultra-vires.

General Rule: Ultra Vires Act may have no legal and binding and becomes unenforceable as the case may
be, depending on the above circumstance.
Exceptions: Being not an illegal per se act, it may become binding and enforceable by ratification, estoppel
or on equitable grounds. It is only VOIDABLE.
Acts which are clearly beneficial to the company or necessary to promote the interest or welfare of the
corporation, its employees and their families, or in the legitimate furtherance of its business are within
corporate powers. (Republic vs. Acoje Mining)
Mere ultra-vires acts which are not illegal per se may become binding and enforceable either by ratification,
estoppel or on equitable grounds unless the public or third parties are thereby prejudiced. (Privano vs. De la
Rama Steamship)
Corporations authorized to acquire the bonds have the implied power to guarantee them in order to place
them upon the market under better, more advantageous conditions, and thereby secure the profit derived from
their sale. When a contract is not on its face necessarily beyond the scope of the power of the corporation by
which it was made, it will, in the absence of proof to the contrary, be presumed to be valid. Corporations are
presumed to contract within their powers. The doctrine of ultra vires, when invoked for or against a
corporation, should not be allowed to prevail where it would defeat the ends of justice or work a legal wrong.
(Carlos vs. Midoro Sugar Co.)
Actions which are beyond the powers of the corporation as embodied in its articles of incorporation and have
absolutely no relation to the avowed purpose of the corporation are ultra-vires. (Japanese War Notes
Claimants Assoc., Inc. vs. SEC)
Corporate officers have no power to execute for mere accommodation a negotiable instrument of the
corporation for their individual debts or transactions arising from or in relation to matters in which the
corporation has no legitimate concern. Since such accommodation paper cannot thus be enforced against the
corporation, especially since it is not involved in any aspect of the corporate business or operations, the
signatories thereof shall be personally liable therefor, as well as for the consequences arising from their acts
in connection therewith. (Crisologo-Jose vs. CA)

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 33
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

CHAPTER 8: BY-LAWS
Rules and ordinances made by a corporation for its own government; to regulate the conduct and define the
duties of the stockholders or members towards the corporation and among themselves.
They are rules and regulations or private laws enacted by the corporation to regulate, govern and control its
own actions, affairs and concerns and its stockholders or member and directors and officers with relation
thereto and among themselves in their relation to it.
Requirements and procedure for adoption of by-laws:
1. The by-laws must not be inconsistent with the Code;
2. If adopted prior to incorporation:
a. Approved and signed by all the incorporators;
b. Submitted together with the articles of incorporation to the SEC;
3. If adopted subsequent to incorporation:
a. Adopted within one (1) month after receipt of official notice of the issuance of its certificate of
incorporation by the SEC;
b. 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,
c. Signed by the stockholders or members voting for them
d. Kept in the principal office of the corporation, subject to the inspection of the stockholders or
members during office hours.
e. A copy thereof, duly certified to by a majority of the directors or trustees countersigned by the
secretary of the corporation, must be filed with the SEC which shall be attached to the original
articles of incorporation.
4. Certification of the appropriate government agency concerned to the effect that such by-laws or
amendments are in accordance with law.
5. Issuance by the Securities and Exchange Commission of a certification that the by-laws are not
inconsistent with this Code.
Contents of by-laws:
1. The time, place and manner of calling and conducting regular or special meetings of the directors or
trustees;

2. The time and manner of calling and conducting regular or special meetings of the stockholders or
members;

3. The required quorum in meetings of stockholders or members and the manner of voting therein;

4. The form for proxies of stockholders and members and the manner of voting them;

5. The qualifications, duties and compensation of directors or trustees, officers and employees;
6. The time for holding the annual election of directors of trustees and the mode or manner of giving notice
thereof;
7. The manner of election or appointment and the term of office of all officers other than directors or
trustees;
8. The penalties for violation of the by-laws;
9. In the case of stock corporations, the manner of issuing stock certificates; and
10. Such other matters as may be necessary for the proper or convenient transaction of its corporate business
and affairs.

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 34
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

Remember: By-laws are subordinate to the articles of incorporation, the Corporation Code and other statutes
which form part of the corporate charter. Therefore, by-laws cannot be contrary the corporation’s articles,
creating law and other statutes governing it.

By-laws become effective only upon the approval of the SEC. Once effective, stockholders are conclusively
presumed to know the by-laws. (Ladia)
Time of filing:
1. Prior to incorporation – must be signed by all the incorporators, must be filed together with the
articles of incorporation
2. After incorporation – approval of at least a majority of the outstanding capital stock

Failure to file by-laws may result to suspension or revocation of corporate franchise after proper notice and
hearing, although it will not result to an outright “demise” or in automatic dissolution of the corporation.
(LGVHA vs. CA)
By-laws are internal rules and cannot bind, effect or prejudice third persons without knowledge thereto.
Restrictions to transfer of shares must be indicated in the AoI and stock certificates. If it is contained only in
the by-laws, it is inoperative. (Fleisher vs. Botica Nolasco)
Remember: Distinguish Sec 16 (Amendment of AoI) with Sec 48 (Amendment to by-laws)
Two modes of amending or repealing by laws or adopting a new one:
1. By a majority vote of the directors or trustees and the majority vote of the outstanding capital stock
or members, at a regular or special meeting called for that purpose; or

2. By the board of directors alone when delegated by 2/3 of the outstanding capital stock or members.

Remember: This delegated power to amend, repeal or adopt by-laws may be revoked whenever a
majority of the OCS or members shall so vote at a regular or special meeting.
Incorporation of an invalid by-law provision is not a misdemeanor. It does not justify the dissolution of the
corporation. (Govt. vs. El Hogar)
The by-laws may disqualify a stockholder from being elected into office if he has a substantial interest in a
competitor corporation to avoid any possible adverse effects of conflicting interest of a director. A
corporation may impose additional restrictions to be elected in the BoD. (Gokongwei, Jr. vs. SEC)
Elements of a valid by laws:

1. It must not be contrary to law, public policy or morals.

2. It must not be inconsistent with the articles of incorporate.

3. It must be general and uniform in its effect or applicable to all alike or those similarly situated.

4. It must not impair obligations and contracts or vested rights.

3. It must be reasonable.
Any violations to the above elements shall render the by-laws inoperative and void.

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 35
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

CHAPTER 9: MEETINGS
Meetings – applies to every duly convened assembly either stockholders, members, directors or trustees,
manages, etc. for any legal purpose, or the transaction of business of a common interest.
Kinds of Meetings:
1. Stockholders’ or Members’
2. Directors’ or Trustees’
Types of meetings:
1. General
2. Special
STOCKHOLDERS’ or MEMBERS’ MEETING
Requirements to have a valid stockholders’ meeting:
1. It must be held on the date fixed in the by-laws or in accordance with law.
2. Prior notice must be given.
3. It must be held at the proper place.
4. It must be called by the proper party.
5. Quorum and voting requirements must be met

It must be held on the date fixed in the by-laws or in accordance with law.
Regular meetings 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. In absence of fixed date, it shall be held in
April so that the audited financial statements are already available.
Special meetings of stockholders or members shall be held at any time deemed necessary or as provided in
the by-laws.
Prior notice must be given.
Notice of meetings shall be in writing, and the time and place thereof stated therein. It must state the agenda
otherwise it may become voidable. Notice of meetings may also be waived, expressly or impliedly.

Regular – 2 weeks prior notice

Special – 1 week prior notice

The by-laws may provide for a different period (shorter or longer)
Failure to give notice of a meeting would render the resolution made thereunder voidable at the option of the
stockholder or member who was not notified. (Board of Directors vs. Tan)
Such resolution may however be resubmitted in a properly held meeting to be valid.
It must be held at the proper place.
General Rule: 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.
Exceptions:
1. A non-stock corporation, if provided in its by-laws, may provide for any place within the
Philippines.
2. Metro Manila is considered a city or municipality.
It must be called by the proper party.
Persons who may call the meeting:
1. The person or persons authorized under the by-laws;

2. Absent of any provision in the by-laws, the president;

3. Under Sec. 28 (removal of director), by the secretary on order of the president or on written
demand of the stockholder representing or holding at least a majority of the outstanding capital
stock or majority of the members entitled to vote in a non-stock corporation, or the stockholder or
member making the demand if there is no secretary or he refuses to do so; and

4. On order of the proper forum under Sec. 50.

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 36
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

Where there is no person authorized to call the meeting, a stockholder may petition the SEC to issue an order
directing the petitioner to call a meeting. Otherwise, the remedy is to file a petition for mandamus and compel
the authorized person to call a meeting.
Quorum and voting requirements must be met
General Rule: A quorum shall consist of the stockholders representing a majority of the outstanding capital
stock.
Exception: The by-laws or the Code itself may provide for a greater quorum and if there is an agenda
requiring such to be valid.
The basis of determining the presence of a quorum:
1. Stock corporation – total subscription irrespective of the amount paid by them.
2. Non-stock corporation – total number of registered voting members.

A quorum once present is not broken by the subsequent withdrawal of a part or fraction of the stockholders.

Improperly held meeting.

General Rule: Ineffective.
Exception: All stockholders or members are present or duly represented. Then the resolution or act
shall be valid per se because any defect has been ratified.

Remember: If the voting requirement is met, any resolution passed in the meeting, even if improperly held
or called will be valid if all the stockholders or members are present or duly represented.
DIRECTORS’ or TRUSTEES’ MEETING

Regular: Held monthly, unless the by-laws provide otherwise

Special: Held at any time upon the call of the president or as provided in the by-laws

Meetings may be held anywhere in or outside of the Philippines, unless the by-laws provide otherwise.

Notice must be sent at least one (1) day prior to the scheduled meeting, unless otherwise provided by the by-
laws. Notice may, however, be waived, expressly or impliedly.

General Rule: Meeting conducted in the absence of some of the directors or trustees and without notice to
them is illegal, and the action at such meeting, although by a majority of the directors is invalid.

Exceptions: In a close corporation, the act of any one director may bind the corporation without a meeting.
When such action is subsequently ratified and when the absent director is estopped.
If the notice requirement is not complied with the meeting is illegal and will not bind the corporation except
when subsequently ratified. (Lopez vs. Fontecha)
Presence at a meeting waives want of notice.
Physical presence at the meeting is not required; teleconferencing and videoconferencing is allowed, RA
8792. The board must act and meet as a body corporate.

The president shall preside at the meeting, unless the by-laws provide otherwise.
General Rule: A director or trustee cannot vote by proxy.
Exception: If he is duly represented in a stockholder’s meeting.
Rule: A director or trustee cannot vote by proxy in a BoD or BoT meeting but may do so in a stockholder’s
meeting.
Query: In a stockholder’s meeting for the election of BOD or BOT, a stockholder may still be represented by
a proxy and he may still be elected or be voted for?
Answer: Yes. The prohibition to attend by proxy among directors applies only to a board meeting. Elections
of officers constitute a stockholder’s meeting, thus, proxy is allowed because the director shall vote in his
capacity as a stockholder.

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 37
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

STOCKHOLDERS’ RIGHT TO VOTE AND MANNER OF VOTING

General Rule: The right to vote is an inherent right and the stockholder may vote any way he pleases.
Exceptions:
1. Non-voting shares are not entitled to vote except in those instances provided for in the penultimate
paragraph of Sec. 6
2. Treasury shares
3. Delinquent shares
4. Unregistered transferee of stock

Ordinary shares may only be effectively denied its right to vote upon the issuance of founder’s shares but not
by a provision in the Articles or by-laws.

General Rule: Stockholders or members may vote personally or through a representative by way of proxy,
voting trust agreement or by the executor, administrator, receiver of other legal representative.
Exception: In non-stock corporations, the right to vote may be limited, broadened or denied in the articles of
incorporation or in the by-laws.
The right to vote is vested with the legal owner of the shares. The corporation will not look beyond its record.
Only those appearing in the books of the corporation have the right of a stockholder.
In case of pledged or mortgaged shares, the pledgor or mortgagor is entitled to vote unless there is a written
agreement which is recorded in the corporate books to the contrary. (Sec. 55)

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. In the absence of an
appointment, no person is legally capable to represent and vote.
However, a duly appointed executor or administrator of a stockholder may not be elected as a director unless
he owns at least one share. The appointed representative may ask the court to transfer to him at least one
share so he may be elected.
General Rule: In case of shares jointly owned, the consent of all the co-owners shall be necessary. They
must agree upon the vote.
Exceptions:
1. Written proxy signed by all the owners or co-owners.
2. The shares are owned in an "and/or" capacity.

In case of dispute, apply rule on co-ownership and presumption of equal share shall be applied.

Treasury shares are deprived of the right to vote to prevent or deter the incumbent directors and officers of
the corporation from perpetuating to themselves as such or prolong their stay in the office by voting on the
shares reacquired by it.

Kinds of Representative Voting

1. By Proxy
2. Voting Trust
3. Voting Pool

PROXY (Authority or the Instrument)

The authority given by the stockholder or member to another to vote for him at a stockholders‟ or members‟
meeting. It also refers to the instrument or paper which is evidence of the authority of the agent or the holder
thereof to vote for and in behalf of the stockholder or member.
Two types of proxies:
1. General – gives a general discretionary power of attorney to vote for directors and all ordinary
matters that may properly come before a meeting. It is not an authority, however, to vote for
fundamental changes in the corporate charter or for other unusual transactions, unless specified.
2. Limited – restricts the authority to vote on specified matters only and may direct the manner in
which the vote will be cast.

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 38
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

General Rule: It shall be valid only for the meeting for which it is intended, thus limited or specific.
Exception: Unless otherwise provided in the proxy, then it will become general or extended.
Remember: Proxy voting is a matter of right in a stock corporation and not in a non-stock corporation,
where it may be denied. It cannot be denied in a stock corporation and may be denied in the Articles of
Incorporation in a non-stock corporation. However, absence of such provision in the Articles of
Incorporation, it cannot be denied .
Requirements:
1. In writing
2. Signed by the stockholder or member
3. Filed before the scheduled meeting with the corporate secretary
By-laws may reasonably regulate the form and execution of proxies.
No proxy shall be valid and effective for a period longer than five (5) years at any one time. Where the proxy
has no fixed period, it ceases to exist after the meeting for which it was given.
General Rule: Revocable, either oral or in writing.
Exception: Unless coupled with an interest.
Instances when revoked:
1. Expressed to the proxy holder or election committee
2. Stockholder attend the meeting
3. By a subsequent proxy to another
4. By sale of the shares
VOTING TRUST
A voting trust is one created by an agreement between a group of stockholders of a corporation and a trustee,
or a group of identical agreements between individual stockholders and a common trustee, whereby it is
provided that for a term of years, or for a period contingent upon a certain event, or until the agreement is
terminated, control over the stock owned by such stockholders, shall be lodged in the trustee, either with or
without reservation to the owners or persons designated by them the power to direct how such control shall
be used. It is a device of binding stockholders to vote as a unit and thus assuring a desirable stability and
continuity in management in situations where it is needed.

Effect: The voting trustee becomes merely a “sham owner with a colorable and fictitious title” for the
purpose of voting upon the stocks he does not actually own. It creates a dichotomy between the equitable or
beneficial ownership of the corporate shares of a stockholder, on the one hand, and the legal title thereto on
the other hand. It divest the stockholders participation in the management.
Requirements:
1. It should confer upon the trustee or trustees the right to vote and other rights pertaining to the
shares.

Remember: The right to vote must be separated from the other rights vested in the shares;
2. It should be for a period not exceeding five (5) years at any time unless the voting trust is
specifically required as a condition in a loan agreement, in which case, the voting trust may be for a
period exceeding five (5) years but shall automatically expire upon full payment of the loan;
3. It must be in writing and notarized, and shall specify the terms and conditions thereof;
4. A certified copy thereof must be filed with the corporation and with the Securities and Exchange
Commission, otherwise, said agreement is ineffective and unenforceable;
5. The certificate or certificates of stock covered by the voting trust agreement shall be canceled and
new ones shall be issued in the name of the trustee or trustees stating that they are issued pursuant
to said agreement. In the books of the corporation, it shall be noted that the transfer in the name of
the trustee or trustees is made pursuant to said voting trust agreement;

6. The trustee or trustees shall execute and deliver to the transferors voting trust certificates, which
shall be transferable in the same manner and with the same effect as certificates of stock.
7. It should not 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.

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 39
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

Voting trust distinguished from proxy

VOTING TRUST PROXY
The beneficial owner of the shares ceases Legal title remains with the beneficial owner
to be a stockholder of record of the
Corporation
The trustee votes as owner of the shares The proxy holder votes merely as an agent
The beneficial owner of the shares is The owner of the shares may be elected as
disqualified to be a director a director since legal title remains with him
The purpose is to acquire voting control of Generally used to secure voting and quorum
the corporation requirements or merely for the purpose of
representing an absent stockholder
Irrevocable Revocable unless coupled with an interest
The trustee can act and vote at any meeting A proxy holder can generally act as such
during the duration of the voting trust only at a particular meeting
Agreement
A proxy holder must vote in person, not by a sub-
The trustee may vote in person or by proxy proxy
The duration may exceed 5 years The duration may not exceed 5 years
Must be notarized and filed with the SEC Need not be notarized nor filed with the SEC

A corporation is not a party to a voting trust agreement therefore it is not a real party interest in a suit to
enforce the same. (NIDC vs. Aquino)
A voting trust transfers only voting and other rights pertaining to the shares subject of the agreement or
control over the stock. It does not include the assets, operation and management of the corporation. (NIDC
vs. Aquino)
VOTING POOL
Two or more shareholders will appoint one trustee for their shares, thus all votes for those shares, those of the
shareholder-trustor, will be voted by the one trustee. This is different from cumulative voting because in this
case, the legal ownership is thereby transferred to the trustee.

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 40
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

CHAPTER 10: STOCKS AND STOCKHOLDERS

3 ways in which a person may become a stockholder:
1. By a contract of subscription with the corporation for unissued shares;
2. By the purchase of treasury shares from the corporation; and
3. By purchase or acquisition of shares from existing stockholders (includes purchase from the stock
exchange).
SUBSCRIPTION CONTRACT (Can either be pre or post incorporation subscription)

Subscription is the mutual agreement of the subscribers to take and pay for the stocks of a corporation.

While Subscription Contract is any contract for the acquisition of unissued stock in an existing corporation or
a corporation still to be formed, notwithstanding the fact that the parties refer to it as a purchase or some
other contract. No matter what the parties designate the contract, all subscriptions shall be a contract of
subscription.
Remember: Any stipulation that full payment must be made before one can become a shareholder shall be
void and unenforceable.
A person, whether deemed a purchaser or subscriber of the unissued stocks of an existing corporation or a
corporation still to be formed becomes entitles to all the right of a stockholder and subjected to all liabilities
that attach thereunder upon execution and effectivity of the contract or upon acceptance and creation of the
corporation. (Speilbert vs Neilson)
A subscription contract is not required to be written; an oral contract for subscription is valid and enforceable.
The statutes of fraud do not apply to a subscription contract because such subscription does not fall under the
statutory definition of a sale.
Remember: Sale of treasury shares or purchase from existing shareholders is not a contract of subscription.
Thus, it is not covered by the restrictions and limitations imposed for subscription contract.
Conditional subscription is one made upon a condition precedent, does not make the subscriber a stockholder,
or render him to pay the amount of his subscription, until the performance or fulfillment of the condition.
Subscription upon special terms is an absolute subscription, making the subscriber a stockholder, and
rendering him liable as such, as soon as the subscription is accepted, the special term being an independent
stipulation.
In case of doubt, a subscription shall be considered one upon special terms in order to protect the creditors
and other subscribers.
General Rule: Conditional subscriptions are valid.
Exceptions:
1. The charter or enabling act prohibits the same; or
2. The conditions are such as to render their performance beyond the powers of the
corporation or in violation of law or contrary to public policy.
Effect: The condition is illegal and has no binding force. It becomes an absolute contract of
subscription.
An application for subscription which is at variance with the terms evidenced in a general form of
subscription must be accepted by the corporation to create a binding contract. (Trillana vs. Quezon College,
Inc.)
A condition facultative as to the debtor renders the whole obligation void. (Trillana vs. Quezon College, Inc.)

PRE-INCORPORATION SUBSCRIPTIONS
Types of subscriptions as to time of execution:
1. Pre-incorporation subscriptions – subscriptions for shares of stock of a corporation still to be
formed; and
2. Post-incorporation subscriptions – those made or executed after the formation or organization of
the corporation.
General Rule: A subscription for shares of stock of a corporation still to be formed is irrevocable.
Exceptions:

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 41
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

1. Lapse of a period of 6 months from the date of subscription;

2. All the subscribers consent to the revocation; or
3. The incorporation of said corporation fails to materialize within 6 months or within a longer period
as may be stipulated in the contract of subscription.
Exception to the exceptions: No pre-incorporation subscription may be revoked after the submission of the
articles on incorporation to the SEC.
Pre-incorporation subscriptions are mandatory in view of Secs. 13 and 14 which mandates that a corporation
may be registered as such only if at least 25% of its authorized capital stock has been subscribed and that at
least 25% of the total subscription has been paid.
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 ff:
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 or services actually rendered to the corporation;

4. Previously incurred indebtedness by the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital; and
6. Outstanding shares in exchange for stocks in the event of reclassification or conversion.

Stocks shall not be issued in exchange of promissory notes or future services. Their realization is uncertain.

The consideration must be certainly realized since issuance of shares is a source of financing for the
corporation. (Ladia)

Remember: In case of No Par Value shares, the issue price may be fixed in the Articles of Incorporation or
by the Board of Directors.
Issue – the making of a share contract or contract of subscription; transaction by which a person becomes the
owner of shares and by which new share contracts are created.
The issuance of shares is not dependent on the delivery of a certificate of stock.
Par or issue price – indicates the amount which the original subscribers are supposed to contribute to the
corporate capital as the basis of the privilege of profit sharing with limited liability.
Valuation of properties given as a consideration for issuance of stock:
1. Tangible properties (particularly real properties):
a. Appraisal report of an independent appraiser;
b. Zonal valuation as certified by the BIR; or
c. Market value indicated in the Real Estate Tax Declaration.
2. Intangible properties (such as patents or copyrights):
a. Initial determination by the incorporators or the board of directors subject to the approval
of the SEC; or
b. Appraisal report of an independent appraiser.

Labor performed or services actually rendered to the corporation must be capable of valuation and in fact
fairly valued.
Two theories in the valuation of property or services:
1. True value rule – the motives or intent of those making the valuation are disregarded and the sole
and decisive factor or question is whether or not the property or services are in fact worth the value

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it will be yours. –Mark 11:24

placed on them.

2. Good faith rule – the value of the property or services is a matter about which there can be an
honest difference of opinion. Therefore, if the parties have acted in good faith without fraud or
intentional over-valuation, the transaction cannot be overturned even if the later becomes evident
that the property or services were in fact worth much less than the value fixed on them initially.
The set-off or satisfaction of a debt due from the corporation is a lawful and valid consideration for the
issuance of stock.
Amounts transferred from unrestricted retained earnings to stated capital – refers to the declaration and
distribution of stock dividends where corporate earnings are capitalized.
Outstanding shares exchanged for stocks in the event of reclassification or conversion – refers to stocks
surrendered to the corporation in exchange for a new or different type of shares. (Ex. conversion of founder’s
shares to common shares.)
The prohibition against the issuance of shares by corporations except for actual cash or property at its fair
valuation secures absolute equality among stockholders with respect to their liability upon stock
subscriptions. A stipulation is a stock subscription which obligates the subscriber to pay nothing for the
shares except as dividends may accrue upon the stock is a discrimination in favor of the particular subscriber,
and hence, illegal. (National Exchange Co., Inc. vs. Dexter)
A corporation has no power to receive a subscription upon such terms as will operate as a fraud upon the
other subscribers as stockholders by subjecting the particular subscribers to lighter burden, or by giving his
greater rights and privileges, or as fraud upon creditors of the corporation by withdrawing or decreasing
capital. Therefore, an agreement between a corporation and a particular subscriber, by which the subscription
is not to be payable, or is to be payable in part only, is illegal and void. (National Exchange Co., Inc. vs.
Dexter)
CERTIFICATES OF STOCK AND THEIR TRANSFER
Certificate of stock – the piece of paper or document which evidences the ownership of shares and a
convenient instrument for the transfer of the title.

Requisites for the issuance of a certificate of stock:

1. It must be signed by the president or vice-president and countersigned by the secretary or assistant
secretary;
2. It must be sealed with the corporate seal; and
3. The full amount of subscription together with interest and expenses (in case of delinquent shares) if any
is due, has been paid.

General Rule: Holders of subscribed shares not fully paid are entitled to all the rights of a stockholder.
Exceptions:
1. The shares have been declared delinquent; or

2. The stockholder exercises his appraisal right.

The issuance of a stock certificate is not a condition sine quanon to consider a subscriber as a stockholder.

Remember: Unpaid shares however do not entitle the holders thereof to the issuance of the certificate until the
same has been fully paid.
Two modes of transferring shares of stock:
1. When the corporation has already issued stock certificates – only by delivery of the certificate or
certificates of stock indorsed by the owner or his attorney-in-fact or other person legally authorized to
make the transfer.

2. When the corporation has not yet issued certificates of stock – by a duly notarized deed.

No transfer shall be valid, except as between the parties, until the transfer is recorded in the books of the
corporation.

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Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

Until registration is accomplished, the transfer of stock, though valid between the parties, cannot be effective as
against the corporation. The corporation looks only though its books for the purpose of determining who its
stockholders are.

Non-registration of a transfer of stock will not, however, affect the validity thereof at least in so far as the
contracting parties are concerned.

Remember: Stockholder A, a holder of unpaid shares, may validly sell his shares to others. It shall be a valid sale.
However, it will not be allowed to be recorded in the book of the corporation until and unless the unpaid portion
has been paid.
Reasons for the necessity of the registration of transfers of stock:
1. To enable the corporation to know who its stockholders are;

2. To enable the transferee to exercise his rights as a stockholder;

3. To afford the corporation an opportunity to object or refuse registration of the transfer in cases allowed
by law (as when it has unpaid claims on the shares transferred);
4. To avoid fictitious and fraudulent transfers; and
5. To protect creditors who have the right to look upon stockholders, in case of non-payment or watered
shares, for the satisfaction of their claims.
The duty of the corporate secretary to record a valid transfer of shares of stock is ministerial. Should the
corporation or corporate secretary refuse to record the transfer, mandamus will lie to compel registration.
General Rule: A certificate of stock is not a negotiable instrument. A bona-fide purchaser of a certificate of stock
will acquire no better title to the shares than his transferor had and will be subject to all rights, remedies and
defenses which the true and lawful owner may have.
Exception: When the general principles of estoppel apply. Thus, if the legal owner thereof, by his act or
negligence, is estopped from claiming ownership, (as when he clothes another with apparent title or authority to
dispose of the same) a purchaser in good faith and without notice will acquire a better title as against the owner so
estopped.
Shares of stock are personal properties and the owners thereof have the unbridled right to transfer the same to
anyone they please subject only to reasonable charter provisions.
The duty of the corporate secretary to register a valid transfer of shares is ministerial. Therefore, mandamus will lie
to compel registration in case the corporation or the corporate secretary refuses registration. (Rural Bank of Salinas
vs. CA) However, the transferee has no such right when his title to said shares has no prima facie validity of is
uncertain. (Tay vs. CA)
The right to transfer shares of stock may not be unreasonably restricted or prohibited. Every owner of
corporate shares has the same uncontrollable right to alienate them and is under no obligation from selling them at
his sacrifice and for the welfare and benefit of the corporation and other stockholders. (Padgett vs. Bobcock &
Templeton; Fleischer vs. Botica Nolasco)
However, the right to transfer may be “regulated” to give the corporation protection against colorable or
fraudulent transfer or to enable it to know who its stockholders are. Also, as a matter of policy, the SEC allows the
grant of “preferential rights” to existing stockholders and/or the corporation, giving them the first option to
purchase the shares of a selling stockholder within a reasonable period not exceeding 30 days provided that the
same is contained in the articles of incorporation and in all of the stock certificates to be issued by the corporation.
This is considered “reasonable” since it merely suspends the right to transfer within the period specified.
A corporation may classify its shares and grant such “rights, privileges or restrictions” provided that such are made
in the articles of incorporation and subject to reasonable terms, conditions or period. (Go Soc & Sons vs. IAC)
Other restrictions on the right to transfer shares:
1. It is not valid, except as between the parties, until recorded in the books of the corporation;
2. Share of stock against which the corporation holds any unpaid claim shall not be transferable in the books
of the corporation; unpaid claims, refer to claims arising from unpaid subscription and not to any
indebtedness which a stockholder may owe the corporation such as monthly dues;
3. Restrictions required to be indicated in the articles of incorporation, by-laws and stock certificates of a
close corporation;
4. Restrictions imposed by special law, such as the Public Service Act requiring the approval of the

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government agency concerned if it will vest unto the transferee 40% of the capital of the public service
company;
5. Sale to aliens in violation of maximum ownership of shares under the Nationalization Laws; and
6. Those covered by reasonable agreement of the parties.
Transfer – refers to absolute and unconditional conveyance of the title and ownership of a share of stock to warrant
registration in the books of the corporation in order to bind the latter and other third persons. (Monserrat vs. Ceron)
Only the transfer or absolute conveyance of the ownership of the title to a share need be entered and noted upon the
books of the corporation in order that such transfer may be valid, therefore, inasmuch as a chattel mortgage of the
aforesaid title is not a complete and absolute alienation of the dominion and ownership thereof, its entry and
notation upon the books of the corporation is not a necessary requisite to its validity. (Monserrat vs. Ceron)
Chattel mortgages over shares of stock should be registered both at the owner’s domicile and in the province where
the corporation has its principal office or place of business in order to bind third persons. The ownership of shares
in a corporation is property distinct from the certificates which are merely the evidence of such ownership. The
property in the shares are deemed to be situated in the province in which the corporation has its principal office or
place of business. (Chua Guan vs. Samahang Magsasaka, Inc.)
Remember: The registration of mortgage in the books of the corporation is not required for its validity, but to bind
third person. It must be registered in the Registry of Deeds of the city where the principal office is located.
All transfers of shares should be entered in the books of the corporation. Transfers not so entered are invalid as
to attaching or execution creditors of the assignors as well as to the corporation and to subsequent purchasers in
good faith, and indeed, as to all persons interested, except the parties to such transfer. (Uson vs. Diosomito)
A clause contained in the by-laws of a corporation which provides that the owner of a share of stock cannot sell it
to another person except to the defendant corporation is ultra-vires, violative of the property rights of shareholders,
and in restraint of trade. (Fleischer vs. Botica Nolasco Co.)
Shares of stock being regarded as property, the owner of such shares may, as a general rule, dispose of them as they
see fit, unless the corporation has been dissolved, or unless the right to do so is properly restricted, or the owner’s
privilege of disposing of his shares has been hampered by his own action. (Padgett vs. Babcock & Templeton)
Any restriction on a stockholder’s right to dispose of his shares must be construed strictly; and any attempt to
restrain a transfer of shares is regarded as being in restraint of trade, in the absence of a valid lien upon its shares,
and except to the extent that valid restrictive regulations and agreements exist and are applicable. Subject only to
such restrictions, a stockholder cannot be controlled in or restrained from exercising his right to transfer by the
corporation or its officers or by other stockholders, even though the sale is to a competitor or the company, or to an
insolvent person, or even though a controlling interest is sold to one purchaser. Therefore, restrictions consisting in
the word “non-transferable” is illegal. (Padgett vs. Babcock & Templeton)
The suspension of the power to sell shares of stock which has a beneficial purpose, results in the protection of the
corporation as well as of the individual parties to the contract, and is reasonable as to the length of time of
suspension is valid. (Lambert vs. Fox)
An indorsee of an undelivered certificate of stock has no power to effectively transfer the shares to other persons or
his nominees. For an effective transfer of shares of stock the mode and manner of transfer prescribed by law must
be followed. (Embassy Farms, Inc. vs. CA)
Indorsement of the certificate of stock is a mandatory requirement of law for an effective transfer of a certificate of
stock. (Razon vs. IAC)

The right of a transferee/assignee to have stocks transferred to his name is an inherent right flowing from his
ownership of the stocks. The corporation’s obligation to register is ministerial. (Rural Bank of Salinas vs. CA)

The pledge of shares of stock does not vest ownership of such shares to the pledgee. The pledgor remains the
owner during the pendency of the pledge and prior to foreclosure and sale. Therefore, the pledgee has no right to
demand the registration of the pledged shares in his name. In order that a writ of mandamus may issue, it is
essential that the person petitioning for the same has a clear legal right to the thing demanded and that is it the
imperative duty of the respondent to perform the act required. (Tay vs. CA)

Remember: Mandamus is not a matter of right when refusal to transfer is valid for some good reason.

Without a stock certificate, which is the evidence of ownership of corporate stock, the assignment of corporate
shares is effective only between the parties to the transaction. (Nava vs. Peers Marketing)

For a valid transfer of stocks, there must be strict compliance with the mode of transfer prescribed by law.
1. There must be delivery of the stock certificate;

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 45
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

2. The certificate must be endorsed by the owner or his attorney-in-fact or other persons legally authorized
to make the transfer; and
3. To be valid against third parties, the transfer must be recorded in the books of the corporation.
An assignment, without endorsement and delivery, while valid as among the parties, does not necessarily make the
transfer effective. The assignees cannot enjoy the status of a stockholder, cannot vote nor be voted for, and will not
be entitled to dividends, insofar as the assigned shares are concerned. (Rural Bank of Lipa City, Inc. vs. CA)
Delivery is not essential where it appears that the person sought to be held as stockholders are officers of the
corporation, and have custody of the stock books. (Tan vs. SEC)
After a valid transfer of share, the right to have such registered commences to exist. However, it would not follow
that said right should be exercised immediately or within a definite period. (Won vs. Wack Wack Golf & Country
Club, Inc.)
Certificates of stock are not negotiable instruments. Consequently, a transferee under a forged assignment acquires
no title which can be asserted against the true owner, unless his own negligence has been such as to create an
estoppel against him. If the owner of the certificate has endorsed it in blank, and it is stolen from him, no title is
acquired by an innocent purchaser for value. (De Los Santos vs. Republic)
FORGED AND UNAUTHORIZED TRANSFERS
Forged and unauthorized transfer – what is forged or unauthorized is the transfer of the certificate from the
true and lawful owner to another person.
Unauthorized issuance of certificate of stock – the act of the corporation in issuing a certificate, either
fraudulently or by mistake.
General Rule: In forged or unauthorized transfer of stock the purchaser acquires no title as against the lawful
owner and will have no right or remedy against the corporation (non-negotiability of stock certificates).
Exception: If after such forged or unauthorized transfer, the corporation issues a new certificate and such
certificate passes into the hands of subsequent bona fide purchaser, the latter may rightfully acquire title
thereto since the corporation will be estopped to deny the validity thereof. The subsequent purchaser in good
faith took the shares by virtue of the genuiness of the certificates issued by the corporation or of the
representation made by the corporation that the same is valid and subsisting and that the person named
therein is a stockholder of the corporation. He may therefore, compel the corporation to recognize him as a
stockholder or claim reimbursement and damages against the latter.
ISSUANCE OF STOCK CERTIFICATES
Subscriptions to shares of stock are indivisible. Thus, 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.
Once a subscriber has paid his subscription in full, he becomes entitled to be issued a stock certificate.
The duty of the corporate officers to issue stock certificates to those entitled is a ministerial duty enforceable
by mandamus.
A stockholder whose subscription is not fully paid may not be issued a stock certificate for that portion
already paid. (Fua Cun vs. Summers and China Banking Corporation)
WATERED STOCK
Watered stock – one which is issued by the corporation as fully paid-up shares when in fact the whole
amount of the value thereof has not been paid.
It is considered as fictitiously paid-up shares (Ladia)
Directors or officers shall be solidarily liable with the stockholder or subscriber 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 for the following acts:
1. Consenting to the issuance of watered stocks; or
2. Having knowledge thereof, failing to forthwith express his objection in writing and file the same
with the corporate secretary.
Extend of Liability: Difference of par or issue value and the consideration given or actually paid.
All creditors, whether prior or subsequent to the issuance of watered stock may enforce payment of such
water.

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 46
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

Remember: There is no stock watering in treasury shares because they were already issued and fully paid.

Ways in which watered stocks may be issued:

1. For a monetary consideration less than its par or issued value;

2. For a consideration in property, tangible or intangible, valued in excess of its fair market value;
3. Gratuitously or under an agreement that nothing shall be paid at all; or
4. In the guise of stock dividends when there are no surplus profits of the corporation.

Evil effects of stock watering:

1. The corporation is deprived of its capital thereby hurting its business prospects, financial capability
and responsibility;
2. Stockholders who paid their subscriptions in full, or promised to pay the same, are injured and
prejudiced by the reduction of their proportionate interest in the corporation; and
3. Present and future creditors are deprived of corporate assets for the protection of their interest.
Two theories advanced as the basis for the liability on water stocks:
1. Trust fund doctrine – treating the capital of the corporation, inclusive of the unpaid portion of
subscriptions to said capital, as a “trust fund” which the creditors have a right to look up to for the
satisfaction of their claims. It is not only the corporation which may compel full payment, but
also creditors.

2. Fraud or misrepresentation theory – liability is based on the false representation made by the
corporation and the stockholder concerned to the creditors that the true par value or issued price of
the shared has been paid or promised to be paid full.
Effects of issuance of watered stock:
1. As to the corporation – when a corporation is guilty of ultra-vires acts which constitute an injury to
or fraud upon the public, or which will tend to injure or defraud the public, the State may institute a
quo-warranto proceeding to forfeit its charter for the misuse or abuse of its franchise.

2. As between the corporation and the subscriber – the subscription is void; the subscriber is liable to
pay the full par or issued value thereof, to render it valid and effective.

3. As to the consenting stockholders – they are estopped from raising any objection thereto.

4. As to dissenting stockholder – in view of the dilution of their proportionate interest in the

corporation, they may compel the payment of the “water” in the stock solidarily against the
responsible and consenting directors and officers inclusive of the holder of the watered stock.

5. As to creditors – they may enforce payment of the difference in the price, or the water in the stock,
solidarily against the responsible directors/officers and the stockholders concerned.

6. As against transferees of the watered stock – his right is the same as that of his transferor. If
however, a certificate of stock has been issued and duly indorsed to a bona fide purchaser, without
knowledge, actual or constructive, the latter cannot be held liable, at least as against the
corporation, since he took the shares on reliance of the misrepresentation made by the corporation
that the stock certificate is valid and subsisting. This is because a corporation is prohibited from
issuing certificates of stock until the full value of the subscriptions have been paid and could not,
therefore, deny the validity of the stock certificate it issued as against a purchaser in good faith.
Remember: Unless so required or provided in the subscription contract or by-laws, subscribers to shares of
stock not fully paid are not liable to pay interest on their unpaid subscriptions.
If so required or provided, subscribers for stock shall pay to the corporation interest on all unpaid
subscriptions from the date of subscription 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.
ENFORCEMENT OF PAYMENT OF SUBSCRIPTIONS

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 47
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

When unpaid subscription or any percentage thereof, together with interest if required, shall be paid:
1. On the date or dates fixed in the contract of subscription; or
2. On the date or dates that may be specified by the board of directors pursuant to a “call” declaring
any or all unpaid portion thereof to be so payable.
Two possible remedies available to the corporation to enforce payment of unpaid subscription:
1. By board action (delinquency sale);
2. By a collection case in court.
Failure or refusal of the corporation, through its board of directors to enforce or collect payment of unpaid
subscription will not prevent the creditors or the receiver of the corporation to institute a court action to collect the
unpaid portion thereof under the trust fund doctrine. (Gariva vs Suarez)
Procedure for the enforcement of payment through board action:
1. The board of directors, by a formal resolution, declares the whole or any percentage of unpaid
subscriptions to be due and payable on a specific date. However, if the contract of subscription provides
the date or dates when payment is due, no “call” declaration of the board is necessary;
2. The stockholders concerned are given notice of the board resolution by the corporation either personally
or by registered mail. Publication of the notice of call is not required unless the by-laws provide
otherwise. Notice is not likewise necessary if the contract of the subscription stipulates a specific date
when any unpaid portion is due and payable;
3. Payment shall be made in the date specified in the call or on the date provided for in the contract of
subscription;
4. Failure to pay on the date required in the call or as specified in the contract of subscription will render the
entire balance due and payable and making the stockholder liable for the interest;
5. If within 30 days from the date stated in the call or as may be provided in the contract of subscription no
payment is made, all the stock covered by the subscription shall become delinquent and shall be subject
to a delinquency sale;
6. The board, by resolution, orders the sale of the delinquent stock stating the amount due and the date, time
and place of the sale;
7. The sale shall be made not less than 30 days nor more than 60 days from the date the stocks became
delinquent;
8. Notice of the sale, with the copy of the board resolution should be sent to every delinquent stockholder
either personally or by registered mail;
9. Publication of the notice of sale must be made once a week for two consecutive weeks in the newspaper
of general circulation in the province or city where the principal officer is located;
10. Sale at public auction if no payment is made by the delinquent stockholder in favor of the bidder who
offered to pay the full amount of the balance in the subscription, inclusive of interest, cost of
advertisement and expenses for the smallest number of shares;
11. Registration or transfer of the shares of stock in the name of the bidder and corresponding issuance of the
stock certificate covering the shares successfully bidded;
12. If there be any remaining shares, the same shall be credited in favor of the delinquent stockholder who
shall be entitled to the issuance of a certificate of stock covering such shares;
13. If there is no bidder at the public auction who offers to pay the total amount due plus interest, cost and
expenses, the corporation may, subject to the provisions of the Code, bid for the same and the total
amount due shall be credited or paid in full in the corporate books; and
14. The shares so purchased by the corporation shall be vested in the latter as treasury shares.

Remember: If the corporation has no Unrestricted Retained Earnings, it cannot be a bidder in the auction sale.

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 48
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

Highest bidder – is such bidder who shall offer to pay the full amount of the balance on the subscription together
with accrued interest, cost of advertisement and expenses of sale, for the smallest number of shares or fraction of a
share.
Remember: The winning bidder is the lowest bidder in terms of smallest shares. Pakauntian kasi ng shares na
bibilihin tapos mataas yung magiging value per share. (Ladia)
Grounds to question the delinquency sale:
1. Irregularity or defect in the notice of sale; or
2. Irregularity or defect in the sale itself.

Two conditions before an action to recover delinquent stocks irregularly sold may be allowed:
1. 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 the sale at the legal rate; and
2. The action shall be commenced by the filing of a complaint within six months from the date of the sale.
A “call” is a condition precedent before the right of action to institute a recovery suit accrues. A demand is required
before a debtor may incur a delay in the performance of his obligation.
Instances when a “call” is not necessary:

1. The contract of subscription provides for a date or dates when payment is due; or

2. The corporation has become insolvent.

A subscription for shares of stock does not require an express promise to pay the amount subscribed, as the law
implies a promise to pay on the part of the subscriber. The subscriber is as much bound to pay the amount of the
share subscribed by him as he would be to pay any other debt, and the right of the company to demand payment is
no less incontestable. (Velasco vs. Poizat)
Notwithstanding the fact that the by-laws of the corporation provides for a method for the collection of the unpaid
portion of stock subscriptions, the corporation may still make use of the methods provided by the Code. (De Silva
vs. Aboitiz & Co.)
General Rule: A valid and binding subscription for stock of a corporation cannot be cancelled so as to release the
subscriber from liability thereon.
Exception: Consent of all the stockholders is given.
Exceptions to the exception:
1. Bona fide compromise;

2. Set-off of a debt due from the corporation; or

3. Release supported by consideration. (Lingayen Gulf vs. Baltazar)
The NLRC has no jurisdiction to determine intra-corporate disputes between the stockholder and the corporation as
in the matter of unpaid subscriptions. (Apocada vs. NLRC)

Unpaid subscriptions are not due and payable until a call is made by the corporation for payment. (Apocada vs.
NLRC)

Subscription to the capital of a corporation constitutes a fund to which the 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. (Lumanlan vs. Cura)
The President of the Philippines is devoid of the prerogative of suspending the operation of any stature or any of its
items. Thus the President cannot condone the payment of stock subscriptions in the event that the counterpart fund
to be invested by the government would not be available. (PNB vs. Bitulok Sawmill, Inc.)
A stockholder is personally liable for the financial obligations of a corporation to the extent of his unpaid
subscription. (Edward Keller & Co., Ltd. vs. Cob Group Marketing, Inc.)
The subscription to capital stock of the corporation, unless otherwise stipulated, is not payable at the moment of the
subscriptions but on a subsequent date which may be fixed by the corporation. (Garcia vs. Suarez)
Shares of stock become delinquent when no payment is made on the balance of all or any portion of the
subscription on the date or dates fixed in the contract of subscription without need of call, or on the date specified
by the board of directors pursuant to a call made by it.

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 49
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

General Rule: No delinquent stock shall be entitled to:

1. Be voted for or to vote;
2. Representation at any stockholder's meeting; or
3. Any of the rights of a stockholder.
Exception: Delinquent stocks are entitled to the right to dividends (any cash dividends due on delinquent
stockholders shall first be applied to the unpaid balance on his subscription plus cost and expenses, while stock
dividends shall be withheld until his unpaid subscription is paid in full).
Remember: In a delinquency sale, all subscribed shares declared delinquent are sold even if there is partial
payment. Subscriptions are indivisible one subscribed.
Example 1: Ana subscribed to 1000 shares with a total price of Php100, 000.00. She paid Php50, 000.00 and
was unable to pay the remaining balance despite the demand and call for payment by the corporation.
In a delinquency sale for the 1000 shares, Baldo being the highest bidder (lowest number of shares for the
highest amount) was able to buy the 1000 shares.
Note that the entire 1000 shares subscribed to by Ana was made subject to the delinquency sale despite the
payment. This is because the contract of subscription is an indivisible contract. The payment made by Ana
was in effect forfeited.
General Rule: Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a
stockholder.
Exception: Shares of stock not fully paid are not entitled to be issued a certificate of stock.
Remember: Director whose shares are delinquent shall still remain as director as long as he still holds at least
one share in the books.
Requirements and procedure for issuance of new certificates of stock in lieu of those 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:
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.

2. He shall also submit such other information and evidence which he may deem necessary.

3. Publication of a notice in a newspaper of general circulation published in the place where the
corporation has its principal office, once a week for 3 consecutive weeks at the expense of the registered
owner of such certificate of stock.

4. If no contest has been presented within 1 year from the date of the last publication, 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. However, the
registered owner may file a bond or other security, effective for a period of 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.

5. 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, the issuance of the new certificate of stock shall be suspended
until the final decision by the court regarding the ownership of said certificate of stock.
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.
RIGHTS AND LIABILITIES OF STOCKHOLDERS

Certain basic rights for the protection of stockholders:

1. Participation in the management of the corporate affairs by exercising their right to vote and be

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 50
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

voted upon either personally or by proxy;

2. To enter into a voting trust agreement;
3. To receive dividends and to compel their declaration if warranted;
4. To transfer shares of stock subject only to reasonable restrictions inclusive of the right of the
transferee to compel the registration of the transfer in the books of the corporation;
5. To be issued a certificate of stock for fully paid-up shares;
6. To exercise pre-emptive rights;
7. To exercise their appraisal right;
8. To institute and file a derivative suit;
9. To recover shares of stock unlawfully sold for delinquency;
10. To inspect the books of the corporation;
11. To be furnished the most recent financial statements of the corporation;
12. To be issued a new stock certificate in lieu of the lost or destroyed one;
13. To have the corporation dissolved;
14. To participate in the distribution of the assets of the corporation upon dissolution;
15. In the case of a close corporation, to petition the SEC to arbitrate a deadlock; and
16. In the case of a close corporation, to withdraw therefrom, for any reason, and to compel the
purchase of his shares.

Certain obligations and liabilities of stockholders:

1. To pay the corporation the balance of his unpaid subscriptions;
2. To pay interest on his unpaid subscription if required by the by-laws or by the contract of
subscription;
3. To answer to creditors for the unpaid portion of their subscription;
4. To answer the “water” in their stocks;
5. To be liable, as general partners, for all debts, liabilities and damages of ostensible corporations;
and
6. In case of a close corporation, to be personally liable for corporate torts when they actively
participate in the management of the corporation.

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 51
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

CHAPTER 11: CORPORATE BOOKS AND RECORDS

Records to be kept and maintained by the corporation:
1. Records of all business transactions – which include, among others, journals, ledgers, contracts,
vouchers and receipts, financial statements and other books of accounts, income tax returns, and
voting trust agreement which must be kept and carefully preserved at its principal office.
2. Minutes of all meetings of stockholders or members and of the directors or trustees - setting 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 thereat which must likewise be kept at the principal office of the corporation.

3. Stock and transfer book – showing the names of the stockholders, the amount paid or unpaid on all
stock for which subscription has been made, a statement of every alienation, sale or transfer of
stock made, the date thereof, and by and to whom made which must be kept either in the principal
office of the corporation or in the office of its stock transfer agent.

For non-stock corporation, Membership Book is kept in lieu of Stock and Transfer Book.
These corporate books and records, inclusive of all business transactions and minutes of meetings, are subject
to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on
business days and a copy of excerpts of said records may be demanded.

The corporation, or its responsible directors and officers cannot unduly restrict the right of inspection and
may not arbitrarily set a few days of the year within which the stockholder may make the inspection. (Pardo
vs. Hercules Lumber, Co.)

Remember: Stockholders may not be unduly or arbitrarily refused inspection of the corporate books and
records, however, such right is not absolute as there may be some information which the corporation may
undoubtedly keep secret such as highly sensitive and confidential information.

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.

Remedies of a stockholder who is denied inspection of corporate books:

1. Mandamus;
2. Damages either against the corporate or the responsible officer; or
3. Criminal complaint based on Sec. 144 of the Code.

General Rule: Any officer or agent of the corporation who refuses to allow the inspection of corporate books
and records, or any director or trustee who through a resolution by the board votes for such refusal shall be
liable for damages and shall be guilty of an offense which shall be punishable under Sec. 144.
Exception. It shall be a defense of the corporation that the person demanding inspection:
1. Has improperly used any information secured through any prior examination of the records or
minutes of such corporation or of any other corporation; or
2. Was not acting in good faith or for a legitimate purpose in making his demand.

Attendance of the above defenses can be a valid ground to refuse the demanding person inspection of the
records. Also, when the records of the corporation are not within the possession of the corporation, it may be
a valid ground to refuse inspection of the books. Like for example if such is with the auditors for audit
purposes.
The basis of the right of the stockholder to inspect the books and records of the corporation for a proper
purpose is to protect his interest as a stockholder.
The right to inspect corporate books, although personal, may be exercised through an agent or representative
since it may be unavailing in many instances. (W.G. Philpotts vs. Philippine Manufacturing Co.)

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 52
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

Directors of a corporation have the unqualified right to inspect the books and records of the corporation at all
reasonable hours. However, there is no absolute right to secure certified copies of the minutes of the
corporation until these minutes have been written up and approved by the directors. (Vegaruth vs. Isabela
Sugar Co., Inc.)
Remember: Right to inspect books and records of stockholder may be reasonably restricted and limited but
that of the directors are absolute and unqualified. Stockholders can only inspect specific or limited
information while directors may have access to confidential information.
General Rule: The right of stockholders to examine corporate books extends to a wholly owned subsidiary
which is completely under the control and management of the parent company where he is such a
stockholder. (Gokongwei vs. SEC)
Exception: The subsidiary and the parent are legally being operated as separate and distinct entities and that
the records of the subsidiary are not in the control and possession of the parent company.

Note: Substantial interest in another corporation does not extend the right of the stockholder to inspect the
books.
It is a required condition for the inspection of corporate books that the one requesting it must not have been
guilty of using improperly any information secured through a prior examination and that the person asking
for such examination must be acting in good faith and for a legitimate purpose in making his demand.
(Gonzales vs. PNB)

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 53
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

CHAPTER 12: MERGER AND CONSOLIDATION

Merger – a union effected by absorbing one or more existing corporations by another which survives and
continues the combined business; the uniting of two or more corporations by the transfer of property to one of
them which continues in existence, the other or others being dissolved and merged therein.
Consolidation – the uniting or amalgamation of two or more existing corporations to form a new corporation
and the termination of existence of the old ones.
Outline of Process:
1. Plan of merger or consolidation
2. Approval of the Board or Trustee (majority)
3. Notice for meeting, at least 2 weeks
4. Meeting duly called for the purpose
5. Approval of the stockholders or members (two-thirds)
6. Dissenting, appraisal right
7. Amendment, approved and ratified
8. Agreement of merger or consolidation
9. Articles of merger or consolidation
10. Submission to the SEC of Articles
11. Favorable recommendation, if required
12. Certificate of merger or consolidation
13. If not approved, notice (at least 2 weeks) and hearing
Requirements and procedure for merger or consolidation:
1. The board of directors or trustees of each constituent corporation shall approve a plan of merger or
consolidation setting forth the following:
a. The names of the constituent corporations;
b. The terms of the merger or consolidation and the mode of carrying the same into effect;
c. A statement of changes, if any, in the articles of incorporation; and
d. Other provisions deemed necessary and desirable.
2. Approval of the plan by the stockholders representing 2/3 of the outstanding capital stock or 2/3 of the
members in a non-stock corporations of each constituent corporation at separate corporate meetings
called for the purpose;
3. Prior notice of such meeting, with a copy or summary of the plan of merger or consolidation shall be
given to all stockholders or members at least 2 weeks prior to the scheduled meeting, either personally
or by registered mail stating the purpose thereof;
4. Execution of the articles of merger or consolidation by each constituent corporation to be signed by the
president or vice-president and certified by the corporate secretary or assistant secretary setting forth the
following:
a. The plan of the merger or consolidation;
b. As to stock corporations, the number of shares outstanding, or in the case of non-stock
corporations, the number of members; and
c. As to each corporation, the number of shares or members voting for and against such plan,
respectively.
5. Submission of the articles of merger or consolidation in quadruplicate to the SEC subject to the
requirement of that if it involves corporations under the direct supervision of any other government
agency or governed by special laws the favorable recommendation of the government agency concerned
shall first be secured; and
6. Issuance of the certificate of merger or consolidation by the SEC at which time the merger or
consolidation shall be effective. If the plan, however, is believed to be contrary to law, the SEC shall set
a hearing to give the corporations concerned an opportunity to be heard upon proper notice and
thereafter, the SEC shall proceed as provided in the Code.
Any amendment to the plan of merger or consolidation must be 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 2/3 of the outstanding capital stock or of 2/3 of the members of each of the constituent
corporations.

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 54
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

Reasons inducing reorganization may vary in every case, some, because of weak financial or insolvent condition
while others enter into merger or consolidation notwithstanding the solvency.
Mergers and consolidations may not be entered into for the purpose of circumventing the law against monopolies
and illegal combinations in restraint of trade or for purposes of fraud.
Remember: Merger or consolidation may involve two or more corporations. In merger, one absorbs the other and
there is a surviving corporation. While in consolidation, new corporation is formed and no surviving, except the
new corporation and both constituent ceases to exist. However, there is no liquidation or winding up of affairs in
merger or consolidation.
Effects of merger or consolidation:
1. There will only be one single corporation. In case of merger, the surviving corporation, or in case of
consolidation, the consolidated corporation;

2. Termination of the corporate existence of the constituent corporations, except that of the surviving or the
consolidated corporation;

3. The surviving or the consolidated corporation will possess all the rights, privileges, immunities and powers
and shall be subject to all the duties and liabilities of a corporation organized under the Code;

4. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and
franchises of the constituent corporations; and all property 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, automatic; and

5. The surviving or consolidated corporation shall be responsible and liable for all the liabilities and obligations
of each of the constituent corporations; 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.
Merger or consolidation does not become effective upon the mere agreement of the constituent corporations.
It shall be effective only upon the issuance of a certificate of merger. (Associated Bank vs. CA)
Employment contracts are automatically assumed by the surviving, or consolidated corporation in a merger
or consolidation, even in the absence of the express stipulation in the Articles of merger or merger plan. (BPI
vs BPI Employees Union)

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 55
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

CHAPTER 13: APPRAISAL RIGHT

The method of paying a shareholder for the taking of his property; the statutory means whereby a stockholder
can avoid the conversion of his property into another property not of his own choosing. The purpose of the
right is to protect the property rights of dissenting stockholders from actions by the majority shareholders
which alters the nature and character of their investment. It is a right granted to dissenting stockholders on
certain corporate or business decisions to demand payment of the fair market value of their shares.

Instances when a stockholder may have the right to dissent and demand payment of the fair value of his
shares:

1. In case any amendment to the articles of incorporation has the effect of:
a. Changing or restricting the rights of any stockholder or class of shares;
b. Authorizing preferences in any respect superior to those of outstanding shares of any
class; or
c. 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.

Other instances provided for in the Code:

1. Investment of corporate funds in another corporation or business or for any other purpose;

2. In a close corporation, a stockholder has the right to compel the corporation for any reason to
purchase his shares at their fair value which shall not be less than the par or issued value when the
corporation has sufficient assets to cover it debts and liabilities, exclusive of capital stock.
Requirements and procedure for the exercise of the appraisal right:
1. The stockholder must have voted against the proposed corporate action in any of the instances
allowed by law for the exercise of the appraisal right;

2. A written demand for payment must be made by the dissenting stockholder within 30 days after
the date on which the vote was taken. Failure to make the demand within the said period shall be
deemed a waiver of the appraisal right;

3. Surrender of the certificate of stock by the dissenting stockholder for notation in the corporate
books and payment by the corporation of the fair market value of said shares 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 the stockholder and the corporation cannot agree on the fair market value
thereof, the same shall be determined by appraisers;

4. The corporation must have unrestricted retained earnings in it books to cover the payment of the
fair value of the shares of the dissenting stockholder;

5. Upon payment of the shares by the corporation, the dissenting stockholder shall transfer his
shares to the corporation.

Effects of demand for payment of the fair value of a stockholder’s shares:

1. From the time of demand for payment – all rights accruing to such shares, including voting and
dividend rights, are suspended, except the right to receive payment.
2. After either the right ceases or the purchase of the said shares by the corporation – all rights
accruing to such shares are restored and all dividend distributions which would have accrued on the
shares shall be paid to the holder thereof.
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.
Remember: The rights of the stockholder not paid may be restored but the appraisal right exercised stay
forever unless withdrawn and the corporation consents thereto. Thus, should the corporation decides to pay
the stockholder even after the lapse of the 30 days period, it may validly do so. (Ladia)

Example: A, stockholder of Corp Z, wanted to exercise his appraisal right but the corporation has no URE.

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Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

After the lapse of 30 days, Corp Z had URE and decided to pay A. In case Corp Z decided to declare
dividends the following day, A shall not be entitled to dividends since he is no longer a stockholder at the
time the declaration was made.
No demand for payment may be withdrawn unless the corporation consents thereto.
Instances when the right to payment ceases:
1. The stockholder withdraws his demand for payment with the consent of the corporation;

2. The proposed corporate action is abandoned or rescinded by the corporation;

3. The proposed corporate action is disapproved by the SEC where such approval is necessary;
4. The SEC determines that such stockholder is not entitled to the appraisal right;
5. The stockholder fails within 10 days after demanding payment for his shares to submit the
certificates of stock representing his shares to the corporation for notation and the corporation, at its
option, terminates the right.
6. The shares represented by the certificates bearing such notation are transferred and the certificates
subsequently canceled.
Effect: The dissenting stockholder will not be paid the fair value of his shares so as to restore his rights
as such stockholder, and all dividends distribution which would have accrued on his shares shall be
paid to him in those instances provided for in section 84.
General Rule: The costs and expenses of appraisal shall be borne by the corporation.
Exception: The fair value ascertained by the appraisers is approximately the same as the price which the
corporation offered to pay the stockholder.
General Rule: In an action to recover the fair value of stocks, all costs and expenses shall be assessed against
the corporation.
Exception: The refusal of the stockholder to receive payment is unjustified.
Remember: The cost and expenses of appraisal when the FMV is approximately the same as the price
offered by the corporation or when refusal to receive payment is unjustified.
A dissenting stockholder is required within 10 days after demanding payment for his shares to submit the
stock certificates representing his shares to the corporation for notation. His failure to do so shall, at the
option of the corporation, terminate his rights. Failure to surrender the stock certificates does not
automatically terminate the exercise of appraisal right.
The dissenting stockholder is not prohibited from selling, transferring or assigning his shares. If such be the
case, once the certificates are subsequently canceled, the rights of the transferor as a dissenting stockholder
shall cease and the transferee shall have all the rights of a regular stockholder; and all dividend distributions
which would have accrued on such shares shall be paid to the transferee.
A director who exercises his appraisal right remains to be a director until his shares are no longer registered
in his name.
A stockholder whose subscription is not fully paid is still entitled to exercise his appraisal right, section 72.
Pre-emptive Right vs Right of Appraisal
Pre-emptive Right (Section 39) Appraisal Right (Section 81)
Right to acquire additional shares. Essence Right to sell or dispose of shares.

To avoid dilution of the holdings of the Purpose So that the stockholder will receive the fair value of
stockholders. To protect his interest. his shares when he no longer wants to participate in
the ventures of the corporation.
In any issuances of shares subject to limitations as When can be Available only in cases provided for in Section 81
provided in Section 39 and 102. exercised? and other specific provisions of the code.
Ang Right of First Refusal or Pre-emptive Right, Sa madaling Appraisal Right naman, gusto mo nang bitawan yung
may karapatan yung stockholder na unang bumili sabi. shares mo sa corporation kasi ayaw mo nung mga
dun sa issuances para maprotect yung percentage pinaggagagawa nung management. Pero dapat andun
ng ownership nya. Bago sa labas ibenta, sa sa isa sa grounds na nasa batas. Gaya nung pagmerge
stockholders muna. Parang sa rule on property, or consolidate sa iba, eh ayaw mo dun sa ka-merge,
diba kapag may ibebenta kang lupa, dun muna sa kaya bebenta mo nalang yung shares mo, tapos
kapitbahay, kapag ayaw nila, saka mo ioffer sa iba. demand mo yung value nung shares mo.
CHAPTER 14: NON-STOCK CORPORATIONS

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 57
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

One where no part of its income is distributable as dividends to its members, trustees, or officers, subject to
the provisions of the Code on dissolution.
Even if a corporation has capital stock divided into shares it is considered as non-stock so long as it does not
distribute dividends to its members and officers. (CIR vs. Club Filipino de Cebu)
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.
The fact that a non-profit corporation earns a profit, gain or income for the corporation or members does not
make it a profit-making corporation where such profit or income is used for the purpose set forth in the
articles of incorporation and is not distributable to its incorporators, members or officers, since mere
intangible or pecuniary benefits of the members does not change the nature of the corporation.
The determination of whether or not a non-stock corporation can engage in profit-making business or activity
depends largely on the purpose or purposes indicated in the articles of incorporation. If the business activity
is authorized in the said articles, necessary, incidental or essential thereto, the same may be undertaken by the
corporation, otherwise, not, as it would be an ultra-vires act.
Purposes: 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
(non-exclusive).
The provisions governing stock corporation, when pertinent, shall be applicable to non-stock corporations.
MEMBERSHIP AND VOTING RIGHTS

General Rule: Each member, regardless of class, shall be entitled to one vote (no cumulative voting).

Exception: The right to vote is limited, broadened or denied in the articles of incorporation or the by-laws.
General Rule: A member may vote by proxy.
Exception: Proxy voting is denied in the articles of incorporation or the by-laws.
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 SEC.
General Rule: Membership in a non-stock corporation and all rights arising therefrom are personal and non-
transferable.
Exception: The articles of incorporation or the by-laws provide otherwise.
Membership in non-stock corporations may be acquired by complying with the provisions of its rules
prescribed in the by-laws. In absence of restrictions, a non-stock corporation may act arbitrarily and exclude
any persons it may see fit, and the courts have no power to interfere. It is free to fix qualifications for
membership and to provide for termination of membership.
General Rule: The board of directors of a non-stock corporation shall have the authority to admit members.
Exception: The by-laws provide otherwise.
Membership shall be terminated in the manner and for the causes provided in the articles of incorporation or
the by-laws.
General Rule: Termination of membership shall have the effect of extinguishing all rights of a member in
the corporation or in its property.
Exception: The articles of incorporation or the by-laws provide otherwise.

In terminating membership, strict compliance with the manner and procedure laid down in the by-laws must
be observed, otherwise it may render the expulsion ineffective and invalid. (Carmoan vs, PED)
In absence of any provision in the articles of incorporation or by-laws relative to the manner and causes of
termination, the power is nonetheless inherent in the following situations:
1. When an offense is committed which, although it has no immediate relation to a member‟s duty as
such, it is so infamous as to render him unfit for society of honest men, and which is indictable at
common law;
2. When the offense is a violation of his duty as a member of the corporation; and

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 58
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

3. When the offense is of a mixed nature, being both against his duty as a member of the corporation,
and also indictable at common law.
As to whether or not a member should be expelled or maintained is the established right of the corporation to
determine and the courts are without authority to strip a member of his membership without cause.
Courts cannot strip a member of a non-stock corporation of his membership therein without cause.
Otherwise, that would be an unwarranted and undue interference with the well established right of a
corporation to determine its membership. (Chinese YMCA vs. Ching)
TRUSTEES AND OFFICERS
Non-stock or special corporations may designate their governing boards by any name through their articles of
incorporation or their by-laws.
General Rule: The number of trustees in a non-stock corporation may exceed 15.
Exception: The articles of incorporation or the by-laws provide otherwise.
General Rule: The term of office of the board of trustees may be staggered. They shall classify themselves
in order that 1/3 of their number shall expire every year and subsequent elections of trustees comprising 1/3
shall be held annually.
Exception: The articles of incorporation or the by-laws provide otherwise.
Qualifications of trustees:
1. He is a member of the corporation;
2. Majority thereof must be residents of the Philippines; and
3. Other qualifications as may be provided for in the by-laws.
General Rule: officers of a non-stock corporation may be directly elected by the members.
Exception: The articles of incorporation or the by-laws provide otherwise.
Trustees elected to fill vacancies occurring before the expiration of a particular term hold office only for the
unexpired period.
General Rule: The courts will not interfere on matters involving the internal affairs of an unincorporated
association such as elections, the manner by which it was conducted and the results thereof. (Lions Club
International vs. CA)
Exceptions:
1. There is fraud, oppression or bad faith;
2. The action complained of is capricious, arbitrary or unjustly discriminatory;
3. Property and civil rights are invaded;
4. The proceedings are violative of the laws of society, or the law of the land, as by depriving a person
of due process of law;
5. There is lack of jurisdiction on the part of the tribunal conducting the proceedings;
6. The organization exceeds its powers;
7. The proceedings are illegal; or
8. An incorporated association or its members avail of the remedy of instituting an intra-corporate
dispute case.
General Rule: Regular or special meetings of members of a non-stock corporation shall be held in the city or
municipality where the principal office is located, and if practicable in the principal office of the corporation.
Exceptions:
1. The by-laws of the corporation provide otherwise; and
2. Metro Manila is considered a city or municipality.

Requirements for meetings held outside the location of the principal office as provided for by the by-laws:
1. Proper notice is sent to all members indicating the date, time and place of the meeting; and

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 59
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

2. The place of meeting must be within the Philippines.

General Rule: All proceedings and business transactions at a meeting improperly held or called are invalid.
Exception: All of the members are present or duly represented at the meeting.
DISTRIBUTION OF ASSETS UPON DISSOLUTION
Rules of distribution:
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;
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.
Procedure and requirements for a plan of distribution of assets:
1. Majority vote of the board of trustees adopting a plan of distribution;
2. Approval of such plan by at least 2/3 of the members having voting rights present or represented by
proxy at a regular or special meeting for that purpose; and
3. Prior 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 the Code for the giving of notice of meetings to members.

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CHAPTER 15: CLOSE CORPORATIONS

One whose articles of incorporation provide that:

1. All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record
by not more than a specified number of persons, not exceeding 20;
2. All the issued stock of all classes shall be subject to one or more specified restrictions on transfer
permitted by Title XV of the Code; and
3. The corporation shall not list in any stock exchange or make any public offering of any of its stock
of any class.
Absent any of the three requisites, a corporation cannot be considered a close corporation and would
thus be governed by the general provisions on ordinary corporations.
In addition, identity of the stockholders of a close corporation and their active participation in the
management are also some of the unique characteristics of a close corporation. (Ladia)
A corporation does not become a close corporation just because a husband and wife owns 99.86% of the
capital stock. The qualifying conditions required by law must be complied with. (San Juan Structural Steel
vs. CA)
A corporation shall not be deemed a close corporation when at least 2/3 of its voting stock or voting rights is
owned or controlled by another corporation which is not a close corporation.
Remember: Subsidiary or Affiliates Corporation may become close corporation if they are wholly owned by
a close corporation or if at least 2/3 of its voting stock or rights is owned or controlled by a close corporation.
General Rule: Any corporation may be incorporated as a close corporation.
Exceptions:
1. Mining or oil companies;
2. Stock exchanges;
3. Banks;
4. Insurance companies;
5. Public utilities;
6. Educational institutions; and
7. Corporations declared to be vested with public interest.

Sec. 140 authorizes the NEDA to recommend to the legislature the setting of maximum limits to family or group
ownership of stock in corporation vested with public interest, and the determination of whether or not it should be
vested with public interest is within its domain.
The provisions of Title XV of the Code shall primarily govern close corporations. However, the provisions of
other Titles of the Code apply suppletorily.
A close corporation may partake the nature of a partnership in that the stockholders thereof take an active role in
the management of the corporate affairs either as directors, officers or even perhaps as partners in management
which is akin to the partnership form of business. It is a de facto partnership with a corporate shell or a hybrid of
both the corporate and partnership forms, an incorporated partnership.
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;

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 requirements in meetings of stockholders or directors;

4. 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; and
3. The stockholders of the corporation shall be subject to all liabilities of directors.

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4. 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.
In order to bind purchasers in good faith, restrictions on the right to transfer shares must appear in:
1. The articles of incorporation;
2. The by-laws; and
3. The certificate of stock.
Restrictions on the right to transfer shares shall not be more onerous than granting the existing stockholders or the
corporation the option to purchase the shares of the transferring stockholder within reasonable terms, conditions or
period. 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.

Order of Priority for Transfer:

1. Existing stockholder of the same class
2. Corporation, if with sufficient asset, regardless of URE
3. Third persons
Effects of issuance or transfer of stock in breach of qualifying conditions:
CONDITIONS EFFECTS
1. The stock is issued or transferred to a The transferee is conclusively presumed to
person not entitled under the articles of have notice of his ineligibility to be a
incorporation; and stockholder.
2. The stock certificate conspicuously
shows the qualifications of the persons
entitled.
1. The articles of incorporation states the The transferee is conclusively presumed to
number of persons, not exceeding 20, have notice of this fact.
who are entitled to be holders of record
of its stock
2. The stock certificate conspicuously states
such number; and
3. The issuance or transfer of stock causes
the stock to be held by more than such
number of persons.
1. The stock certificate conspicuously The transferee is conclusively presumed to
shows a restriction on transfer of stock; have notice of this fact.
2. The transfer violates the restriction.

General Rule: The transfer being invalid, the close corporation may refuse to register the transfer of stock in
the name of the transferee who has or is conclusively presumed to have notice that:
1. He is not eligible to be a holder of stock of the corporation;
2. Transfer of stock to him causes 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
3. The transfer of stock is in violation of a restriction on transfer of stock.
Exceptions:
1. The transfer of stock has been consented to by all the stockholders; or
2. The close corporation has amended its articles of incorporation.
Options granted to the transferee:
1. Rescind the transfer; or
2. Recover under any applicable warranty, express or implied.
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.
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.
No provision in any written agreement signed by the stockholders, relating to any phase of the corporate affairs,

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shall be invalidated as between the parties on the ground that its effect is to make them partners among themselves.
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.
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.
Sec. 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:
General Rule: Any action by the directors of a close corporation without a meeting is invalid.
Exceptions:
1. Written consent is signed by all the directors;
2. All the stockholders have actual or implied knowledge of the action and make no prompt objection
thereto in writing;
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 director's 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.)

Exception to the exceptions: The by-laws provide otherwise.

General Rule: 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.
Exception: The articles of incorporation provide otherwise.
Remember: Absent any provision in the Articles of Incorporation denying the pre-emptive right of in a close
corporation, the same shall be absolute. Thus, the restrictions as provided in section 39 shall not be applicable.
Any amendment to the articles of incorporation which seeks to:

1. Delete or remove any provision required by Title XV of the Code to be contained in the articles of
incorporation, or

2. Reduce a quorum or voting requirement stated in said articles of incorporation,

must be approved by the affirmative vote of at least 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.
Deadlock - the directors or stockholders are so divided respecting the management of the corporation's 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 case of a deadlock and upon written petition by any stockholder, the SEC has the power to arbitrate the dispute and
the authority to:

1. Cancel or alter any provision contained in the articles of incorporation, by-laws, or any stockholder's
agreement;
2. Cancel, alter or enjoin any resolution or act of the corporation or its board of directors, stockholders, or
officers;
3. Direct or prohibit any act of the corporation or its board of directors, stockholders, officers, or other
persons party to the action;
4. Require 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;

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5. Appoint a provisional director;

6. Dissolve the corporation; or
7. Grant such other relief as the circumstances may warrant.

Provisional director:
1. 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 SEC.

2. A provisional director is not a receiver of the corporation and does not have the title and powers of a
custodian or receiver.

3. 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 SEC or by all the stockholders.

4. His compensation shall be determined by agreement between him and the corporation subject to approval
of the SEC, which may fix his compensation in the absence of agreement or in the event of disagreement
between the provisional director and the corporation.
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.
Any stockholder of a close corporation may, by written petition to the SEC, compel the dissolution of such
corporation whenever:
1. 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

2. Corporate assets are being misapplied or wasted.

Remember: It is not necessarily SEC which has jurisdiction over intra-corporate dispute since such jurisdiction is no
longer with the SEC but based on the principal place of office of the corporation, thus it should be submitted before the
proper forum having jurisdiction over the same.

In a close corporation, a corporate action taken at a board meeting without proper call or notice 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. (Manuel Dulay Enterprises vs. CA)
Stockholders who actively engage in the management or operation of the business and affairs of a close corporation
shall be personally liable for corporate torts unless the corporation has obtained reasonably adequate liability insurance.
Essentially a tort consists in the violation of a right given or the omission of a duty imposed by law. Article 283 of the
Labor Code mandates the employer to grant separation pay to employees in case of closure or cessation of operations
of establishment or undertaking not due to serious business losses or financial reverses. CFTI failed to comply with this
law-imposed duty or obligation. Consequently, its stockholder who was actively engaged in the management or
operation of the business should be held personally liable. (Naguiat vs. NLRC)
CLOSE CORPORATION vs ORDINARY STOCK CORPORATION
CLOSE CORPORATION ORDINARY STOCK CORPORATION
1. The number of stockholders cannot 1. No limitation as to number of
exceed 20. shareholders.
2. The number of directors can effectively 2. Maximum number of directors is 15
be more than 15.
3. Shares of stock are subject to specified 3. Generally no restriction on transfer of
restrictions. shares.
4. Shares of stock are prohibited from 4. No prohibition.
being listed in the stock exchange or
offered for sale to the public.
5. Stockholders may take an active part in 5. Management is lodged in the board of
corporate management by vesting directors.
management to them rather than the a
board of directors.

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6. acti
Those ve in management are 6. Directors are liable for torts only if they
personally liable for corporate torts have acted negligently or fraudulently.
unless the corporation has obtained an
adequate liability insurance.
7. Directors can validly act even without a 7. Directors must, as a rule, act as a body
meeting. at a duly constituted meeting.
8. Agreements between stockholders 8. Not valid and binding since stockholders‟
regarding the operations of the business agreement cannot limit the discretion of
can validly be made. the Board to manage corporate affairs.
9. To the extent that directors may be 9. Ordinarily, no such classification and no
classified into one or more classes and restrictions on cumulative voting.
to be voted solely by a particular class of
stock, cumulative voting may, in effect,
be restricted.
10. The articles of incorporation may provide 10. Officers are elected by the Board of
that all officers shall be elected or Directors.
appointed by the stockholders.
11. It may provide for greater quorum and 11. Although the articles of incorporation or
voting requirements in meetings of by-laws may provide for greater quorum
stockholders and directors. and voting requirements in directors‟
meetings under Sec. 25, those for
stockholders‟ meetings cannot generally
be altered.
12. Restrictions on transfer of shares should 12. Valid and binding if indicated in the
be indicated in the articles of articles of incorporation and stock
incorporation,by-lawsandstock certificates.
certificates.
13. Pre-emptive rights of stockholders is 13. Pre-emptive rights may be denied as
broader as it includes all issues without provided for in Sec. 39.
exception.
14. A stockholder may withdraw and compel 14. Unless he sells his shares, a stockholder
the corporation to purchase his shares cannot get back his investment nor
for any reason with the limitation only compel the corporation to buy his shares
that the corporation has sufficient assets except in the exercise of his appraisal
to cover its liabilities exclusive of capital right.
stock.
15. The proper forum may interfere in the 15. Courts cannot interfere in the business
management of a close corporation in judgment of the directors/stockholders.
case of deadlocks under Sec. 104, even
if the directors/stockholders are acting in
good faith.
16. Any stockholder may petition the Sec for 16. Dissolution may be had only on the
corporate dissolution on grounds among grounds provided by the provisions of
others, provided for in Sec. 105., the Code on dissolution and PD 902-A,
as amended.

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Whatever you asked for in prayer, believe that you have received it and
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CHAPTER 16: SPECIAL CORPORATIONS

EDUCATIONAL CORPORATIONS (PUBLIC OR PRIVATE)

Those which provide facilities for teaching or instruction. They are governed primarily by special laws and
secondarily by the Code. However, those created by the government are primarily governed by the special
law creating them.
Educational institutions are required to incorporate within 90 days after their recognition as such. However,
failure to comply will not immune the educational institution from suit as a corporation.
A favorable recommendation of the Secretary of Education, Culture and Sports is required before the SEC
accepts or approves the articles of incorporation or by-laws of any educational institution.
Trustees of non-stock educational corporations shall not be less than 5 nor more than fifteen 15, in
multiples of 5.

Remember: With regards incorporation, since there is no provision in the Title 13 of the Code of Commerce
pertaining to Special Corporations, the provision pertaining to ordinary stock corporation may govern, that is
at least 5 but not more than 15, except in case of corporate sole.

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 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 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.
General Rule: Educational institutions shall be owned solely by citizens of the Philippines or corporations or
associations at least 60% of the capital of which is owned by such citizens. The control and administration of
educational institutions shall be vested in citizens of the Philippines.
Exception: Educational institutions established by religious groups and mission boards.
General Rule: No educational institution shall be established exclusively for aliens and no group of aliens
shall comprise more than 1/3 of the enrollment in any school.
Exception: The rule shall not apply to schools established for foreign diplomatic personnel and their
dependents and, unless otherwise provided by law, for other foreign temporary residents.
RELIGIOUS CORPORATIONS
One composed entirely of spiritual persons which is created for the furtherance of religion or perpetuating the
rights of the church or for the administration of church or religious work or property.
Classes of religious corporations:
1. Corporations sole; and
2. Religious societies.
Religious corporations are governed by the appropriate chapter of the Code and the general provisions on
non-stock corporations.

Corporation Sole
Consists of one person only and his successor in some particular station, who are incorporated by law in
order to give them some legal capacities and advantages, particularly that of perpetuity, which in their natural
persons they could not have had.
Purpose – Administration and management, as trustee, of the affairs, properties and temporalities of any
religious denomination, sect or church.
Who – Chief archbishop, bishop, priest, minister, rabbi or other presiding elder of such religious
denomination, sect or church.
Requirements and procedure of incorporation:
1. The chief archbishop, bishop, priest, minister, rabbi or other presiding elder of such religious

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denomination, sect or church must file the articles of incorporation with the SEC which must
contain the following:
a. 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;
b. 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;
c. 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 religious denomination, sect or church within his territorial
jurisdiction, describing such territorial jurisdiction;
d. 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
e. The place where the principal office of the corporation sole is to be established and
located, which place must be within the Philippines.
2. The articles of incorporation may include any other provision not contrary to law for the regulation
of the affairs of the corporation.
3. The articles of incorporation must be:
Verified by affidavit or affirmation of the chief archbishop, bishop, priest, minister, rabbi or
presiding elder, as the case may be;
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; and
Duly certified to be correct by any notary public.
4. From and after the filing of the aforementioned documents with the SEC, such chief archbishop,
bishop, priest, minister, rabbi or presiding elder shall become a corporation sole.
All temporalities, estate and properties of the religious denomination, sect or church administered or managed
by the corporation sole shall be held in trust for the use, purpose, behalf and sole benefit of the religious
denomination, sect or church, including hospitals, schools, colleges, orphan asylums, parsonages and
cemeteries thereof.
A provision relative to its term of existence is not required since a corporation sole is supposed to exist in
perpetuity.

General Rule: A corporation acquires juridical personality only upon the issuance of a certificate of
incorporation by the SEC.
Exception: A corporation sole becomes endowed with corporate personality after filing of the verified
articles of incorporation together with other required documents.

A 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.
General Rule: A court order is required before a corporation sole may sell or mortgage real property held by
it. Before such an order is granted, a verified petition must be made by the chief archbishop, bishop, priest,
minister, rabbi or presiding elder acting as corporation sole and it must be shown that notice of the
application has been given as directed by the court and that it is to the interest of the corporation that the
petition be granted. However, such application may be opposed by any member of the religious
denomination, sect or church represented by the corporation sole.
Exception: Court intervention is not necessary when 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.
Registration of real property in the name of the corporation sole does not vest ownership unto the head
thereof.

The constitutional requirement that 60% of the capital of a corporation must be owned by Filipino citizens

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before it may register land in its own name does not apply to a corporation sole. A corporation sole has no
nationality and the framers of the constitution did not have in mind the corporation sole when it provided for
such requirement. (Roman Catholic Apostolic Adm. of Davao, Inc. vs. LRC)
Whether or not a corporation sole, or any private corporation for that matter, can acquire alienable land of the
public domain depends upon the character of the land at the time of the institution of the registration
proceeding. If it still forms part of the public domain, no. If it is private, yes. (Republic vs. INC)
Under the Public Land Act, alienable public land may be subject to registration by a possessor if he,
personally or through his predecessor-in-interest, had openly, continuously, exclusively and notoriously
possessed the same for 30 years. The law creates the legal fiction whereby the land, upon completion of the
requisite period ipso jure and without the need of judicial or other sanction, ceases to be public land and
becomes private property. (Director of Lands vs. CA)
In case of vacancy in the office of the “head” of the corporation, the person authorized by the rules,
regulations or discipline of the denomination shall exercise all the powers and authority of the corporation
sole during such vacancy and until such vacancy has been filled-up.
The successors in office shall become the corporation sole and shall be permitted to transact business as such
only upon the filing with the SEC:
1. a copy of their commission;
2. certificate of election;
3. letters of appointment;
4. duly certified by a notary public.
Requirements for the voluntary dissolution of corporations sole:
1. Filing with the SEC of a verified declaration of dissolution which must set forth the following:
a. The name of the corporation;
b. The reason for dissolution and winding up;
c. The authorization for the dissolution of the corporation by the particular religious
denomination, sect or church; and
d. The names and addresses of the persons who are to supervise the winding up of the
affairs of the corporation.
2. Approval of the SEC.
Religious Societies

A body of person associated together for the purpose of maintaining religious worship.

Purpose – the administration of its temporalities or for the management of its affairs, properties and estate
Who – any religious society or religious order, or any diocese, synod, or district organization of any religious
denomination, sect or church.
Requirements and procedure for incorporation:
1. Filing of the articles of incorporation with the SEC;
2. The articles of incorporation must set forth the following:
a. That the religious society or religious order, or diocese, synod, or district organization is
a religious organization of a religious denomination, sect or church;
b. That at least 2/3 of its membership have given their written consent or have voted to
incorporate, at a duly convened meeting of the body;
c. 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;
d. 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;
e. The place where the principal office of the corporation is to be established and located,
which place must be within the Philippines; and

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f. 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 5 nor more than 15.
3. The articles of incorporation must be 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.
4. Issuance of the SEC of the certificate of incorporation.

The articles of incorporation of a religious society need not indicate a term since it is supposed to exist in
perpetuity.

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CHAPTER 17: DISSOLUTION

Dissolution is the extinguishment of the corporate franchise and the termination of corporate existence.
General Rule: When a corporation is dissolved, it ceases to be a juridical entity and can no longer pursue the
business for which it is incorporated.
Exception: The Corporation will continue as a body corporate for another period of 3 years from the time it
is dissolved for the purpose of winding up its affairs and the liquidation of its assets.
Three modes of dissolution:
1. By expiration of the corporate term;
2. By voluntary surrender of its primary franchise (voluntary dissolution); or
3. By the revocation of its corporate franchise (involuntary dissolution).
EXPIRATION OF CORPORATE TERM
General Rule: A corporation registered under the Corporation Code is required to indicate its term of
existence in the articles of incorporation.
Exceptions:
1. Corporations sole; and
2. Religious societies.
A corporation ceases to exist and is automatically dissolved upon the expiration of the term indicated in its articles of
incorporation without the need of formal proceeding. There is no need to for the institution of a proceeding for quo
warranto to determine the time and date of the dissolution of a corporation because the period of corporate existence is
provided in the articles of incorporation. (PNB vs. CFI)
The extension of the corporate term should nonetheless be made before the expiration of the original term, otherwise,
the corporation is dissolved, ipso facto. (Alhambra Cigar vs. SEC)

SURRENDER OF FRANCHISE (VOLUNTARY DISSOLUTION)

Three modes of voluntary dissolution:
1. Voluntary dissolution where no creditors are affected;
2. Voluntary dissolution where creditors are affected; and
3. Shortening of corporate term.
Voluntary dissolution where no creditors are affected
Formal and procedural requirements for voluntary dissolution where no creditors are affected:
1. Majority vote of the board of directors or trustees;
2. Sending of notice to each stockholder or member either by registered mail or personal delivery at
least 30 days prior to the meeting (scheduled by the board for the purpose of submitting the board
action to dissolve the corporation for approval of the stockholders or members);
3. Publication of the notice of time, place and subject of the meeting for 3 consecutive weeks in a
newspaper published in the place where the principal office of said corporation is located or in a
newspaper of general circulation in the Philippines;
4. Resolution adopted by the affirmative vote of the stockholders owning at least 2/3 of the
outstanding capital stock or 2/3 of the members at the meeting duly called for the purpose;
5. A copy of the resolution authorizing the dissolution must be certified by a majority of the board of
directors or trustees and countersigned by the corporate secretary; and
6. Issuance of a certificate of dissolution by the SEC.
The requirements and formalities provided by law for the dissolution of corporations are mandatory such that
failure to comply therewith will have no effect on the legal existence of the corporation. A corporation being
a creation of law may only terminate its existence in the manner prescribed by law.
Remember: It is the State which grants the corporation its right to exist, it is only through the State which
can allow the termination of its existence. The one which vests the power, may take the power.

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it will be yours. –Mark 11:24

A mere resolution by the stockholders or the board of directors of a corporation to dissolve the same does not
affect the dissolution of a corporation. (Daguhoy Enterprises vs. Ponce)

Voluntary dissolution where creditors are affected

Formal and procedural requirements for voluntary dissolution where creditors are affected:
1. Affirmative vote of the stockholder representing at least 2/3 of the outstanding capital stock or at
least 2/3 of the members at a meeting duly called for that purpose;
2. Petition for the dissolution shall be filled with the SEC signed by the majority of its board of
directors or trustees or other officers having the management of its affairs, verified by the president
or secretary or one of its directors or trustees, setting forth all claims and demands against it;
3. Issuance of an order by the SEC reciting the purpose of the petition and fixing the date on or before
which objections thereto may be filed by any person, which date shall not be less than 30 days nor
more than 60 days after entry of the order;
4. Before such date, a copy of the order must be published once a week for 3 consecutive weeks in a
newspaper of general circulation published in the city or municipality where the principal office is
situated or in a newspaper of general circulation in the Philippines;
5. Posting of the same order for 3 consecutive weeks in 3 public places in such city or municipality;

6. Upon 5 days notice, given after the date on which the right to file objects has expired, the SEC shall
hear the petition and try any issue made by the objections filed; and
7. Judgment dissolving the corporation and directing disposition of its assets as justice requires and
the appointment of a receiver (if necessary in the court’s discretion) to collect such assets and pay
the debts of the corporation.

The appointment of a receiver is only permissive and not mandatory. The law is intended to let the
stockholders have control of the assets of the corporation upon dissolution and winding up of its affairs.
Dissolution by shortening the corporate term
Procedure to shorten the corporate term:
1. Approval by a majority vote of the board or directors or trustees.
2. Written notice of the proposed action and the time and place of meeting shall be served to each
stockholder or member either by mail or by personal service.
3. Ratification by the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of
the members in case of non-stock corporations.
4. Submission of the amended articles of incorporation to the SEC.
5. Approval of the SEC.
In case of a corporation sole, an authorization for the dissolution by the particular religious denomination,
sect or church is necessary.
A vote must cast at a duly constituted meeting. Written assent is not sufficient.
It is only upon the approval of the SEC that the corporation is deemed dissolved.

INVOLUNTARY DISSOLUTION
Requirements for involuntary dissolution by the SEC:
1. Filing of a verified complaint; and
2. Proper notice and hearing on the grounds provided by laws, rules and regulations.
Notwithstanding the fact that RA 8799 transferred the jurisdiction of the SEC under Sec. 5 of PD 902-A to
the Special Commercial Courts, the same law granted the SEC concurrent jurisdiction over revocation
proceedings. Sec. 5 (m) of RA 8799 provides that the SEC shall have the power to suspend or revoke, after
proper notice and hearing, the franchise or certificate of registration of corporations, partnerships or
associations, upon any ground provided by law.

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 71
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

Grounds for involuntary dissolution under Sec. 6, PD 902-A:

3. Fraud in procuring the certificate of registration;
4. Serious misrepresentation as to what the corporation can do or is doing to the great prejudice of or
damage to the general public;
5. Refusal to comply or defiance of any lawful order of the Commission restraining commission of
acts which would amount to a grave violation of its franchise;
6. Continuous inoperation for a period of at least 5 years;
7. Failure to file by-laws within the required period; and
8. Failure to file required reports in appropriate forms as determined by the Commission within the
prescribed period.
Other grounds provided for the in Corporation Code:
1. Violation of any provision of the Code (Sec. 144);

2. In case of deadlock in a close corporation (Sec. 105);

3. In a close corporation, any acts of directors, officers or those in control of the corporation which 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 (Sec. 105).

Other grounds can be found in special laws, e.g. the Securities Regulation Code and the General Banking
Act.

Courts proceed with extreme caution in the proceeding which have for their object the forfeiture of corporate
franchises, and a forfeiture will not be allowed, except under express limitation, or for a plain abuse of power
by which the corporation fails to fulfill the design and purpose of its organization. But when such abuses and
violations constitute or threaten a substantial injury to the public or such as to amount to a violation of the
fundamental conditions of the contract (charter) by which the franchise were granted and thus defeat the
purpose of the grant, then dissolution will be granted. (Government vs. Philippine Sugar Estates Co.)
The court has a discretion with respect to the infliction of capital punishment upon corporations and there are
certain misdemeanors and misusers of franchises which should not be recognized as requiring their
dissolution. (Government vs. El Hogar)
That the corporation is guilty of willful and repeated violation of the law and that its continuance inflicts
substantial injury to the public warrants its dissolution. (Republic vs. Security Credit)
Relief by dissolution will be awarded only where no other adequate remedy is available, and is not available
where the rights of the stockholders can be, or are, protected in some other way. The several acts of misuse
and misapplication of the funds and/or assets of the corporation were committed more particularly by the
corporation‟s president, for the commission of which they may be held personally liable. (Republic vs.
Bisaya Land Transportation Co., Inc.)
Under the present state of law, any stockholder or member of a corporation can institute a dissolution
proceeding against his own corporation before the proper forum.
The Special Commercial Courts, shall hear and decide cases involving intra-corporate dispute or partnership
relations between and among stockholders, members or associates; between any or all of them and the
corporation, partnership or association of which they are stockholders, members or associates, respectively;
and between such corporation, partnership or association and the State insofar as it concerns their individual
franchise or right to exist as such entity. (PD 902-A)
The SEC has concurrent jurisdiction to suspend, revoke, after proper notice and hearing, the franchise or
certificate of registration of corporations, partnership or associations upon any of the grounds provided by
law. (Sec. 5(m) RA 8799)
The existence of a de jure corporation may be determined in a private suit for its dissolution between
stockholders, without intervention of the State. (Hall vs. Piccio)
In a close corporation, a petition for the dissolution of the corporation may be instituted by any shareholder
on the ground of mere dishonesty.

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 72
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

EFFECTS OF DISSOLUTION
No right or remedy in favor of or against any corporation, its stockholders, members, directors, trustees, or
officers, nor any liability incurred by any such corporation, stockholders, members, directors, trustees, or
officers, shall be removed or impaired by the subsequent dissolution of said corporation.
Dissolution terminates a corporation’s primary franchise and generally prevents it from further exercising
other or secondary franchises which have been conferred to it.
Dissolution terminates the corporation’s power to enter into contracts or to continue the business as a going
concern. (Hall vs. Piccio)
General Rule: In a lease to a corporation, the rights and obligations thereunder are not extinguished by the
corporation’s dissolution since leases affect property rights and survives the death of parties. The
stockholders succeed to the rights and liabilities of the dissolved corporation in an unexpired leasehold state
which may be enforced by or against the receiver or liquidating trustee.
Exception: The lease, by its terms, terminates when the corporation ceases to exist.
Contracts for personal services are deemed terminated by the dissolution of the corporation. There is an
implied condition that the contract shall terminate in such event. (Gelano vs. CA)
A dissolved corporation has no juridical personality; it ceases to exist as a corporation and cannot apply for a
new certificate or a secondary franchise. (Buenaflor vs. Camarines Sur Industry Corp.)
The 3-year period allowed by the law is only for the purpose of liquidation or winding up of corporate affairs.
No act can be done for the purpose of continuing the business for which it was established. Neither can it
enforce a contract executed prior to its dissolution. (Cebu Port Labor Union vs. State Marine Co.)
The termination of the life of a juridical entity does not, by itself, imply the diminution or extinction of rights
demandable against such juridical entity. Debts due to or against the corporation will not be extinguished.
Otherwise, it will amount to an impairment of contracts or a denial of due process. (Gonzales vs. Sugar
Regulatory Administration)
LIQUIDATION AND WINDING UP
Liquidation and winding up – the collection of all corporate assets, the payments of all its debts and
settlement of its obligations and the ultimate distribution of the corporate assets, if any of it remains, to all
stockholders in accordance with their proportionate stockholdings in the corporation or in accordance with
their respective contracts of subscription (e.g. preferred stocks).
A dissolved corporation continues as a body corporate for a period of 3 years from the time of dissolution 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.
General Rule: No corporation shall distribute any of its assets or property except upon lawful dissolution
and after payment of all its debts and liabilities.
Exceptions:
1. By decrease of capital stock; or
2. As otherwise allowed the Code.
Three methods of liquidation:
1. By the corporation itself though the Board of Directors.
2. By a Trustee appointed by the corporation.
3. By appointment of a receiver.
Mere appointment of a receiver without anything more does not imply the dissolution of a corporation.
Pending actions by or against a corporation are abated upon expiration of the period allowed by law for the

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Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

liquidation of its affairs; but trustees to whom the corporate assets have been conveyed may sue or be sued as
such in all matters connected with the liquidation. The effect of conveyance is to make the trustees the legal
owners of the property conveyed, subject to the beneficial interest therein of creditors and stockholders.
(National Abaca Other Fibers Co. vs. Pore)
If the corporation carries out the liquidation of its assets through its own officers and continues and defends
the actions brought by or against it, its existence shall terminate at the end of three years from the time of
dissolution; but if a receiver or assignee is appointed, as has been done in the present case, with or without a
transfer of its properties within three years, the legal interest passes to the assignee, the beneficial interest
remaining in the members, stockholders, creditors and other interested persons; and said assignee may bring
an action, prosecute that which has already been commenced for the benefit of the corporation, or defend the
latter against any other action already instituted or which may be instituted even outside of the period of three
years fixed for the offices of the corporation. (Sumera vs. Valencia)
(Board of Liquidators vs. Kalaw)
The counsel who prosecuted and defended the interest of the corporation and who appeared in behalf of the
corporation may be considered a trustee of the corporation at least with respect to the matter in litigation
only. The word “trustee” must be understood in its general concept. (Gelano vs. CA)

A claim established against the corporation may be prosecuted against the liquidator of such corporation even
after the three years from its dissolution. (Republic vs. Marsman Development Company)
Upon dissolution of the corporation its assets are held for the benefit of its stockholder after payment of its
debts and will be so distributed to the said stockholder in accordance with their proportionate interest in the
corporation or their contracts of subscription.
Holders of preferred shares may be granted certain rights or privileges upon dissolution.
General Rule: The board of directors of a dissolved corporation is not permitted to undertake any activity
outside of the usual liquidation of the corporation.
Exception: The stockholders of a dissolved corporation may convey their respective shareholdings toward
the creation of a new corporation to continue the business of the old. Winding up is the sole activity of a
dissolved corporation that does not intend to incorporate a new. (Chung Ka Bio vs. IAC)
If the three year period of liquidation has elapsed and no effort to finally settle or close the corporate affairs
was undertaken, those having pecuniary interest in the corporate assets, including not only the stockholders
but likewise the creditors, acting for and its behalf, may make proper representations with the SEC for
working out a final settlement of the corporate concern. (Clemente vs. CA)
Note: The above decision is an aberrant ruling. Once the three year period for liquidation and winding up has
elapsed without any trustee or receiver being appointed, the assets of the corporation will be escheated in
favor of the Government thus barring the claims of stockholders and creditors.

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 74
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

CHAPTER 18: FOREIGN CORPORATIONS

Foreign corporation – 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).
The phrase “whose laws allow Filipino citizens and corporations to do business in its own country or state” is
a mere condition precedent to the grand of a license of a foreign corporation to do business in the Philippines.
General Rule: The “incorporation test” is applied in determining whether a corporation is domestic or
foreign. If it is incorporated in another state, it is a foreign corporation, while if it is registered under
Philippine laws, it is deemed a Filipino or domestic corporation irrespective of the nationality of its
stockholders.
Exception: In times of war, the “control test” would apply in determining the corporate nationality, i.e., the
citizenship of the controlling stockholders determines the nationality of the corporation.
General Rule: A corporation can have no legal existence outside the boundaries of the sovereign by which it
is created.

Exception: By virtue of state comity, a corporation created by laws of one state is usually allowed to transact
business in other states and to sue in the courts of the forum, subject to restrictions and certain requirements
imposed therein.
Requisites for a foreign corporation to transact business in the Philippines:
1. A license or permit to do so; and
2. A certificate of authority from the appropriate government agency.

Procedure for application of a license:

1. Submission to the SEC 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 principal office of the corporation in the country or state of incorporation;
c. The resident agent;
d. The place in the Philippines where the corporation intends to operate;
e. The purpose or purposes of the corporation;
f. The directors and officers of the corporation;
g. Its authorized capital stock;
h. Its outstanding capital stock;
i. The amount actually paid in; and
j. Such additional information as may be necessary or appropriate in order to enable the SEC to
determine whether such corporation is entitled to a license to transact business in the
Philippines, and to determine and assess the fees payable.
3. 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.

4. 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.

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Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

5. 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.
Foreign corporations already issued a license to transact business in the Philippines prior to the effectivity of the
Code continue to have such authority under the terms and conditions of its license, subject to the provisions of the
Code and other special laws.
Upon compliance with the provisions of Sec. 125, other special laws and the rules and regulations implementing
them, the SEC shall thereafter issue the 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 60 days after the issuance of the license, a foreign corporation, except those engaged in foreign banking or
insurance, shall deposit with the SEC, for the benefit of creditors, securities consisting of bonds or other evidence
of indebtedness of the Philippine government or its political subdivisions or instrumentalities, or of government
owned or controlled corporations and entities, shares of stock in “registered enterprises,” shares of stock in
domestic insurance companies and banks, or any combination thereof, with an actual market value of P100,000.00.
Additional securities may be required by the SEC if the actual market value of the securities on deposit has
decreased by at least 10%.
The objective of the law requiring the license is not to prevent the foreign corporation from performing isolated or
single acts, but to prevent it from acquiring a domicile for the purpose of pursuing its business without taking steps
to render it amendable to suit in the local courts. (Marshall-Wells Co. vs. H. W. Elser & Co.)
MODES OF ENTRY OF FOREIGN CORPORATIONS
Modes of entry of foreign corporations:
1. Branch office;
2. Representative or liaison office;
3. Local subsidiary;
4. Regional or area headquarters;
5. Regional operating headquarters;
6. Regional warehouse; or
7. Joint venture.
RESIDENT AGENT
The appointment of a resident agent is a condition precedent to the issuance of a license to transact business
in the Philippines by a foreign corporation.
The following may be appointed as a resident agent:
1. An individual residing in the Philippines, of good moral character and of sound financial standing;
or
2. A domestic corporation lawfully transacting business in the Philippines (includes partnerships such
as law firms and accounting firms).
The necessity of the appointment of a resident agent is only for the purpose of receiving summons and other
legal processes in any legal action or proceeding against the foreign corporation.
Modes of service of summons upon a foreign corporation:
1. Service upon the resident agent – service upon the resident agent is mandatory if the foreign
corporation is license to do business in the Philippines;

2. Service upon the appointed person – when a foreign corporation has designated a person to receive
summons in judicial proceedings affecting the corporation that designation is EXCLUSIVE and
service of summons is without force and effect unless made to him.
3. Service upon the SEC – if the licensed foreign corporation has ceased to transact business in the
Philippines or has no resident agent in the Philippines; or

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Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

4. Service upon any of its officers within the Philippines.

Remember: The service of summons upon the SEC and Officers within the Philippines shall be effective
ONLY when the foreign corporation failed or neglected to designate such a person or an agent.
DOING BUSINESS WITHOUT A LICENSE
General Rule: 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
Exception: Such corporation may be sued or proceeded against before Philippine courts or administrative
tribunals on any valid cause of action recognized under Philippine laws.
A foreign corporation cannot transact business in the Philippines without the requisite license. If it does so,
the responsible officers may be subjected to the penal provisions of Sec. 144.
General rules regarding whether or not a foreign corporation may sue or be sued in the Philippines:
1. As to whether or not it can sue.
a. A foreign corporation transacting or doing business in the Philippines with a license can sue
before Philippine Courts.
b. Subject to certain exceptions, a foreign corporation doing business in the country without a
license can not sue in Philippine Courts.
c. If it is not transacting business in the Philippines, even without a license, it can sue before the
Philippine Courts.
2. As to whether it can be sued or not.
a. A foreign corporation transacting business in the Philippines with the requisite license can be
sued in the Philippines.
b. A foreign corporation transacting business in the Philippines without a license can be sued in
Philippine courts.
c. If it is doing business in the Philippines, it cannot be sued in Philippine courts for lack of
jurisdiction.
Remember: Foreign Corporation doing business in the Philippines without a license to do so cannot sue but may
be sued and its officers are subject to penal sanction.
It is not the lack of required license but doing business without a license which bars a foreign corporation from
access to our courts. (Universal Shipping vs. IAC)
General Rule: A foreign corporation must have the requisite license to sue before the Philippine courts.
Exceptions:
1. The act or transaction involved is an “isolated transaction;”
2. The foreign corporation is not seeking to enforce any legal or contractual rights arising from, or
growing out of any business which it has transacted in the Philippines;
3. The purpose of the suit is to protect its trademark, tradename, corporate name, reputation or
goodwill;
4. The suit is based on a violation of the Revised Penal Code;
5. The foreign corporation is merely defending a suit filed against it;
6. The party is estopped to challenge the personality of the corporation by entering into a contract
with it;

7. The foreign corporation is a widely known enterprise and is popular in his industry.
Exception to an exception: Where a single act or transaction however, is not merely incidental or casual but
indicates the foreign corporation’s intention to do other business in the Philippines, said single act or transaction
constitutes “doing” or “engaging in” or “transacting” business in the Philippines.

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Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

The true test regarding “doing” or “engaging in” or “transacting” business is whether the foreign corporation is
continuing 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. The term implies 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 incident to, and in progressive prosecution of, the purpose and object of its organization.
(Mentholatum Co., Inc. vs. Mangaliman)
The object of the statute was to subject the foreign corporation doing business in the Philippines to the jurisdiction
of its courts. The object of the statute was not to prevent the foreign corporation from performing single acts, but to
prevent is from acquiring domicile for the purpose of business without taking the steps necessary to render it
amenable to suit in the local courts. The law simply means that no foreign corporation shall be permitted “to
transact business in the Philippine Islands” unless it shall have the license required by law, and until it complies
with the law, shall not be permitted to maintain any suit in the local courts. (Marshall-Wells Co. vs. Henry W. Elser
& Co.)
A foreign corporation not engaged in business in the Philippines may not be denied the right to file an action in
Philippine courts for isolated transactions. (Bulakhidas vs. Navarro)
If A foreign corporation not engaged in business in the Philippines has the right to sue on an isolated transaction,
more so may it sue based on a mistake. (Swedish East Asia Co., Ltd. vs. Manila Port Service)
There was only one agreement between petitioners and the respondent. The three seemingly different transactions
were entered into by the parties only in an effort to fulfill the basic agreement and in no way indicate an intent on
the part of the respondent to engage in a continuity of transactions with petitioners which will categorize it as a
foreign corporation doing business in the Philippines. The respondent, being a foreign corporation not doing
business in the Philippines, does not need to obtain a license to do business in order to have the capacity to sue.
(Atnam Consolidated, Inc. vs. CA)
Under the rules of the BOI, the phrase “doing business” has been exemplified with illustrations, among them being
as follows:
1. Soliciting orders, purchase (sales) or service contracts. Concrete and specific solicitations by a foreign
firm, not acting independently of the foreign firm amounting to negotiation or fixing of the terms and
conditions of sales or service contract, regardless of whether the contracts are actually reduced to writing,
shall constitute doing business even in the enterprise has no office or fixed place of business in the
Philippines.
2. Appointing a representative or distributor who is domiciled in the Philippines unless said representative
or distributor has an independent status, i.e., it transacts business in its name and for its own account, and
not in the name or for the account of the pricipal.
3. Opening offices, whether called “liaison” offices, agencies or branches, unless provided otherwise.
4. Any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to
that extent the performance of acts or works, or the exercise of some of the functions normally incident
to, or in the progressive prosecution of, commercial gain or of the purpose and objective of the business
organization. (Facilities Management Corp. vs. De La Rosa)
A single act may bring the corporation within the purview of the statute where it is an act of the ordinary business
of the corporation. In such a case, the single act of transaction is not merely incidental or casual, but is of such
character as distinctly to indicate a purpose on the part of the operations for the conduct of a part of the
corporation’s ordinary business. (Far East Int’l Import vs. Nankai)
ITEC’s arrangement with its various business contacts in the country indicate its purpose to bring about the
situation among its customers and the general public that they are dealing directly with ITEC and that ITEC is
actively engage in business in the country. In determining whether a corporation does business in the Philippines or
not, aside from their activities within the forum, reference may be made to the contractual agreements entered into
by it with other entities in the country. (Communication Materials and Design, Inc. vs. CA)
A foreign corporation doing business in the Philippines may sue in Philippine courts although no authorized to do
business here against a Philippine citizen or entity who had contracted with and benefited by said corporation. To
put it another way, a party is estopped to challenge the personality of a corporation after having acknowledged the
same by entering into a contract with it. And the doctrine of estoppel to deny corporate existence applies to a
foreign as well as to domestic corporations. One who has dealt with a corporation of foreign origin as a corporate
entity is estopped to deny its corporate existence and capacity. The principle will be applied to prevent a person
contracting with a foreign corporation from later taking advantage of its noncompliance with the statutes chiefly in
cases where such person has received the benefits of the contract. (Communication Materials and Design, Inc. vs.
CA)
The right of a corporation to use its corporate and trade name is a property right, a right in rem, which it may assert

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Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

and protect against all the world, in any of the courts of the world – even in jurisdictions where it does not transact
business – just the same as it may protect its tangible property, real or personal, against trespass, or conversion.
Since it is the trade and not the make that is to be protected, a trademark acknowledges no territorial boundaries or
municipalities or states or nations, but extends to every market where the trader’s goods have become known and
identified by the use of the mark. (Western Equipment and Supply Co. vs. Reyes)
A foreign corporation which has never done business in the Philippine Islands and which is unlicensed and
unregistered to do business here, but is widely and favorably known in the Islands through the use therein of its
products bearing its corporate and trade name has a legal right to maintain an action in the Islands. Parenthetically
the Trademark Law allows a foreign corporation or juristic person to bring an action in Philippine courts for
infringement of a mark or trade-name, for unfair competition, or false designation of origin and false description,
whether or not it has been licensed to do business in the Philippines. (General Garments Corporation vs. Director of
Patents)
Article 8 of the Paris Convention to which the Philippines became a party provides that a trade name shall be
protected in all the countries of the Union without the obligation of filing or registration, whether or not it forms
part of the trademark. (Puma vs. IAC)
A foreign corporation not doing business not doing business in the Philippines needs no license to sue before
Philippine courts for infringement of trademark and unfair competition. (Le Chemise Lacoste vs. Fernandez)
In a suit involving the violation of the Revised Penal Code the complainant foreign corporation’s capacity to sue is
not significant. (Le Chemise Lacoste vs. Fernandez)
CAPACITY TO SUE
General Rule: A foreign corporation must affirmatively plead its capacity to sue in order that it may proceed
and effectively institute a case in Philippine courts.
Exceptions:
1. The action involves a complaint for violation of the Revised Penal Code.
2. The foreign corporation is not suing or maintaining a suit but is merely defending itself from one
filed against it.
The qualifying circumstance of whether or not a foreign corporation has engaged in business in the
Philippines is an essential part of the element of a foreign corporation’s capacity to sue and must be
affirmatively pleaded. (Atlantic Mutual Insurance Co. vs. Cebu Stevedoring Co., Inc.)
If the dismissal of the case, based on failure of the foreign corporation to aver its capacity to sue, would not,
however, bar the institution of the same action, dismissal should not be allowed, especially so if it would be
an idle, circuitous ceremony considering the absence of any meritorious substantial defense of the defense of
the defendant. Technical rules should not be accorded undue importance to frustrate and defeat a plainly valid
claim. (Olympia Business Machines Co. vs. Razon, Inc.)
Since petitioner is not maintaining any suit but is merely defending one against itself (it did not file any
complaint but only a corollary defensive petition to prohibit the lower court from further proceeding with a
suit that it had no jurisdiction to entertain), its failure to aver its legal capacity to institute the present petition
is not fatal. (Time, Inc. vs. Reyes)
LAWS GOVERNING FOREIGN CORPORATIONS
General Rule: 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.
Exceptions:
1. Laws which provide for the creation, formation, organization or dissolution of corporations; or
2. Laws which fix the relations, liabilities, responsibilities, or duties of stockholders, members or
officers of a corporation to each other or to the corporation.
Intra-corporate or internal matters not affecting creditors or the public in general are governed not by
Philippine laws but the law under which the foreign corporation was formed or organized.
Special laws may provide or grant certain restrictions, limitations, privileges or incentives to a foreign
corporation not otherwise applicable or granted to domestic corporations (e.g. import duties and tax
incentives under the Omnibus Investments Code).
A foreign corporation authorized to transact business in the Philippines which amends its articles of
incorporation or by-laws must file a copy of such amended articles of incorporation or by-laws with the SEC
or the appropriate government agency within 60 days from the effectivity of such amendment.
Instances when a foreign corporation authorized to transact business in the Philippines must obtain an amended

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 79
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

license:
1. The foreign corporation changes its corporate name; or
2. The foreign corporation desires to pursue other or additional purposes in the Philippines.
Requirements in a merger or consolidation of a foreign corporation licensed in the Philippines:
With a domestic corporation:
Such must be permitted under Philippines laws and by the law of its incorporation; and
The requirements on merger or consolidation provided by the Code must be followed.
With a foreign corporation:
Such must be permitted by the law of its incorporation;
A duly authenticated articles of merger or consolidation must be filed with the SEC or the
appropriate government agency within 60 days from the effectivity of the merger or
consolidation; and
If the absorbed corporation is the foreign corporation doing business in the Philippines, a petition for
withdrawal of its license must also be filed.
Requirements and procedure for the withdrawal of foreign corporations:
1. Filing of a petition for withdrawal of license;
2. All claims which have accrued in the Philippines have been paid, compromised or settled;
3. 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;
4. Publication of the petition for withdrawal once a week for 3 consecutive weeks in a newspaper of general
circulation in the Philippines; and
5. Issuance of the certificate of withdrawal by the SEC.

Grounds for the revocation or suspension of license:

1. Failure to file its annual report or pay any fees as required by the Code;
2. Failure to appoint and maintain a resident agent in the Philippines;
3. Failure, after change of its resident agent or of his address, to submit to the SEC a statement of such
change;
4. Failure to submit to the SEC an authenticated copy of any amendment to its articles of
incorporation or by-laws or of any articles of merger or consolidation within the time prescribed by
the Code;
5. Misrepresentation of any material matter in any application, report, affidavit or other document
submitted;
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.

Other grounds for revocation of license under special laws:

1. General Banking Act – imminent danger of insolvency;
2. Insurance Code – unsound condition, failure to comply with the provisions of law or regulation
obligatory upon it, a condition or method of business hazardous to the public or its policy holders,

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 80
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

impairment of its security deposit, or deficiency in the margin of solvency.

3. Omnibus Investments Code – willful violation of the provisions of existing laws and implementing
guidelines or violation of the terms and conditions of its license.
In case the revocation is warranted the SEC shall:
1. Issue a certificate of revocation;
2. Furnish a copy thereof to the appropriate government agency; and
3. Mail a notice of such revocation accompanied by a copy of the certificate of revocation to the
corporation at its registered office in the Philippines.

Remember: Revocation is not generally granted if it does not cause a substantial injury to the public and
there are other legal remedies because it is a very harsh punishment which amounts to capital punishment.
Also, SEC does not have the sole authority to suspend or revoke the license of a foreign corporation doing
business in the Philippines since there are other government agencies which may also issue an order which
effectively suspending or revoking the license of a foreign corporation.

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 81
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

CHAPTER 18: MISCELLANEOUS PROVISIONS

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 shares.
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.
The NEDA 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 Congress, whenever deemed necessary, a report of its findings, including recommendations for
their prevention or correction.
Maximum limits may be set by Congress 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 Congress corporations, business or industries to be declared vested with a public interest
and in formulating proposals for limitations on stock ownership, the NEDA 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.
Every corporation, domestic or foreign, lawfully doing business in the Philippines shall submit to the SEC 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 SEC may require. Such report shall be submitted within such period as may be
prescribed by the SEC.
All interrogatories propounded by the SEC 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.
The SEC 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.
Violations of any of the provisions of this Code or its amendments not otherwise specifically penalized
therein shall be punished by a fine of not less than one thousand (P1,000.00) pesos but not more than ten
thousand (P10,000.00) pesos or by imprisonment for not less than thirty (30) days but not more than five (5)
years, or both, in the discretion of the court. If the violation is committed by a corporation, the same may,
after notice and hearing, be dissolved in appropriate proceedings before the Securities and Exchange
Commission: Provided, That such dissolution shall not preclude the institution of appropriate action against
the director, trustee or officer of the corporation responsible for said violation: Provided, further, That
nothing in this section shall be construed to repeal the other causes for dissolution of a corporation provided
in this Code.
No right or remedy in favor of or against any corporation, its stockholders, members, directors, trustees, or
officers, nor any liability incurred by any such corporation, stockholders, members, directors, trustees, or
officers, shall be removed or impaired either by the subsequent dissolution of said corporation or by any
subsequent amendment or repeal of this Code or of any part thereof.
All corporations lawfully existing and doing business in the Philippines on the date of the effectivity of this
Code and heretofore authorized, licensed or registered by the Securities and Exchange Commission, shall be
deemed to have been authorized, licensed or registered under the provisions of this Code, subject to the terms
and conditions of its license, and shall be governed by the provisions hereof: Provided, That if any such
corporation is affected by the new requirements of this Code, said corporation shall, unless otherwise herein
provided, be given a period of not more than two (2) years from the effectivity of this Code within which to
comply with the same.

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 82
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

PD 902-A, AS AMENDED
The SEC’s quasi-judicial functions under Sec. 5 of PD 902-A, as amended were transferred to the Special
Commercial Courts by RA 8799.
General Rule: The Special Commercial Courts shall have exclusively and originally jurisdiction over cases
falling under Sec. 5 of PD 902-A.
Exception: The SEC shall retain jurisdiction over cases involving suspension of payments and corporate
rehabilitation filed on or before June 30, 2000.
Distribution of Special Commercial Courts:
1. Two in Makati City;
2. Two in Quezon City;
3. One in each in other cities in Metro Manila; and
4. One per region.
DEVICES OR SCHEMES AMOUNTING TO FRAUD AND MISREPRESENTATION (Sec. 5 [a])
General Rule: The Special Commercial Courts shall have original and exclusive jurisdiction to hear and
decide cases involving devices or schemes employed by or any acts of the board of directors, business
associates, its officers or partners, amounting to fraud and misrepresentation which may be detrimental to the
interest of the public and/or of the stockholder, partners, members of associations or organizations registered
with the SEC.

Exception: The complaint is based on the violation of the Revised Penal Code (Ex. Syndicated Estafa)
Even if the action is for recovery of sums of money paid or given to the corporation through devices and
schemes amounting to fraud or misrepresentation detrimental to the investing public, the same must be filed,
heard and tried by the Special Commercial Courts.
Examples of acts amount to fraud or misrepresentation within the original and exclusive jurisdiction of the
Special Commercial Courts:
1. Fraud committed by a corporation in failing to pay individual money market placements. (Orosa,
Jr. vs. CA)
2. Corporations act of duping persons into investing money when such corporations authority to issue
commercial papers has already expired. (Mangalad vs. Premier Corporation)
3. Corporate officer’s act of diverting corporate funds and assets for his personal use. (Alleje vs. CA)
4. Pyramiding schemes.
The allegation of fraud must be stated with particularity to place the case with the jurisdiction of the Special
Commercial Courts.
INTRA-CORPORATE CONTROVERSIES (Sec. 5 [b])
Intra-corporate controversies include those of corporations, partnerships and associations.
Elements of intra-corporate controversies:
1. An intra-corporate relationship:
a. Between and among the stockholders, members, associates of a corporation, partnership
or association;
b. Between them and the corporation, partnership or association; or
c. Between the corporation, partnership or association and the State.
2. The controversy must arise out of said relationship.
The dispute among the parties must be intrinsically connected with the regulation of the corporation. If the
nature of the controversy involves matters that are purely civil in character necessarily the case does not
involve an intra-corporate controversy. (Speed Distributing Corp. vs. CA)
The fact that shares of stock were issued to be used as part payment for lease rentals does not convert it into a
intra-corporate controversy. (DMRC Enterprises vs. Este del Sol Mountain Reserve, Inc.)

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 83
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

Recovery of the control and management of a corporation in the guise of a complaint for rescission of a
memorandum of agreement which vested such control and management is an intra-corporate controversy.
(DPB vs. Ilustre, Jr.)
If all of the requirements for a valid transfer have been complied the dispute is intra-corporate and is within
the jurisdiction of the Special Commercial Court. (Abejo vs. de la Cruz; Rural Bank of Salinas, Inc. vs. CA)
If the petitioner does not have a “prima facie” title to the share sought to be recorded in his name the dispute
is not intra-corporate and the ordinary or regular court can assume jurisdiction over the case. (Rivera vs.
Florendo; Tay vs. CA)
A dispute regarding the automatic rescission clause of a Memorandum of Agreement regarding the sale of
shares of a group of stockholders to another group of stockholders is intra-corporate. (Saavedra vs. SEC)
Where the conflict involves the enforcement of rights and obligations under the Corporation Code or the inter
and intra-corporate affairs of the corporation, jurisdiction would fall with the Special Commercial Courts. But
if it requires a mere determination of the contractual rights of the parties under an ordinary agreement, the
ordinary or regular courts can acquire jurisdiction thereto.
The factor which decides whether the action is within the jurisdiction of the Special Commercial Courts is
that the controversy arose out of an intra-corporate relation between and among the parties. (SEC vs. CA)
The filing of the civil/intra-corporate case before the SEC does not preclude the simultaneous and
concomitant filing of a criminal action before the regular courts; such that, a fraudulent act may give rise to
liability for violation of the rules and regulations of the SEC cognizable by the SEC itself, as well as criminal
liability for violation of the Revised Penal Code cognizable by the regular courts, both charges to be filed and
proceeded independently, and may be simultaneously, with the other. (Fabia vs. CA)
CONTROVERSIES IN THE APPOINTMENT, ELECTION AND REMOVAL OF DIRECTORS AND
OFFICERS (Sec. 5 [c])
The Special Commercial Courts have original and exclusive jurisdiction to hear and decide cases involving
controversies in the election or appointment of directors, trustees, officers or managers of corporations,
partnerships or associations.
General Rule: A corporate officer’s election, appointment or termination by the board of directors is always
a corporate act, and the fact that the officer asks for backwages does not alter the picture. The original and
exclusive jurisdiction rests with the Special Commercial Courts.
Exception: The main cause of action is for the recovery of unpaid wages and separation pay. (Midland
Construction Co., Inc. vs. Movilla)
The main aspect to be considered is whether the corporate officer asserts his rights as such officer or
questions his removal or ouster. If so, the case would fall within the ambit of the jurisdiction of the Special
Commercial Courts and not the NLRC.
RECEIVERSHIP AND SUSPENSION (Sec. 5 [d] and 6[c, d])
Petitions for suspension of payments of corporations, partnerships or associations, and appointment of
receivership, management committee, board or body are lodged within the jurisdiction of the Special
Commercial Courts.
A corporation, partnership or association, whether or not insolvent, can file a petition for suspension of
payments provided it is placed under a rehabilitation receiver or management committee or rehabilitation
receiver.
Three types of suspension of payments:
1. Simple suspension of payments – mere deferment of payment of debts and it refers to a petition
which is filed by a corporation which possesses sufficient assets to cover its liabilities but foresees
the possibility of meeting them when they respectively fall due owing to temporary liquidity
problems.
2. Suspension of payments with the appointment of a receiver with or without a rehabilitation plan.
The rehabilitation plan is a plan under which the corporation will reschedule the payment of its
debts and liabilities. Either the petitioner corporation will propose the plan or ask for the
appointment of a receiver who will study and make the plan.
3. Suspension of payments where the corporation has no sufficient assets to cover its debts and
liabilities with or without the appointment of a management committee with or without a
rehabilitation plan.

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 84
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

EFFECTS OF SUSPENSION OF PAYMENTS

The proper court may issue an order suspending payments of claims due from a distress corporation.
Upon the appointment of a management committee, rehabilitation receiver, board or body all actions for
claims against the corporation, partnership or association under management or receivership pending before
any court, tribunal, board or body shall be suspended accordingly.
The reason for suspension of payments for claims against a distressed corporation is to enable the
management committee to effectively exercise its powers free from judicial or extrajudicial interference that
might unduly hinder or prevent the „rescue‟ of the debtor company. (PAL vs. Sps. Sadic and Kurangking)
The suspension of all actions for claims against a corporation embraces all phases of the suit, be it before the
trial court or any tribunal or before this Court. No other action may be taken, including the rendition of
judgment during the state of suspension. It must be stressed that what are automatically stayed or suspended
are the proceedings of a suit and not just the payment of claims during the execution stage after the case had
become final and executory. Once the process of rehabilitation, however, is completed, this Court will
proceed to complete the proceedings on the suspended actions. Furthermore, the actions that are suspended
cover all claims against the corporation whether for damages founded on a breach of contract of carriage,
labor cases, collection suits or any other claims of a pecuniary nature. No exception in favor of labor claims
is mentioned in the law. (PAL vs. Zamora)
Claims – refers to debts or demands of pecuniary nature; the assertion of right to have money paid.
Suspended proceedings include extra judicial foreclosures. You cannot even consolidate. All proceedings at
whatever stage are suspended.
Even if the suspension order is issued after a creditor’s action in court has already become final but pending
execution, the execution of the decision is likewise suspended. (Filinvest vs. Ejercito)
Note the words “against the corporation.”
If a corporation secures a loan, and one of its key officers uses his private properties to guarantee the loan,
corporation files for suspension, the bank want to foreclose on the prop, may the bank foreclose? Yes. It is
not an action for ac claim against the corporation. Union bank case.
Properties of an individual stockholder, director or officer, as surety of corporate liabilities, are not, and will
not be covered by the suspension of payments order issued by the court pursuant to PD 902-A.
Same with regard to criminal proceedings, personal to corporate officer concerned.
Despite the appointment of a receiver for a corporation under PD 902-A, an action against a corporation
seeking the nullification of corporate documents cannot be suspended by reason thereof, since the civil action
does not present a monetary claim against the corporation. (Finasia Investment and Finance Corporation vs.
CA)
The SEC does not have jurisdiction to entertain petitions for suspension of payments filed by parties other
than corporations, partnerships or associations. (Union Bank vs. CA)
Equality is Equity – during suspension 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. The creditors should stand on equal footing. Not anyone of them should be given any
preference by paying one of them ahead of the others. (Alemars Sibal and Son, Inc. vs. Elibenas)
The issue of whether or not preferred creditors of distressed corporations stand on equal footing with all other
creditors gains relevance and materiality only upon the appointment of a management committee,
rehabilitation receiver, board or body. Suspension of claims against the corporation under rehabilitation is
counted or figured up only upon the appointment of a management committee or a rehabilitation receiver.
(RCBC vs. IAC)
VERY IMPORTANT!!!
1. All claims against corporations, partnerships or associations that are pending before any court,
tribunal or board, without distinction as to whether or not a creditor is secured or unsecured, shall
be suspended effective upon the appointment of a management committee, rehabilitation receiver,
board or body in accordance with the provisions of PD 902-A.
2. Secured creditors retain their preference over unsecured creditors, but enforcement of such
preferences is equally suspended upon the appointment of a management committee, rehabilitation
receiver, board or body. In the event that the assets of the corporation, partnership or association
are finally liquidated, however, secured or preferred credits under the applicable provisions of the
Civil Code will definitely have preference over unsecured ones.

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 85
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

If the rehabilitation of the corporation is not feasible, the court muto propio or the management committee
may petition the lifting and the preferences will be there again.
APPOINTMENT OF MANAGEMENT COMMITTEE, BOARD OR BODY (Sec. 6 [d])
Special Commercial Courts may create or appoint a management committee, board or body upon petition or
muto propio to undertake the management of corporations, partnerships or association not supervised or
regulated by other government agencies in appropriate cases where there is imminent danger of dissipation,
loss or wastage or destruction of assets or other properties or paralyzation of business operations of such
corporation or entities which may be prejudicial to the interest of minority stockholders, parties-litigant or the
general public.
It may also create or appoint a management committee, board or body to undertake the management of
corporations, partnerships or other associations supervised or regulated by other government agencies such as
banks and insurance companies, upon the request of the government agency concerned.
Requisites before a management committee, board or body may be appointed or created:
1. Dissipation, loss, wastage or destruction of assets or other properties; and
2. Paralyzation of its business operations which may be prejudicial to the interest of the minority
stockholders, parties-litigants or the general public. (Sy Chim vs. Sy Siy Ho & Sons, Inc.)

Danger – a general term, including peril, jeopardy, hazard and risk; refers to exposure or liability to injury.
Imminent – something which is threatening to happen at once, something close at hand, something to happen
upon the instant, close although not yet happening, and on the verge of happening.
In the absence of a strong showing of an imminent danger of dissipation, loss, wastage or destruction of
assets or other properties of a corporation and paralysis of its business operations, the mere apprehension of
future misconduct based upon prior mismanagement will not authorize the appointment of a management
committee/receiver. (Sy Chim vs. Sy Siy Ho & Sons, Inc.)
Mere disagreement among stockholder as to the fairness of the corporation would not in itself suffice as a
ground for the appointment of a management committee. However, where the dissention among the
stockholders is such that the corporation cannot successfully carry on its corporate functions, the appointment
of a management committee becomes imperative. (Jacinto vs. First Women’s Credit Corporation)
A management committee shall have the power to take custody of and control all assets and properties owned
and possessed by the entity under management. It shall take the place of the management and board of
directors of the entity under management, assume their rights and responsibilities, and preserve the entity’s
assets and properties in its possession.
The rehabilitation receiver shall not take over the management and control of the debtor but shall closely
oversee and monitor the operations of the debtor during the pendency of the proceedings. He shall be
primarily tasked to study the best way to rehabilitate the debtor and to ensure that the value of the debtor’s
property is reasonably maintained pending the determination of whether or not the debtor should be
rehabilitated, as well as implement the rehabilitation plan after its approval.
Venue of actions in intra-corporate controversies – Special Commercial Court which has jurisdiction over the
principal office of the corporation, partnership or association.
Nature of proceedings is in rem. Jurisdiction acquired upon publication of the proceeding.
Creditors have the personality (at least 25% of the total outstanding liabilities) may file, ex. Bayantel.
Their compensation is subject to agreement of the parties.
Actuations of the board, body, committee subject to….
Service of pleadings . Sec. 6 rule 1. may be by fax or email. When authorized by the court.
Service of summons. Sec. 5 rule 2. made upon any of the statutory or corporate officers or their respective
secretaries. vs. Eb Villarosa case. (Rule of Court)

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 86
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

SECURITIES REGULATION CODE (SRC)

Full disclosure rule – as long as there is full and complete disclosure relative to the issue of securities the
investing public should determine for themselves whether or not to invest.
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 to determine
technical and intricate matters of fact.
A criminal charge for violation of the SRC is a specialized dispute. Hence, it must first be referred to an
administrative agency of special competence, i.e., the SEC… The SRC 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 the SEC. Where the complaint is criminal in nature, the SEC shall
indorse the complaint to the DOJ for preliminary investigation and prosecution as provided in Section 53.1.
(Baviera vs. Paglinawan)
Securities
Securities – are shares, participation or interests in a corporation or in a commercial enterprise or profit-
making venture and evidenced by a certificate, contract, instrument, whether written or electronic in
character. It includes:
1. Shares of stock, bonds, debentures, notes, evidences of indebtedness, asset-backed securities;
2. Investment contracts, certificates of interest or participation in a profit sharing agreement,
certificates of deposit for a future subscription;
3. Fractional undivided interests in oil, gas or other mineral rights;
4. Derivatives like option and warrants;
5. Certificates of assignments, certificates of participation, trust certificates, voting trust certificates or
similar instruments;
6. Proprietary or non proprietary membership certificates incorporations; and
7. Other instruments as may in the future be determined by the Commission.
The definition of securities is extra-ordinarily broad. It is a catch all phrase meant to include all novel devices
which are of the same nature. Investment contracts and golf club shares are included in the definition of
securities.
General Rule: Securities cannot be sold or offered for sale or distribution to more than 19 persons without a
Registration Statement duly filed and approved by the SEC. Once the securities are sold or offered to more
than 19 persons, it becomes a public offering requiring prior registration with the SEC. Violation thereof
renders the person administratively, civilly and criminally liable.
Exception: The securities involved are covered by Sec. 9 (exempt securities) and Sec. 10 (exempt
transactions).

Persons engaging in the business of buying or selling securities in the Philippines as a broker or dealer, or
acting as a salesman for such entities must be registered and authorized as such by the SEC.
Investment contract – a contract or scheme whereby a person invests his money in a common venture
premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts
of others.
Issuance of certificates of participation in a multi-level marketing scheme, solely on the management of
others without goods or services is an investment contract and thus a security. (Justee vs. SEC)
Pyramiding schemes partakes of a nature of an investing contract which cannot be sold to more than 19
persons without prior approval of the SEC.
When an investor is relatively uninformed and turns over his money to others, essentially depending upon
their representations and their honesty and skill in managing it, the transaction generally is considered as an
investment contract. The touchstone is the presence of an investment in a common venture premised on a
reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.
(People vs. Petralba)

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 87
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

Exempt Securities (Sec. 9):

1. 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.
2. 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
of disclosures the Commission may prescribe.

3. Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper

adjudicatory body.
4. 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, HLURB, or BIR.
5. Any security issued by a bank except its own shares of stock.
Exempt Transactions (Sec. 10):

1. Any judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in

insolvency or bankruptcy.
2. By or for the account of a pledge holder, or mortgagee or any other similar lien holder selling or
offering for sale or delivery in the ordinary course of business and not for the purpose of avoiding
the provisions the SRC, to liquidate a bona fide debt, a security pledged in good faith as security for
such debt.
3. An isolated transaction in which any security is sold, offered for sale, subscription or delivery by
the owner thereof, or by his representative for the owner‟s account, such sale or offer for sale,
subscription or delivery not being made in the course of repeated and successive transactions 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.
4. 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.
5. 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.
6. The issuance of bonds or notes secured by mortgage upon real estate or tangible personal property,
where the entire mortgage together with all the bonds or notes secured thereby are sold to a single
purchaser at a single sale.

7. 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 the
SRC or was, when sold, exempt from the provisions of the SRC, 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 the SRC. 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.
8. Broker’s transactions, executed upon customer’s orders, on any registered Exchange or other
trading market.
9. Subscriptions for shares of the capital stock of a corporation prior to the incorporation thereof or in
pursuance of an increase in its authorized capital stock 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 subscriptions 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 increased.

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 88
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

10. The exchange of securities by the issuer with its existing security holders exclusively, where no
commission or other remuneration is paid or given directly or indirectly for soliciting such
exchange.
11. The sale of securities by an issuer to fewer than 20 persons in the Philippines during any twelve-
month period.
12. The sale of securities to any number of the following qualified buyers:
a. Bank;
b. Registered investment house;
c. Insurance company;
d. Pension fund or retirement plan maintained by the Government of the Philippines or any
political subdivision thereof or managed by a bank or other persons authorized by the
Bangko Sentral to engage in trust functions;
e. Investment company; or
f. Such other person as the Commission may by rule 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.
Tender Offer
Tender Offers – a publicly announced intention by the purchaser to acquire a certain block of equities of a
company through open market purchases or private negotiations.
A tender offer is required of any person or group of persons acting in concert who intend to acquire:
1. At least 15% of any class of any equity security of a listed corporation or of any class of any equity
security of a corporation with assets of at least P50M and having 200 or more stockholders with at
least 100 shares each; or
2. At least 30% of such equity over a period of 12 months.
Proxies
Proxies must be issued and proxy solicitation must be made in accordance with rules and regulations to be
issued by the Commission.
Requisites for proxies:
1. In writing;
2. Signed by the stockholder or his duly authorized representative; and
3. Filed before the scheduled meeting with the corporate secretary.
General Rule: A proxy shall be valid only for the meeting for which it is intended.
Exception: It is otherwise provided in the proxy.
No proxy shall be valid and effective for a period longer than 5 years at one time.
No broker or dealer shall give any proxy, consent or authorization, in respect of any security carried for the
account of a customer, to a person other than the customer, without the express written authorization of such
customer.
A broker or dealer who holds or acquires the proxy for at least 10% or such percentage as the Commission
may prescribe of the outstanding share of the issuer, shall submit a report identifying the beneficial owner
within 10 days after such acquisition, for its own account or customer, to the issuer of the security, to the
Exchange where the security is traded and to the Commission.
Independent Director
Any corporation with a class of equity securities listed for trading on an Exchange or with assets in excess of
P50M and having 200 or more holders, at least of 200 of which are holding at least 100 shares of a class of its
equity securities or which has sold a class of equity securities to the public pursuant to an effective
registration statement shall have at least 2 independent directors or such independent directors shall constitute
at least 20% of the members of such board, whichever is the lesser.

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 89
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

Independent director – a person other than an officer or employee of the corporation, its parent or
subsidiaries, or any other individual having a relationship with the corporation, which would interfere with
the exercise of independent judgment in carrying out the responsibilities of a director.
The SEC may exempt corporations from the required independent directors as it did in the rehabilitation of
Victorias Milling Co. Inc..
Insider Trading
Insider:
1. The issuer;
2. A director or officer (or person performing similar functions) of, or a person controlling the issuer;
3. A person whose relationship or former relationship to the issuer gives or gave him access to
material information about the issuer or the security that is not generally available to the public;
4. A government employee, or 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
5. A person who learns such information by a communication from any of the foregoing insiders.
General Rule: An insider may not 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.
Exceptions:
1. The insider proves that the information was not gained from such relationship; or
2. The insider disclosed the information to a party reasonably believed by the insider to possess the
information.
Material non-public information – has not been generally disclosed to the public and:
1. 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
2. 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.
An insider may not communicate material non-public information to any person who will likely buy or sell a
security of the issuer while in possession of such information.
Trading by persons who have material non-public information about a tender offer is prohibited.
Registration of Brokers, Dealers, Salesmen and Associated Persons

Persons engaging in the business of buying or selling securities in the Philippines as a broker or dealer, or
acting as a salesman for such entities must be registered and authorized as such by the SEC.

Broker – a person engaged in the business of buying and selling securities for the account of others.

Dealer – any person who buys and sells securities for his/her own account in the ordinary course of business.

Salesman - a natural person, employed as such or as an agent, by a dealer, issuer or broker to buy and sell
securities.
A stockbrokerage firm can have no other business than that.
Purchase of shares should be coursed through a broker. However a private transaction can be made.
Fraudulent Transactions and Other Market Manipulations
Fraudulent and manipulative devices:
1. Wash sale – any transaction in a security which involves no change in the beneficial ownership thereof.

2. Matched order – an order or orders for the purchase or sale of security with the knowledge that a
simultaneous order or orders of substantially the same size, time and price for the sale or purchase of
such security has, or will be entered by or for the same or different parties.
3. Marking the close – place of purchase or sale order, at or near the close of the trading period.

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 90
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

4. Painting the tape – the activity is made during normal trading hours. It involves buying activity among
nominee accounts at increasingly higher or lower prices or causing fictitious reports to appear on the
“ticker tape.”
5. Squeezing the float – the part or portion of the issue/security which is outstanding but intentionally held
by dealers or other persons with a view of reselling them later for profit.

6. Hype and dump – the act employed by a person or group of persons of purchasing the outstanding capital
stock of a dormant public shell company for a nominal amount and merge it with their privately held
company. They would then gain control of the majority of the stocks of the merged entity. The shares of
the Shell Company are often reverse-split four to one or more to reduce the number of shares. Stock
certificates are often re-issued in the name of the merged entity to relatives and associates who act as
nominees of the person or group of persons employing the device. They would then look for a broker-
dealer who would be willing to make a market relative to the stocks of the newly merged company; then
hire a promoter who would “hype” the virtues of the company, its products and stocks. The broker-dealer
then generates volume and advance bid price. When the market reaches a high price, they would “dump”
their shareholdings and bail out.

7. Boiler room operations – involves an intensive selling campaign through numerous salesmen by
telephone or through direct mail offerings for securities of either a certain type or from a specific issuer.
Investors are induced to purchase through hard-sell techniques based on unfounded predictions and
mailing of misleading market letters.
8. Circulating or dissemination information that the price of any security listed in the Exchange will or is
like to rise or fall (illegal)
9. Making false or misleading statements 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 (illegal).
10. Pegging or fixing or stabilizing the price of security effected either alone or with others through any
series of transactions for the purchase or sale thereof (illegal)
11. Short sale – sale of securities which the vendor does not own (illegal unless done in accordance with the
rules and regulations of the SEC) (T3 rule).
12. Insider trading – the act of an insider of buying or selling securities of the issuer while in possession of
material information with respect thereto that is not generally available to the public (illegal unless
exempted).
Wash sale and matched order is illegal when used as a means to create a false or misleading appearance of active
trading in the security concerned.
Marking the close, painting the tape, squeezing the float, hype and dump, and boiler room operations are illegal
when they are effected to:
1. Raise the price or induce the purchase of a security or of a controlling, controlled or commonly controlled
company by others;
2. Depress their price to induce the sale of a security, whether of the same or of a different class, of the same
issuer or of a controlling, controlled company, or common controlled company of others; and
3. Creates active trading to induce such purchase or sale through said devices or schemes.
Other fraudulent transactions:
1. Employing any device, scheme, or artifice to defraud;

2. Obtaining 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
3. Engaging in any act, transaction, practice or course of business which operates or would operate as
a fraud or deceit upon any person.
Fraud – akin to bad faith which implies a conscious and intentional design to do a wrongful act for a
dishonest purpose or moral obliquity.

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 91
Whatever you asked for in prayer, believe that you have received it and
it will be yours. –Mark 11:24

Settlement Offer
At any time, during an investigation or proceeding under this Code, parties being investigated and/or charged
may propose in writing an offer of settlement with the Commission.
Upon receipt of such offer of settlement, the Commission may consider the offer based on timing, the nature
of the investigation or proceeding, and the public interest.
The Commission may only agree to a settlement offer based on its findings that such settlement is in the
public interest. Any agreement to settle shall have no legal effect until publicly disclosed. Such decision may
be made without a determination of guilt on the part of the person making the offer.
Limitation of Actions
SEC. 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) years after the violation upon which it is based. In no event shall any 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
(b) 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.
False registration statement - liable civilly - sec. 56
Ceiling as to amount of damages - triple of the amount involved
limitation of actions - not later than 5 years after the cause of action accrues

Salipsip and Rubin as Updated by ZGB|| Arellano University School of Law ||Page 92