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CORPORATION LAW REVIEWER For Final Exam

(BUSINESS ORGANIZATION II)
[Outline by Asst Omb Cabras; Combined Notes and Commentaries from
PH Corporate Law Compendium Atty Aquino, 2014, Handbook on
Partnership Law and Corporation Code Atty Nolledo, 1998 & Corp book
by Atty Campos; Additional lecture notes and pointers from Asst Omb
Cabras] Prepared by: Salymar Santos

CORPORATION CODE
(Batas Pambansa Blg. 68)
II. FINANCIAL STRUCTURE
Includes the Authority to Issue Debt Structures; Power to
incur, create or increase bonded indebtedness (Sec 38)
Sources of Funds; The capital needed to finance the
business of a corporation may come from any or all the
following sources:
1. LOANS from the bank or advances by Creditors;
2. Contributions of its Shareholders
3. Profits by which the corporation may earn
[Campos 2004].
The Capital Structure refers to the aggregate of the securities
issued by the corporation. The instruments usually represent
relatively LONG-TERM investment in the corporation.
Basically, there are two (2) classes:
1. DEBT SECURITIES
2. SHARES OF STOCK (Equity Securities)
**A sound capital structure is of UTMOST IMPORTANCE
because it may spell the success or failure of the business
[Campos 2004]
***Capital Stock and Capital Distinguished [Campos 2004
and Nolledo 1998]:
CAPITAL STOCK: signifies the amount fixed, usually by
the corporate charter, to be subscribed and paid in or
secured to be paid in by the shareholders of a corporation,
wither in money, or in property, labor or services at the
organization of the corporation or afterwards, and upon
which it is to conduct its operations.
When it has not yet issued all such shares, then its outstanding
or subscribed capital stock
CAPITAL: the actual property of the corporation, including
cash, real and personal property. It therefore includes all
corporate assets contributions of stockholders, loan by
third persons, and earnings less of course, any loss which
have been incurred in the business.
A. DEBT SECURITIES
Generally:
Lirag Textile Mills, Inc., vs. SSS (GR No. L-33205 [1987])

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ISSUE: Whether or not the PURCHASE AGREEMENT is a

DEBT INSTRUMENT.
RULING: YES. Purchase Agreement is a debt instrument,
imposing upon the petitioners the obligation to pay the
amount owed, and creating as between them the relation of
creditor and debtor, not that of a stockholder and a
corporation.
The Purchase Agreement is, indeed, a debt
instrument. Its terms and conditions unmistakably show that
the parties intended the repurchase of the preferred shares on
the respective scheduled dates to be an absolute obligation
which does not depend upon the financial ability of petitioner
corporation. This absolute obligation on the part of petitioner
corporation is made manifest by the fact that a surety was
required to see to it that the obligation is fulfilled in the event
of the principal debtor's inability to do so. The unconditional
undertaking of petitioner corporation to redeem the preferred
shares at the specified dates constitutes a debt which is defined
"as an obligation to pay money at some fixed future time, or at a
time which becomes definite and fixed by acts of either party
and which they expressly or impliedly, agree to perform in the
contract.
1. Authority to Issue Debt Securities
- Power to incur, create or increase bonded indebtedness
(Section 38 of the Corporation Code)
Section 38. Power to increase or decrease capital stock; incur,
create or increase bonded indebtedness. No corporation shall
increase or decrease its capital stock or incur, create or increase
any bonded indebtedness unless approved by a majority vote
of the board of directors and, at a stockholders meeting duly
called for the purpose, two-thirds (2/3) of the outstanding
capital stock shall favor the increase or diminution of the
capital stock, or the incurring, creating or increasing of any
bonded indebtedness. Written notice of the proposed increase
or diminution of the capital stock or of the incurring, creating,
or increasing of any bonded indebtedness and of the time and
place of the stockholders meeting at which the proposed
increase or diminution of the capital stock or the incurring or
increasing of any bonded indebtedness is to be considered,
must be addressed to each stockholder at his place of residence
as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served
personally.
A certificate in duplicate must be signed by a majority of the
directors of the corporation and countersigned by the
chairman and the secretary of the stockholders meeting,
setting forth:
(1) That the requirements of this section have been complied
with;
(2) The amount of the increase or diminution of the capital
stock;
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(3) If an increase of the capital stock, the amount of capital

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

(BO2)

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DEBT SECURITIES: (also called bonds) generally involve

the corporations promise to pay the principal amount of a
loan at a stated time and interest rate, while the debt remains
unpaid. Further, corporate operations may be financed by
other forms of credit, such as a credit line extended by
suppliers.
2. TYPES OF DEBT SECURITIES
1. Unsecured Bonds also called debentures
involve the sole obligation of the corporation
and there is essentially no security attached to
the load. However, to protect debenture
holders, the debenture agreements usually
impose limitations on corporate borrowing,
payment of dividends, and redemption and/or
acquisition of its own share.
2.

Secured Bonds A secured bond, aside from

the general obligation of the corporation,
creates a claim against the corporations general
assets and a lien on specific property.

3.

Income Bonds A loan where payment of

interest is conditioned on corporate earnings.
- Payable out of net profit.

4.

Convertible Bonds there are bonds which

may be exchanged, usually at the option of the
holder, for other corporate securities at a
specified ratio.

5.

Callable Bonds these are bonds wherein

there is stipulation that the corporation can
redeem or call all or part of the loan before
maturity at a specified redemption price.

B. EQUITY SECURITIES
Equity Securities (commonly called shares) are called such
as said securities represent a proportionate proprietary
interest in the corporation. However they do not vest the
owner with title to any property of the corporation. Shares
confer the owner with a three (3) fold interest in the
corporation. THE
1. Right to participate in control
2. Right to participate in the earnings of the
corporation
3. Right to participate in the residual assets of the
corporation upon liquidation
Garcia vs. Lim Chu Sing, 59 PHIL 562
- A share of stock or the certificate thereof is not an
indebtedness to the owner not evidence of indebtedness
and, therefore, it is not a credit.
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- Stockholders, as such, are not creditors of the

corporation.
- the capital stock of a corporation is a trust fund to be
used more particularly for the security of creditors of the
corporation, who presumably deal with it on the credit of
its capital stock.
Therefore, the defendant appellant Lim Chu Sing not being
a creditor of the Mercantile Bank of China, although the
latter is a creditor of the former, there is no sufficient ground
to justify a compensation.
N.B Equity placements in a corporation which form part of
the capital stock are not assets, they are capital accounts,
hence they do not represent a credit on the part of the SHs
nor a debt on the part of the corporation. As such they
cannot be subject to compensation.
1. Issuance of Shares
a. Certificate of Stock (Section 63 of the Corporation Code)
Section 63. Certificate of stock and transfer of shares. The
capital stock of stock corporations shall be divided into shares
for which certificates signed by the president or vice president,
countersigned by the secretary or assistant secretary, and
sealed with the seal of the corporation shall be issued in
accordance with the by-laws. Shares of stock so issued are
personal property and may be transferred by delivery of the
certificate or certificates indorsed by the owner or his attorneyin-fact or other person legally authorized to make the transfer.
No transfer, however, shall be valid, except as between the
parties, until the transfer is recorded in the books of the
corporation showing the names of the parties to the
transaction, the date of the transfer, the number of the
certificate or certificates and the number of shares transferred.
No shares of stock against which the corporation holds any
unpaid claim shall be transferable in the books of the
corporation.
Certificate of Stock: the written acknowledgement by the
corporation of the stockholders interest in the corporation
and its property.
b. Pre-Emptive Rights (Section 39 of the Corporation
Code)
Section 39. Power to deny pre-emptive right. All
stockholders of a stock corporation shall enjoy pre-emptive
right to subscribe to all issues or disposition of shares of any
class, in proportion to their respective shareholdings, unless
such right is denied by the articles of incorporation or an
amendment thereto: Provided, That such pre-emptive right
shall not extend to shares to be issued in compliance with laws
requiring stock offerings or minimum stock ownership by the
public; or to shares to be issued in good faith with the
approval of the stockholders representing two-thirds (2/3) of

(BO2)

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the outstanding capital stock, in exchange for property needed

for corporate purposes or in payment of a previously
contracted debt.

c. Consideration (Section 62 of the Corporation Code)

Section 62. Consideration for stocks. Stocks shall not be
issued for a consideration less than the par or issued price
thereof. Consideration for the issuance of stock may be any or
a combination of any two or more of the following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the
corporation and necessary or convenient for its use and lawful
purposes at a fair valuation equal to the par or issued value of
the stock issued;
3. Labor performed for or services actually rendered to the
corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to
stated capital; and
6. Outstanding shares exchanged for stocks in the event of
reclassification or conversion.
Where the consideration is other than actual cash, or consists
of intangible property such as patents of copyrights, the
valuation thereof shall initially be determined by the
incorporators or the board of directors, subject to approval by
the Securities and Exchange Commission.
Shares of stock shall not be issued in exchange for promissory
notes or future service.
The same considerations provided for in this section, insofar as
they may be applicable, may be used for the issuance of bonds
by the corporation.
The issued price of no-par value shares may be fixed in the
articles of incorporation or by the board of directors pursuant
to authority conferred upon it by the articles of incorporation
or the by-laws, or in the absence thereof, by the stockholders
representing at least a majority of the outstanding capital stock
at a meeting duly called for the purpose. (5 and 16)
National Exchange vs. Dexter, 51 PHIL 601
ACT 1459: Section 16 - No corporation organized under this Act
shall create or issue bills, notes, or other evidence of debt for
circulation as money, and no corporation shall issue stock or bonds
except in exchange for actual cash paid to the corporation or for
property actually received by it at a fair valuation equal to the par
value of the stock or bonds so issued.
In the absence of restrictions in its character, a
corporation, under its general power to contract, has the power
to accept subscriptions upon any special terms not prohibited
by positive law or contrary to public policy, provided they are
not such as to require the performance of acts which are beyond
the powers conferred upon the corporation by its character, and
provided they do not constitute a fraud upon other subscribers
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or stockholders, or upon persons who are or may become

creditors of the corporation.
The prohibition against the issuance of shares by
corporations except for actual cash to the par value of the stock
to its full equivalent in property is thus enshrined in both the
organic and statutory law of the Philippine; Islands; and it
would seem that our lawmakers could scarely have chosen
language more directly suited to secure absolute equality
stockholders with respect to their liability upon stock
subscriptions. NOW, if it is unlawful to issue stock otherwise
than as stated it is self-evident that a stipulation such as that
now under consideration, in a stock subcription, is illegal, for
this stipulation obligates the subcriber to pay nothing for the
shares except as dividends may accrue upon the stock. In the
contingency that dividends are not paid, there is no liability
at all. This is a discrimination in favor of the particular
subcriber, and hence the stipulation is unlawful.
- FAIR TREATMENT.

(BO2)

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**As to different types of ISSUANCE OF SHARES:

3. Par Value Shares one on the certificate of which or
in the articles of incorporation, appears an amount in
pesos as the nominal value of the share [Nolledo 1998]
The function of the par value is to fix its minimum
subscription price. [Ibid.]
The par value of a share is fixed in the articles of
incorporation and is the minimum issue price of
such share. This value must be stated in the
certificate of stock, which cannot be issued until the
subscriber has paid his subscription in full. The
stocks cannot be issued or sold by corporation at
less than par, otherwise they would be watered
stock and the stockholder would still be liable for
the difference between what he paid and the par
value thereof. [Section 65 Corp Code; Campos
2004]. They may however be issued ot sold at higher
price than par.

**A by law provision that unduly limits or provides for only one
way to enforce the obligation to pay is VOID. There war no way
to enforce payment except thru dividend declaration and if
there is no dividend declaration, the subscriber is excused from
payment.
However, a stipulation that the obligation to pay the
subscription may be enforced by the BoD by withholding the
dividends declared on shares is VALID as it merely gives the
BoD an option to choose and does not prevent exercise of other
remedies to enforce payment.

WHAT IF THE CONTRACT STATED WHICH MAY BE AS

OPPOSED TO PAYABLE FROM?
The stipulation would have been valid as the collection is not
limited by the contingent event of dividend declaration.
-SETTING AN OPTION.

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The usual kinds of shares under Section 6 of Corporation

Code are:
1. Common Shares - one which entitles the owner or
holder to an equal prorate division of profits without
any preference or advantage over any class of
stockholders.
2. Preferred Shares one which entitles the holder to
some priority as to dividend or principal or both over
some other class or classes of stockholders.

"Conditions attached to subcriptions, which, if valid, lessen the

capital of the company, are a fraud upon the grantor of the
franchise, and upon those who may become creditors of the
corporation, and upon unconditional stockholders."

**Consideration for par value or no par value shares: Stocks

must be issued for a consideration not less than the par or
issued price (in case of no par), whether the consideration is
for actual case or other than actual cash. If the par value for
example is 10php, then an actual cash of 10php must be paid
for it, or property, etc. equivalent to said value must be
delivered to the corporation. But consideration may be in the
form of services actually rendered or exchange of shares (as in
conversion), or previous corporate debt (which can be
measured or computed in terms of peso/s), or amounts
transferred from surplus to capital (stock dividends), or
intangible property like patents or copyrights [Nolledo 1998].

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Advantages:
a. Ease of Sale;
b. Greater protection to creditors;
c. Unlikelihood of sale of subsequently issued
shares at a lower price;
d. Unlikelihood of the distribution of
dividends that are ostensible profits;
e. Reduced danger of surplus becoming
frozen in a merger or consolidation.
Disadvantages:
a. Liability by subscribers for unpaid
subscription;
b. Inaccurate representation as to its true
value. [Nolledo 1998]
4.

No Par Value Shares is a share without any nominal

value in terms of peso or pesos worth [Nolledo 1998].
The issuance of No Par value shares shall result in
the share being fully paid and non-assessable and
the holder of such shares shall not be liable to the
corporation or to its creditors in respect thereto.
[Ibid.]
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No par shares are those whose issued price is not

stated in the certificate, but which may be fixed in
the Articles of Incorporation, or by the board of
directors when so authorized by said articles or by
the by-laws, or in the absence thereof, by the
shareholders themselves [Section 62 Corp Code;
Campos 2004]
Advantages:
a. Less likely to mislead nave investors who
may take the par value printed on the
certificate as a representation of its present
actual value;
b. Flexibility of price;
c. Disappearance of personal liability for
unpaid subscription;
d. Affords remedy for or relief from the evil of
over-capitalization;
e. Stock dividends are more easily issued,
simplifying accounting procedure;
f. No par value share tells no untruth
concerning the value of the shareholders
contributions.
Disadvantages:
a. Large issues of stock for property;
b. Lesser protection to creditors; [Nolledo
1998; Aquino 2014]
PAR VALUE
Pre-determined at the time
of the establishment of the
Corporation
Non-flexible: Par value
prevents issuance of shares
at a discount that may be
desirable for business
purposes in some cases.
The issue or stated value of
the shares may be HIGHER
than the par value. The
value fixed cannot be below
par.
Arbitrary (dictated) amount
under the AoI or Corporate
charter. The BOD is
authorized to fix the amount
subscribed to such shares.

Subscriber may be led to

believe that the actual value
of his interest is equal at
least to the par value stated

NO PAR VALUE
No pre-determined price

Flexibility of the price; No

par value shares are resorted
to maintain flexibility on the
price that may be hampered
at times because of the rule
on watered stocks.
With respect to no par value
shares, the stated or issued
value cannot be less than
five (5) pesos.
Price depends on the Market
Value and other conditions;
its price may also be fixed in
the Articles of Incorporation
or by BOD pursuant to the
authority conferred upon it
by the AoI or Bylaws.
There is no false appearance
behind which true value of
the stock in money is
hidden.

(BO2)

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in the certificate
Section 15. Forms of Articles of Incorporation.
X
X
X
(In case all the share are without par value): That the capital
stock of the corporation is ______________ shares without par
value. (In case some shares have par value and some are
without par value): That the capital stock of said corporation
consists of _____________ shares of which ______________
shares are of the par value of _________________
(P____________) PESOS each, and of which
_________________ shares are without par value.
X
X
X
d. Payment of the Balance of the Subscription (Sections 66
and 67 of the Corporation Code)
Section 66. Interest on unpaid subscriptions. Subscribers for
stock shall pay to the corporation interest on all unpaid
subscriptions from the date of subscription, if so required by,
and at the rate of interest fixed in the by-laws. If no rate of
interest is fixed in the by-laws, such rate shall be deemed to be
the legal rate.
Section 67. Payment of balance of subscription. Subject to
the provisions of the contract of subscription, the board of
directors of any stock corporation may at any time declare due
and payable to the corporation unpaid subscriptions to the
capital stock and may collect the same or such percentage
thereof, in either case with accrued interest, if any, as it may
deem necessary.
Payment of any unpaid subscription or any percentage thereof,
together with the interest accrued, if any, shall be made on the
date specified in the contract of subscription or on the date
stated in the call made by the board. Failure to pay on such
date shall render the entire balance due and payable and shall
make the stockholder liable for interest at the legal rate on
such balance, unless a different rate of interest is provided in
the by-laws, computed from such date until full payment. If
within thirty (30) days from the said date no payment is made,
all stocks covered by said subscription shall thereupon become
delinquent and shall be subject to sale as hereinafter provided,
unless the board of directors orders otherwise.
Lingayen Gulf vs. Baltazar, 93 PHIL 404
Under the Corporation Law, notice of call for payment for
unpaid subscribed stock must be published, except when the
corporation is insolvent, in which case, payment is
immediately demandable. We also rule that release from
such payment be made by all the stockholders.
When the Corporation Code lays down the procedure, the
same is mandatory; failure to comply with such procedure
renders the transaction void.

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IF THERE IS NO STIPULATION AS TO PAYMENT OF

INTEREST, SHOULD INTEREST BE PAID?
NO. The payment of interest must ne stated in the by laws,
otherwise, it is not de,andable.
IF INTEREST IS AGREED UPO AND NO PERCENT IS
AGREED UPON, WHAT IS THE RATE?
The legal rate of interest of 12% will be imposed.
IF A SUBSCRIPTION AGREEMENT PROVIDES FOR A
MATURITY DATE, CAN A CALL STILL BE MAD E BY
THE BOARD OF DIRECTORS?
NO. A call is necessary only in instances where there is no
date of payment in the subscription agreement. The call can
specify that all subscription receivable are due and
demandable or that a certain percentage of said receivable is
due.
HOW IS A CALL MADE IN ORDER TO IN SHS?
The BoD may make a call at an y time, setting the date for
payment to be made. If said date arrives and NO PAYMENT
is made, the ENTIRE balance shall be due and demandable
and interest starts to run. The SH must pay within 30 days
from the date set, otherwise, their shares become delinquent.
WHAT ARE THE TWO (2) WAYS BY WHICH
SUBSCRIPTION IS RECEIVABLE BECOME DUE?
1) By the expiration of the period as STATED IN THE
AGREEMENT
2) By expiration of the period as STATED IN THE
CALL
!!! IMPORTANT: IF THE PERIOD LAPSE, DO THE
SHARES BECOME DELINQUENT?
No. The shares become delinquent thirty (30) days from the
lapse of the above period or the call. The BoD may declare
the shares do not become delinquent even after the lapse of
30 days.
WHAT ARE THE LGAL EFFECTS WHEN SHARES
BECOME DELINQUENT?
Delinquent shares cannot vote or e-voted upon.
Dividends, if any, are first applied to delinquency.
HOW WILL DELINQUENT SHARES AFFECT QUORUM?
As to VOTING QUORUM, they are not part thereof
As to DIVIDENDS QUORUM, they are still part thereof.
e. Liability for Unpaid Subscriptions
Keller vs. COB Group, 141 SCRA 86
As to the liability of the stockholders, it is settled that a
stockholder is personally liable for the financial
obligations of a corporation to the extent of his unpaid
subscription.

(BO2)

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f. Delinquency Subscription (Sections 68 to 71 of the

Corporation Code)
Section 68. Delinquency sale. The board of directors may,
by resolution, order the sale of delinquent stock and shall
specifically state the amount due on each subscription plus
all accrued interest, and the date, time and place of the sale
which shall not be less than thirty (30) days nor more than
sixty (60) days from the date the stocks become delinquent.
Notice of said sale, with a copy of the
resolution, shall be sent to every delinquent stockholder either
personally or by registered mail. The same shall furthermore
be published once a week for two (2) consecutive weeks in a
newspaper of general circulation in the province or city where
the principal office of the corporation is located.
Unless the delinquent stockholder pays to
the corporation, on or before the date specified for the sale of
the delinquent stock, the balance due on his subscription, plus
accrued interest, costs of advertisement and expenses of sale,
or unless the board of directors otherwise orders, said
delinquent stock shall be sold at public auction to such bidder
who shall offer to pay the full amount of the balance on the
subscription together with accrued interest, costs of
advertisement and expenses of sale, for the smallest number of
shares or fraction of a share. The stock so purchased shall be
transferred to such purchaser in the books of the corporation
and a certificate for such stock shall be issued in his favor. The
remaining shares, if any, shall be credited in favor of the
delinquent stockholder who shall likewise be entitled to the
issuance of a certificate of stock covering such shares.
Should there be no bidder at the public
auction who offers to pay the full amount of the balance on the
subscription together with accrued interest, costs of
advertisement and expenses of sale, for the smallest number of
shares or fraction of a share, the corporation may, subject to the
provisions of this Code, bid for the same, and the total amount
due shall be credited as paid in full in the books of the
corporation. Title to all the shares of stock covered by the
subscription shall be vested in the corporation as treasury
shares and may be disposed of by said corporation in
accordance with the provisions of this Code.
Section 69. When sale may be questioned. No action to
recover delinquent stock sold can be sustained upon the
ground of irregularity or defect in the notice of sale, or in the
sale itself of the delinquent stock, unless the party seeking to
maintain such action first pays or tenders to the party holding
the stock the sum for which the same was sold, with interest
from the date of sale at the legal rate; and no such action shall
be maintained unless it is commenced by the filing of a
complaint within six (6) months from the date of sale.
Section 70. Court action to recover unpaid subscription.
Nothing in this Code shall prevent the corporation from
collecting by action in a court of proper jurisdiction the
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amount due on any unpaid subscription, with accrued interest,

costs and expenses.
Section 71. Effect of delinquency. No delinquent stock shall
be voted for or be entitled to vote or to representation at any
stockholders meeting, nor shall the holder thereof be entitled
to any of the rights of a stockholder except the right to
dividends in accordance with the provisions of this Code, until
and unless he pays the amount due on his subscription with
accrued interest, and the costs and expenses of advertisement,
if any.
Delinquency Sale Procedure; WHEN SHARES ARE
DECLARED DELINQUENT, WHAT REMEDIES ARE
AVAILABLE TO THE CORPORATION? (68 to 71)
A delinquency sale with the following procedure:
1) BoD by a resolution shall order the sale
2) The sale is set 30-60 days from the date the shares
were declared delinquent;
3) NOTICE to delinquent SH, by personal service or
registered mail;
4) PUBLICATION in a newspaper for two (2)
consecutive weeks;
5) SH may pay if not PUBLIC BIDDING;
6) A new certificate is issued in favor of the winning
bidder;
7) If there is no winning bidder, the shares become
TREASURY SHARES.
HOW DOES THE BIDDING WORK?
The winning bidder is the one who offers t o pay
the FULL AMOUNT OF THE BALANCE (plus interests and
costs) FOR THE SMALLEST NUMBER OF SHARES OR A
FRACTION OF A SHARE.
When there are similar amounts of bids, but
different number of shares, get the one who offered the
smallest number of shares.
When different amounts of bids, but the same number of
shares, get the highest bidder/amount.
When there are different amounts and number of shares, get
the one who offered the smallest number of shares
(provided his bid covers the full amount).
REMEMBER: As long as all the amounts bided are enough
to cover the total amount due, always get the bidder who
offered the smallest number of shares.
If there is more than one bidder offering the same smallest
number of shares, get the bid with the higher amount.
WHAT IS THE PURPOSE OF A DELINQUENCY?

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- To recover the payment for the entire balance of the

subscription, plus interest.
- For a return in the costs of advertisement and sale.
- To protect the interest of the delinquent SH to the extent
possible.
Phil Trust vs. Rivera, 44 PHIL 496

It is established doctrine that subscription to the capital of a

corporation constitute a find to which creditors have a right to
look for satisfaction of their claims and that the assignee in
insolvency can maintain an action upon any unpaid stock
subscription in order to realize assets for the payment of its
debts. (Velasco vs. Poizat, 37 Phil., 802.) 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
an under the conditions prescribed by the statute or the charter
or the articles of incorporation. Moreover, strict compliance
with the statutory regulations is necessary
WHAT ARE THE REQUISITIES TO EFFECTIVELY RELEASE
THE PAYMENT OF SUBSCRIPTION RECEIVABLE?

1.
2.

Consent of ALL the SHs as a subscription contract is

also a contract between and among the SHs.
Consent of ALL the CREDITORS because of the
Trust Fund Doctrine.

TIMELINE:
Shares become delinquent unless otherwise ordered by
the BoD:

Miranda vs. Tarlac Rice Mill, 57 SCRA 619

Section 38 of the Corporation Law provides that the board
of directors of every corporation may at any time declare
due and payable to the corporation unpaid subscriptions
to the capital stock and may collect the same with interest
accrued thereon or such percentage of said unpaid
subscriptions as it may deem necessary. In his work, The
Philippine Law of Stock Corporation page 97, Justice Fisher
expressed the opinion that his power of the directors is
absolute and cannot be limited by the subscription
contract, but this does not mean that the directors may not
rely on the subscription contract if they see fit to do so.
No call is necessary when a subscription is payable, not
upon call or demand by the directors or stockholders, but
immediately, or on a specified day, or on or before a
specified day, or when it is payable in installments at
specified times. In such cases it is the duty of the
subscriber to pay the subscription or installment thereof

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as soon as it is due, without any call or demand, and, if

falls to do so, an action may be brought at any time.
ABAD SANTOS, ;., dissenting:
Considering the reasons behind the provisions of law under
consideration, which, to my mind, account for their
mandatory character, the rule followed in some
jurisdictions that no call is necessary when a subscription
is payable in installments at specified times, should not be
applied here.
In the case at bar, we cannot even indulge in the
presumption that there was a call for subscriptions, for it is
agreed by the parties that, with the exception of Alberto
Miranda, none of the other stockholders of the defendant
corporation has paid or been required to pay on his
subscription. Thus we see here practiced by the directors of
the defendant corporation the very favoritism which the
statutory provisions above mentioned seek to avert. And yet
this court is going to sanction such an evil practice.
** The defense of the subscriber that other subscribers have
not been required to pay is untenable. The SC stated that
after a general call is made, the BoD may, in the exercise of
the BJR (business judgment rule) may, decide against whom to
collect.
However, if it can be shown that the exercise is in
grave abuse of discretion or prompted by discriminatory
motivations, it cannot fall within the BJR.
If the BoD refuses to collect on delinquencies, the
remedy is for the SHs to file a derivative suit.
IT IS WITHIN THE BOARD OF DIRECTORS
DISCRETION TO DECLARE DVIDENDS (EXCEPT
WHEN RETAINED EARNINGS EXCEEDS 100% OF PAID
UP). CAN THE BOARD CHOOSE ONLY SPECIFIED
SHAREHOLDERS TO WHOM DIVIDENDS MUST BE
GIVEN?
NO. The grant of dividends must not be
discretionary.
COMPARE THAT POWER OF THE BOARD WITH ITS
POWER IN DELINQUENCY PROCEEDINGS?
GR: The making of the call is within the BJR.
XPT: When the subscription contract itself fixes the time for
payment (the BoD thus loses its discretion).
XPT to XPT: When the corporation is insolvent the contract
becomes immediately due and demandable.
De Silva vs. Aboitiz, 44 PHIL 755
FACTS: De Silva subscribed for 650 shares of stock of
Aboitiz of the value of P500 each. He only paid for the value
of 200 shares, for which he became indebted to the
corporation in the amount of P255,000, representing the
unpaid value of his subscription. The secretary of the

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corporation notified him of the resolution passed by its

Board, declaring the unpaid subscriptions to have become
due and demandable. Further, the said resolution also stated
that all such shares which remain unpaid will be declared
delinquent, and will be advertised for sale at public auction.
De Silva thus filed a complaint in the CFI against the
corporation, asking the court to enjoin the corporation from
holding such sale. He said that the corporation exceeded its
authority, as he said that its By-laws stated that the unpaid
shares shall be paid out of the 70% of the profit obtained,
which shall be distributed among the subscribers, who shall
not receive any dividend until the shares are paid in full.
Further, he contends that the By-laws provide an operative
way of paying for the shares continuously until their full
amortization. The CFI dismissed the case.
ISSUE: Whether or not, under the provision of article 46
of the bylaws of the defendant corporation, the latter may
declare from unpaid shares delinquent, or collect their
value by another method different from that prescribed in
the aforecited article.
X
X
X
Said article reads thus:
As will be seen from the context of the said article, its first
part specifies the manner in which the net profit resulting
from the annual liquidation should be distributed
So that it is discretionary on the part of the board of
directors to do whatever is provided in the said article
relative to the application of a part of the 70 per cent of the
profit distributable in equal parts on the payment of the
shares subscribed to and not fully paid, and to the creation
of a special emergency fund or extraordinary reserve fund;
and the fact itself that said special fund may not be created
when the dividend appearing to be distributable, after
deducting from the said 70 per cent the amount to be
applied on the payment of the unpaid subscription, is less
than 10 per cent of the capital actually paid, shows that it is
the board of directors and not the delinquent subscriber that
may and must judge and decide whether or not such value
must be paid out of a part of the 70 per cent of the profit
distributable in equal parts among the shareholders, as
provided in the first part of the said article. It lies therefore,
within the discretion of the board of directors to make use
of such authority.
In the instant case, the defendant corporation, through its
board of directors, made use of its discretionary power,
taking advantage of the first of the two remedies provided
by the aforesaid law. On the other hand, the plaintiff has no
right whatsoever under the provision of the above cited
article 46 of the said by-laws to prevent the board of
directors from following, for that purpose, any other method
than that mentioned in the said article, for the very reason
that the same does not give the stockholders any right in
connection with the determination of the question whether
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or not there should be deducted from the 70 per cent of the

profit distributable among the stockholders such amount as
may be deemed fit for the payment of subscriptions due and
unpaid. Therefore, it is evident that the defendant
corporation has not violated, nor disregarded any right of
the plaintiff recognized by the said by-laws, nor exceeded
its authority in the discharge of its executive functions, nor
abused its discretion when it performed the acts
mentioned in the complaint as grounds thereof, and,
consequently, the facts therein alleged do not constitute a
cause of action.
The by laws may provide a remedy for the collection of
unpaid subscriptions. Such remedies are not exclusive of
those provided under the Corpraotion Code (extra-judicial
or judicial sale).
This case contained a similar provision in the by laws as the
National Exchange vs Dexter case, however, in this case a
mere option was being granted to the BoD as opposed to the
said case where it was imperative.
**As long as it is in the power of the BoD. MUST BE
IN THE BYLAWS. In the absence of such
stipulation, the default would be the remedies
provided under the delinquency sale.
*** To add for other ways of payment of unpaid
shares.
**Can you deviate from the authority given by the
bylaws? Or change the provisions under the
delinquency sale?
NO!!! But you can add or insert, using the by-laws
as long as there is no violation of the principle of
Due Process.
Effect: Once you make it mandatory, you must
COMPLY. But again, as to the procedure provided
by the LAW (Corp Code Sec 68 71), NO!!!!! You
cannot change the law.
EG: As to declaration of a delinquent stock:
There is no way that a particular share is delinquent
without resolution
Fun Cun vs. Summers, 44 PHIL 705
The claim was for a subsequent indebtedness of Fua Cun to
the bank and the bank was not claiming under the
subscription agreement but from a mere ordinary obligation.
Thus, as an ordinary creditor, its claims were subject to prior
registration.
GR: A corporation is not bound but the notice of mortgage
of shares if said shares are not fully paid as the corporation
has a lien on unpaid claims which includes shares not fully
paid. Corporate claims over unpaid shares take precedence
over mortgages

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XPT: By way of an exception, even if shares are not fully

paid, the corporation is bound by the notice of mortgage,
if its claim over the shares arises out of a SUBSEQUENT
ORDINARY OBLIGATION E.G indebtedness. If the
corporation, in order to collect a debt from a debtor, who is
the same time a subscriber, AFTER knowledge of the notice
of mortgage, then the mortgagees claim will prevail.
**If there is a delinquency, then the corporation is claiming
from the subscription agreement No attendant circumstances
in this case, in other words, their relationship is that of a creditor
and debtor only.*Just an amount not an unpaid subscription.*
*** Review of Monserrat and Chua Guan cases the STB
(Stock and Transfer Book) is the repository of all transfers of
shares, mortgages, not being transfers has no proper place in
the STB. Annotations of mortgages in the STB do not bind
the world since it is not a repository of mortgages.
HOWEVER, a mortgage of stocks, if registered in the STB or
brought to the knowledge of the corporation, binds the
corporation as long as the shares are fully paid up as notice
is equivalent to registration
*** Can you compel the corporation to put the mortgage in the
STB? WHAT can you compel the corporation to do?
Effect of mortgage?
Summary:
SALE OR ALIENATION:
1) If the shares are FULLY PAID, the corporation is
bound to recognize and record in its books the sale
or alienation.
2) If the shares are NOT FULLY PAID , the corporation
is not bound to recognize not record any sale or
alienation. The STB is not the repository of not
fully paid shares as:
- they are not covered by certificates.
- Section 63 (P2) if unpaid not transferable
to books.
MORTGAGE or ENCUMBRANCE:
Whether or not the shares are fully paid, the corporation is
not bound to register the mortgage in the STB, it cannot be
compelled by mandamys to register.
If FULLY PAID SHARES, then the corporation has no more
previous claim and is thus bound by the notice of mortgage.
If NOT FULLY PAID SHARES, the corporation retains its
previous claim and is therefore not bound by the notice of
mortgage. Between the corporations unpaid claim and the
mortgage, the unpaid claim prevails.
If the corporation is a SUBSEQUENT claim based on an
ordinary obligation and not an unpaid subscription, the
corporation is BOUND by the notice of mortgage.
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g. Trust Fund Doctrine (Sections 43 and 122 of the

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

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Except by decrease of capital stock and as

otherwise allowed by this Code, no corporation shall distribute
any of its assets or property except upon lawful dissolution
and after payment of all its debts and liabilities.
WHAT IS TRUST FUND DOCTRINE? (See also Page 20 of
Midterm Reviewer for Corpo)
The capital stock and other assets of the corporation are
regarded as equity held in trust for the payment of creditors.
Any disposition of corporate funds to the prejudice of
creditors is null and void. Creditors have a right to assume that
so long as there are outstanding debts, the corporation will not
use its assets to purchase its own shares. Capital stock should
not be returned ahead of the liabilities.
2. Classes of Shares
a. Classification of Shares (Section 6 of the Corporation
Code)
Section 6. Classification of shares. The shares of stock of
stock corporations may be divided into classes or series of
shares, or both, any of which classes or series of shares may
have such rights, privileges or restrictions as may be stated in
the articles of incorporation: Provided, That no share may be
deprived of voting rights except those classified and issued as
"preferred" or "redeemable" shares, unless otherwise provided
in this Code: Provided, further, That there shall always be a
class or series of shares which have complete voting rights.
Any or all of the shares or series of shares may have a par
value or have no par value as may be provided for in the
articles of incorporation: Provided, however, That banks, trust
companies, insurance companies, public utilities, and building
and loan associations shall not be permitted to issue no-par
value shares of stock.
Preferred shares of stock issued by any
corporation may be given preference in the distribution of the
assets of the corporation in case of liquidation and in the
distribution of dividends, or such other preferences as may be
stated in the articles of incorporation which are not violative of
the provisions of this Code: Provided, That preferred shares of
stock may be issued only with a stated par value. The board of
directors, where authorized in the articles of incorporation,
may fix the terms and conditions of preferred shares of stock
or any series thereof: Provided, That such terms and
conditions shall be effective upon the filing of a certificate
thereof with the Securities and Exchange Commission.
Shares of capital stock issued without par value shall be
deemed fully paid and non-assessable and the holder of such
shares shall not be liable to the corporation or to its creditors in
respect thereto: Provided; That shares without par value may
not be issued for a consideration less than the value of five
(P5.00) pesos per share: Provided, further, That the entire
consideration received by the corporation for its no-par value
shares shall be treated as capital and shall not be available for
distribution as dividends.
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A corporation may, furthermore, classify its

shares for the purpose of insuring compliance with
constitutional or legal requirements.
Except as otherwise provided in the articles
of incorporation and stated in the certificate of stock, each
share shall be equal in all respects to every other share.
Where the articles of incorporation provide
for non-voting shares in the cases allowed by this Code, the
holders of such shares shall nevertheless be entitled to vote on
the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition
of all or substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another
corporation or other corporations;
7. Investment of corporate funds in another corporation or
business in accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately
preceding paragraph, the vote necessary to approve a
particular corporate act as provided in this Code shall be
deemed to refer only to stocks with voting rights.
***Section 6 provides for the General Rule as to the
Classification of Shares. That, as a default, each share ARE
GIVEN the same rights and privileges.
- Classifications such as preferences will be put in
the Articles of Incorporation.
1. Preferred Shares A share is considered as PREFERRED
if it has CONTRACTUAL rights SUPERIOR to common
stock as to DIVIDENDS or ASSETS in LIQUIDATION or
both. These rights must be provided for in the AoI.
GR: Preferred shares may have as many feature as may be
desired.
LIMITATION: The preferred features must be stated in the
Articles.
The AoI must still conform to the limitations provided by
law. Even if preferences are stated in the AoI, you are still
subject to the presumption of law if an assured 18%
dividend is granted to a Preferred Share, such can only be
given if there subject to the availability of the Unrestricted
Retained Earnings (URE).
IF PREFERENCES ARE GRANTED TO PREFERRED
SHARES (PS), WHAT IS THE DISTINCTION BETWEEN
TSAID SHARES AND COMMON SHARES (CS)?
The CS bears the risk of loss, while PS have priority
in cases of dividends and/or liquidation is to take place,

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whatever assets which remain after payment of debts shall

first be applied to the payment of the investments of PS.
Thus, greater risk is assumed by CS holders.
WHY WOULD A PERSON INVEST TO CS IF THERE
ARE PREFERENCES GIVEN TO PS?
CS are still attractive to the investing public as they,
as a general rule, are granted the right to PARTICIPATE in
management and are given voting rights. As by the
preferences given to FS, you can legally deprive them of
voting rights.
SUBTYPES OF PREFERRED SHARES:
Participating and Non-Participating
Participating shares are those which entitle the holders of
preferred shares to participate with holders of CS in the
surplus profits (after the amount of stipulated dividend had
been granted to said PS).
Non-participating shares entitles the holders of preferred
shares only to the stipulated preferred dividends.
WHEN ARE PS DEEMED PARTICIPATING SHARES?
The right to dividends is an inherent feature of
shareholding, thus the only time you are deprived of such
feature is when there is a stipulation to such effect. Thus, in
the absence of such a stipulation, shares become
participating because SAID RIGHT HAS NOT BEEN
DENIED TO THEM.
- Must be with specifications.
**In the absence of any express stipulation, preferred stocks
are deemed to be non-participating.
Cumulative and non-Cumulative
Cumulative shares are those preferred shares which entitle
the holders to both current dividends and dividends not
paid from previous years. It preferred dividend had not
been paid in full in any year, be said dividends earned or
unearned, the back dividends is paid to CS.
Non-cumulative shares are those preferred shares that are
entitled only to current dividends.
WHEN ARE PS DEEMED CUMULATIVE SHARES?
The right to dividends is an inherent feature of
shareholding, thus the only time you are deprived of such
feature is when there is a stipulation to such effect. Thus, in
the absence of such a stipulation, shares become cumulative
because SAID RIGHT HAS NOT BEEN DENIED THEM.
There is a guaranteed return which must be expressly
denied to justify the failure to carry over.
Section 6 has been made part of the Corporation Code so
that a corporate planner may have all tools needed to attract
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the investing public, with the only limitation being the fact
that preferences must be stated in the AoI.
**In the absence of any express stipulation, preferred stocks
are deemed to be cumulative.
Whatever the reason for such failure, once profits
are made and dividends declared in any subsequent year, all
arrears must be paid to the preferred before the common
stocks can receive any shares on the profits. [Campos 2004]
2. Redeemable Shares (Section 8 of the Corporation Code)
Section 8. Redeemable shares. Redeemable shares may be
issued by the corporation when expressly so provided in the
articles of incorporation. They may be purchased or taken up
by the corporation upon the expiration of a fixed period,
regardless of the existence of unrestricted retained earnings in
the books of the corporation, and upon such other terms and
conditions as may be stated in the articles of incorporation,
which terms and conditions must also be stated in the
certificate of stock representing said shares.
Redeemable shares allow a corporate investor to limit the
period of investment, so as not to wait for the liquidation/
dissolution of the corporation before he can recoup on his
investments.
The fact that a certain kind of shares are deemed redeemable
shares, along with the other terms and conditions for their
redemption must be so stated in the articles.
As a general rule, any and all features granted to shares
must not violate the TRUST FUND DOCTRINE (TFD),
Section 8 is specifically provided as without such provision,
a classification of shares with the features of a redeemable
share is a violation of the Trust Fund Doctrine.
Republic Planters Bank vs. Hon. Agana (GR No. 51765 [1997])
A preferred share of stock, on one hand, is one which
entitles the holder thereof to certain preferences over the
holders of common stock. The preferences are designed to
induce pensions to subscribe for shares of a corporation.
Preferred shares take a multiplicity of forms. The most
common forms may be classified into two: (1) Preferred
shares as to assets; and (2) preferred shares as to dividends.
3. Founders Shares (Section 7 of the Corporation Code).
The former is a share which gives the holder thereof
preference in the distribution of the assets of the corporation
in case of liquidation; the latter is a share the holder of
which is entitled to receive dividends on said share to the
extent agreed upon before any dividends at all are paid to
the holders of common stock. There is no guaranty,
however, that the share will receive any dividends.
Thus, the declaration of dividends is dependent
upon the availability of surplus profit or unrestricted

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retained earnings, as the case may be. Preferences granted to

preferred stockholders, moreover, do not give them a lien
upon the property of the corporation nor make them
creditors of the corporation, the right of the former being
always subordinate to the latter. Dividends are thus payable
only when there are profits earned by the corporation and as
a general rule, even if there are existing profits, the board of
directors has the discretion to determine whether or not
dividends are to be declared. Shareholders, both common
and preferred, are considered risk takers who invest capital
in the business and who can look only to what is left after
corporate debts and liabilities are fully paid.
Redeemable shares, on the other hand, are shares
usually preferred, which by their terms are redeemable at
a fixed date, or at the option of either issuing corporation,
or the stockholder, or both at a certain redemption price. A
redemption by the corporation of its stock is, in a sense, a
repurchase of it for cancellation. The present Code allows
redemption of shares even if there are no unrestricted
retained earnings on the books of the corporation. This is
a new provision which in effect qualifies the general rule
that the corporation cannot purchase its own shares except
out of current retained earnings. However, while
redeemable shares may be redeemed regardless of the
existence of unrestricted retained earnings, this is subject
to the condition that the corporation has, after such
redemption, assets in its books to cover debts and
liabilities inclusive of capital stock. Redemption, therefore,
may not be made where the corporation is insolvent or if
such redemption will cause insolvency or inability of the
corporation to meet its debts as they mature.

3. Founders Shares (Section 7 of the Corporation Code)

Section 7. Founders shares. Founders shares classified as
such in the articles of incorporation may be given certain rights
and privileges not enjoyed by the owners of other stocks,
provided that where the exclusive right to vote and be voted
for in the election of directors is granted, it must be for a
limited period not to exceed five (5) years subject to the
approval of the Securities and Exchange Commission. The
five-year period shall commence from the date of the
aforesaid approval by the Securities and Exchange
Commission.
CAN FOUNDERS SHARES (FS) BE GRANTED TO
NON-FOUNDERS?
YES. Under Section 6, it is legal to issue FS even to a
non-founder. If a right to vote or an exclusive right to be
voted in the BoD is a feature granted to a share under
Section 6 (as opposed to Section 7), the five (5) year
limitation therein will not apply. The reason for such
limitation under Section 7 is the desire not to have founders
perpetuate themselves in office; if the same is created by
virtue of Section 6 there is deemed to be a free choice as to
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the acceptance of limitations (the person knew what he was

getting into prior to entering into the relation).
***Founders shares can be sold or transferred
4. Treasury Shares (Section 9 of the Corporation Code)
Section 9. Treasury shares. Treasury shares are shares of
stock which have been issued and fully paid for, but
subsequently reacquired by the issuing corporation by
purchase, redemption, donation or through some other lawful
means. Such shares may again be disposed of for a reasonable
price fixed by the board of directors. (n)
Treasury Shares Shares that the corporation buys back
after it has issued them. They are issued but NOT
OUTSTANDING shares as opposed to issued to outstanding
shares, which have the rights to vote and of pre-emption.
-After buy-back = No more voting rights.
Commissioner vs. Manning, 66 SCRA 14
Although authorities may differ on the exact legal and
accounting status of so-called "treasury shares," they are
more or less in agreement that treasury shares are stocks
issued and fully paid for and re-acquired by the
corporation either by purchase, donation, forfeiture or
other means. Treasury shares are therefore issued shares,
but being in the treasury they do not have the status of
outstanding shares. Consequently, although a treasury
share, not having been retired by the corporation reacquiring it, may be re-issued or sold again, such share, as
long as it is held by the corporation as a treasury share,
participates neither in dividends, because dividends
cannot be declared by the corporation to itself, nor in the
meetings of the corporation as voting stock, for otherwise
equal distribution of voting powers among stockholders
will be effectively lost and the directors will be able to
perpetuate their control of the corporation, though it still
represents a paid-for interest in the property of the
corporation. The foregoing essential features of a treasury
stock are lacking in the questioned shares.
Under Manning, the share were not treated as treasury
shares as they were transferred to the trustees and not to the
corporation, Treasury shares have two (2) features:
1. At one point in time they were fully paid and
outstanding; and
2. They were acquired by the corporation thru the
modes of ownership.
Shares classified as treasury shares have neither the
right to VOTE(for if they can be used to vote, the BoD will
be the ones to use them, electing their representatives and
thus perpetuating themselves in office) nor to DIVIDENDS
(as it would prejudice the SHs as URE is an equity for SHs).
Treasury shares do not enjoy the right of preemption, however, they are subject to pre-emptive rights

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the disposition of TS are subject to the pre-emptive rights of

the SHs.
b. Watered Stocks (Section 65 of the Corporation Code)
Section 65. Liability of directors for watered stocks. Any
director or officer of a corporation consenting to the issuance
of stocks for a consideration less than its par or issued value
or for a consideration in any form other than cash, valued in
excess of its fair value, or who, having knowledge thereof,
does not forthwith express his objection in writing and file the
same with the corporate secretary, shall be solidarily, liable
with the stockholder concerned to the corporation and its
creditors for the difference between the fair value received at
the time of issuance of the stock and the par or issued value of
the same. (n)
c. Quasi-Reorganization (Section 38 of the Corporation
Code): Section 38 allows the reduction of capital stock and
the reason for such reduction is as follows:
A capital deficit may prevent the distribution of
dividends, thus reducing capital might wipe-out the deficit
and permit the payment of dividends.
If capital invested is more than that is needed for
carrying out the business of the corporation, a reduction of
legal capital may be availed of to distribute as liquidating
dividends said surplus.
- Management strategies:
- Stock Splits- In a stock split, issued shares are
broken up into a greater number of shares, each of which
has a value proportionate to said issued shares prior to the
stock split. A stock split lowers the price of shares to a more
marketable price, possibly attracting more investors.
- Stock Consolidation A stock consolidation
combines issued shares that once comprised a broken group
of such shares. The advantage to such consolidation is it
allows the corporation to place the stocks on a higher strata,
possibly attracting institutional investors.
C. DIVIDENDS AND OTHER DISTRIBUTIONS
Right to Dividends (Section 43 of the Corporation Code)
Section 43. Power to declare dividends. - The board of
directors of a stock corporation may declare dividends out of
the unrestricted retained earnings which shall be payable in
cash, in property, or in stock to all stockholders on the basis of
outstanding stock held by them: Provided, That any cash
dividends due on delinquent stock shall first be applied to the
unpaid balance on the subscription plus costs and expenses,
while stock dividends shall be withheld from the delinquent
stockholder until his unpaid subscription is fully paid:
Provided, further, That no stock dividend shall be issued
without the approval of stockholders representing not less
than two-thirds (2/3) of the outstanding capital stock at a
regular or special meeting duly called for the purpose. (16a)
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Stock corporations are prohibited from retaining surplus

profits in excess of one hundred (100%) percent of their paid-in
capital stock, except: (1) when justified by definite corporate
expansion projects or programs approved by the board of
directors; or (2) when the corporation is prohibited under any
loan agreement with any financial institution or creditor,
whether local or foreign, from declaring dividends without
its/his consent, and such consent has not yet been secured; or
(3) when it can be clearly shown that such retention is
necessary under special circumstances obtaining in the
corporation, such as when there is need for special reserve for
probable contingencies. (n)
Dividend; Definition: a corporate profit set aside, declared
and ordered by the directors to be paid to stockholders on
demand or at a fixed time. [Nolledo 1998]
DOES THE SHAREHOLDERS HAVE A RIGHT TO
DEMAND DIVIDENDS?
YES. Whenever the unrestricted retained earnings is
more than 100% of paid-up capital, the SHs may demand
the declaration of dividends EXCEPT:
If there are expansion projects approved by the BoD if
consent is yet to be obtained for a loan agreement special
circumstances or probable contingencies.
***Dividends are classified into two (2) kinds, namely:
(1) Cash dividends; and (2) Stock dividends. Cash
dividends has numerous variations they may be payable in
cash (money) or property, or bond or in stock of another
corporation (a dividend in stock which is not a stock
dividend), or in scrip. When a cash dividend is payable in
kind (property etc) it is taxable in its fair market value.
[Nolledo 1998]
Nature of Stock Dividends: Stock dividends do not
constitute taxable income except in case of redemption, or
subsequent sale thereof or in case of change of stockholders
interest as in stock operation.
A stock dividend is a fruit or income belonging to
the usufructuary. [Nolledo 1998]
1. Types of Dividends and Other Distributions
Nielsen & Co. vs. Lepanto Consolidated, 26 SCRA 540
(1968)
A "stock dividend" is any dividend payable in
shares of stock of the corporation declaring or authorizing
such dividend. It is, what the term itself implies, a
distribution of the shares of stock of the corporation among
the stockholders as dividends. A stock dividend of a
corporation is a dividend paid in shares of stock instead of
cash, and is properly payable only out of surplus profits. So,
a stock dividend is actually two things: (1) a dividend, and
(2) the enforced use of the dividend money to purchase
additional shares of stock at par. When a corporation issues

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stock dividends, it shows that the corporation's accumulated

profits have been capitalized instead of distributed to the
stockholders or retained as surplus available for distribution,
in money or kind, should opportunity offer. Far from being a
realization of profits for the stockholder, it tends rather to
postpone said realization, in that the fund represented by
the new stock has been transferred from surplus to assets
and no longer available for actual distribution. Thus, it is
apparent that stock dividends are issued only to
stockholders. This is so because only stockholders are
entitled to dividends. They are the only ones who have a
right to a proportional share in that part of the surplus
which is declared as dividends. A stock dividend really
adds nothing to the interest of the stockholder; the
proportional interest of each stockholder remains the same.If
a stockholder is deprived of his stock dividends - and this
happens if the shares of stock forming part of the stock
dividends are issued to a non-stockholder then the
proportion of the stockholder's interest changes radically.
Stock dividends are civil fruits of the original investment,
and to the owners of the shares belong the civil fruits.
Under Section 16 of the Corporation Law stock
dividends cannot be issued to a person who is not a
stockholder in payment of services rendered. And so, in
the case at bar Nielson cannot be paid in shares of stock
which form part of the stock dividends of Lepanto for
services it rendered under the management contract. We
sustain the contention of Lepanto that the understanding
between Lepanto and Nielson was simply to make the case
value of the stock dividends declared as the basis for
determining the amount of compensation that should be
paid to Nielson, in the proportion of 10% of the cash value of
the stock dividends declared.
CASH DIVIDEND
Has variations (cash,
property, bonds or stocks in
other corporations)
Declared by a mere majority
of the BoD
Payable to holders of
delinquent Shs but applied
to unpaid balance and costs
of subscription
Revocable BEFORE
announcement
Involves actual
disbursement [Nolledo 1998]
Becomes absolute property
of stockholder once declared
and paid, making it beyond
the reach of corporate
creditors

STOCK DIVIDEND
Payable in stocks of the
corporation
Declared by the BoD and
approved by 2/3rds of SHs
Stock dividends may be
given but they are withheld
until full payment of the
delinquency
Revocable EVEN AFTER
announcement
Does not involve any
disbursement
Is still part of corporate
property and can, therefore,
be subject to claims of
corporate creditors [Nolledo
1998]

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2. Legal Restrictions on Dividends and Other

Distributions
Unrestricted Retained Earnings: The amount of
accumulated profits and gains realized out of the normal
and continuous operation of the company after deducting
therefrom distributions of stockholders and transfers to
capital stock or other accounts which is:
1) Not appropriated by its BODs for corporate
expansion profits or programs;
2) Not covered by a restriction fro dividend
declaration under a loan agreement; and
3) Not required to be retained under special
circumstances obtaining in the corporation such as
when there is a need for a special reserve for
probable contingencies. [Aquino 2014]
Restricted Retained Earnings: the accumulated profits
realized out of normal and continuous operations of the
business after deducting therefrom distribution of
stockholders or transfers to capital stock or other accounts.
Realized earnings include not only the earnings realized
from the ordinary course of business of the corporation but
also those arising from transactions not associated with but
incidental to or necessary in keeping the business for which
the corporation was organized (e.g Gains from sale of Real
Property). [Ibid]
*** UNRESTRICTED RETAINED EARNINGS
Under Section 43 dividends can only be declared out of
unrestricted retained earnings. In determining the amount
of retained earnings, the following formula is used:
Retained Earnings = Assets [Liabilities and Legal
Capital]
Retained earnings are technically the corporations PROFITS.
For a portion of such retained earnings to be qualified as
UNRESTRICTED it must be shown that such portions has
not been reserved by the board for some corporate purpose
or for some other legal or contractual obligation. Hence,
unrestricted retained earnings is tantamount to actual profits
(profits less business, legal and contractual obligations)
The above restriction is equivalent to the EARNED
SURPLUS TEST, which allows dividends payments only
from excess of net assets of a corporation over its stated
capital. Other tests, allowable in pertinent USA jurisdictions,
are as follows:
1.
2.

SURPLUS TEST where dividends are paid out

from any surplus, be it earned or capital.
NET ASSETS TEST allows dividend payments in
all instances except in situation where the
corporations total assets, after payment of
dividends, is less than the sum of its total liabilities

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and the amount of liquidation preferences to

preferred shares.
NIMBLE DIVIDENDS allows the payment of
dividends from current profits despite the existence
of a deficit for the current year, Thus, the board may
declare dividends during a year where there are no
earnings so long as the corporation had earnings for
the immediately preceding year.

BUSINESS JUDGMENT RULE (BJR)

The existence of URE, does not be itself determine the right
of stockholders to receive dividends, as the decision to
declare dividends is subject to the sound business judgment
of the board. The board can decide not to declare as
dividends surplus profit and the courts will not substitute
its discretion with that of the board so long as there is no
bad faith or abuse of discretion.
3. Declaration and Payment of Dividends
***Requisites for valid declaration of Cash Dividends:
1. Existence of unrestricted retained earnings (URE);
2. Declaration by the BOD for the payment of cash
dividends out of such earnings;
In the declaration of cash dividends, it is only the BOD
that acts or decides there is no need if concurrence by
the shareholders. [Nolledo 1998]
***Requisites for valid declaration of Stock Dividends:
1. Existence of URE;
2. Existence of original and unissued shares which
may be issued as stock dividends (the capital stock
however, may be increased to accomplish issuance
of stock dividends);
3. Dividend declaration is made by the BOD and
approved by 2/3 of the outstanding capital stock at
a regular or special meeting called for the purpose.
It will be noted then that in the declaration of stock
dividends, the stockholders must give their
concurrence; this is not true in case of cash dividends.
[Ibid]
NO DIVIDENDS CAN BE DECLARED OUT OF
CAPITAL: Considering that the legal requirement is that
dividends can be declared out of URE, dividends cannot be
declared out of capital. The Trust Fund Doctrine will be
violated if dividends are declared out of capital.
XPT:
a. In the case if liquidating dividends;
b. In the case of dividends from investment in a
wasting assets corporation. [Nolledo 1998, Campos
2004]
CIR vs. Court of Appeals , GR No. 108576 (20 January 1999)
Stock dividends, strictly speaking, represent capital and
do not constitute income to its recipient. So that the mere
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issuance thereof is not yet subject to income tax as they are

nothing but an "enrichment through increase in value of
capital investment." As capital, the stock dividends
postpone the realization of profits because the "fund
represented by the new stock has been transferred from
surplus to capital and no longer available for actual
distribution."
In a loose sense, stock dividends issued by the
corporation, are considered unrealized gain, and cannot be
subjected to income tax until that gain has been realized.
Before the realization, stock dividends are nothing but a
representation of an interest in the corporate properties.
As capital, it is not yet subject to income tax. It should be
noted that capital and income are different. Capital is
wealth or fund; whereas income is profit or gain or the
flow of wealth. The determining factor for the imposition of
income tax is whether any gain or profit was derived from a
transaction.
EXCEPTION: However, if a corporation cancels or redeems
stock issued as a dividend at such time and in such manner
as to make the distribution and cancellation or redemption,
in whole or in part, essentially equivalent to the distribution
of a taxable dividend, the amount so distributed in
redemption or cancellation of the stock shall be considered
as taxable income to the extent it represents a distribution of
earnings or profits accumulated after March first, nineteen
hundred and thirteen.
Corporate earnings would be distributed under the guise
of its initial capitalization by declaring the stock
dividends previously issued and later redeem said
dividends by paying cash to the stockholder. This process
of issuance-redemption amounts to a distribution of taxable
cash dividends which was just delayed so as to escape the
tax. It becomes a convenient technical strategy to avoid the
effects of taxation.
Thus, to plug the loophole the exempting clause was
added. It provides that the redemption or cancellation of
stock dividends, depending on the time and manner it
was made, is essentially equivalent to a distribution of
taxable dividends, making the proceeds thereof taxable
income to the extend it represents profits. The exception
was designed to prevent the issuance and cancellation or
redemption of stock dividends, which is fundamentally
not taxable, from being made use of as a device for the
actual distribution of cash dividends, which is taxable.
***As qualified by the phrase such time and in such
manner the exception was not intended to characteristics
as taxable dividend every distribution of earnings arising
from the redemption of the equivalent of a taxable
dividend is a question of fact, which is determinable on

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the basis of the particular facts of the transaction in

question. No decisive test can be used to determine the
essentially equivalent negative any idea that a weighted
formula can resolve a crucial issue. Should the
distribution be treated as taxable dividend? On this
aspect, American courts developed certain recognized
criterion, which includes the following:
1. The presence or absence of real business purpose
2. The amount of earnings and profits available for the
declaration of a regular dividends and the
corporations past record with respect to the
declaration of dividends;
3. The effect of the distribution as compared with the
declaration of regular dividend;
4. The lapse of time between issuance and redemption;
5. The presence of substantial surplus and generous
supply of cash which invites suspicious does a
meager policy in relation to both current earnings
and accumulated surplus.
4. Liability for Improper Dividends and
Distributions
Steinberg vs. Velasco, 52 PHIL 953 (1929)
D. TRANSFER OF INVESTMENT SECURITIES
1. Ownership of Securities
a. Right to Issuance (Section 64 of the Corporation Code)
Section 64. Issuance of stock certificates. No certificate of
stock shall be issued to a subscriber until the full amount of his
subscription together with interest and expenses (in case of
delinquent shares), if any is due, has been paid.
Baltazar vs. Lingayen Gulf, 14 SCRA 522
b. Joint Ownership (Section 56 of the Corporation Code)
Section 56. Voting in case of joint ownership of stock. In
case of shares of stock owned jointly by two or more persons,
in order to vote the same, the consent of all the co-owners shall
be necessary, unless there is a written proxy, signed by all the
co-owners, authorizing one or some of them or any other
person to vote such share or shares: Provided, That when the
shares are owned in an "and/or" capacity by the holders
thereof, any one of the joint owners can vote said shares or
appoint a proxy therefor. (n)
c. Pledgor, Mortgagor and Administrators (Section 55 of
the Corporation Code)
Section 55. Right to vote of pledgors, mortgagors, and
administrators. In case of pledged or mortgaged shares in
stock corporations, the pledgor or mortgagor shall have the
right to attend and vote at meetings of stockholders, unless the
pledgee or mortgagee is expressly given by the pledgor or
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mortgagor such right in writing which is recorded on the

appropriate corporate books. (n)
Executors, administrators, receivers, and other legal
representatives duly appointed by the court may attend and
vote in behalf of the stockholders or members without need of
any written proxy. (27a)
d. Pooling Agreements
- Control and Board Discretion (Section 100 of the
Corporation Code)
Section 100. Agreements by stockholders. 1. Agreements by and among stockholders executed before the
formation and organization of a close corporation, signed by
all stockholders, shall survive the incorporation of such
corporation and shall continue to be valid and binding
between and among such stockholders, if such be their intent,
to the extent that such agreements are not inconsistent with
the articles of incorporation, irrespective of where the
provisions of such agreements are contained, except those
required by this Title to be embodied in said articles of
incorporation.
2. An agreement between two or more stockholders, if in
writing and signed by the parties thereto, may provide that in
exercising any voting rights, the shares held by them shall be
voted as therein provided, or as they may agree, or as
determined in accordance with a procedure agreed upon by
them.
3. No provision in any written agreement signed by the
stockholders, relating to any phase of the corporate affairs,
shall be invalidated as between the parties on the ground that
its effect is to make them partners among themselves.
4. A written agreement among some or all of the stockholders
in a close corporation shall not be invalidated on the ground
that it so relates to the conduct of the business and affairs of
the corporation as to restrict or interfere with the discretion or
powers of the board of directors: Provided, That such
agreement shall impose on the stockholders who are parties
thereto the liabilities for managerial acts imposed by this Code
on directors.
5. To the extent that the stockholders are actively engaged in
the management or operation of the business and affairs of a
close corporation, the stockholders shall be held to strict
fiduciary duties to each other and among themselves. Said
stockholders shall be personally liable for corporate torts
unless the corporation has obtained reasonably adequate
liability insurance.
e. Stock and Transfer Book (Section 74 of the Corporation
Code)
Section 74. Books to be kept; stock transfer agent. Every
corporation shall keep and carefully preserve at its principal
office a record of all business transactions and minutes of all
meetings of stockholders or members, or of the board of
directors or trustees, in which shall be set forth in detail the

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time and place of holding the meeting, how authorized, the

notice given, whether the meeting was regular or special, if
special its object, those present and absent, and every act done
or ordered done at the meeting. Upon the demand of any
director, trustee, stockholder or member, the time when any
director, trustee, stockholder or member entered or left the
meeting must be noted in the minutes; and on a similar
demand, the yeas and nays must be taken on any motion or
proposition, and a record thereof carefully made. The protest
of any director, trustee, stockholder or member on any action
or proposed action must be recorded in full on his demand.
The records of all business transactions of the corporation and
the minutes of any meetings shall be open to inspection by any
director, trustee, stockholder or member of the corporation at
reasonable hours on business days and he may demand, in
writing, for a copy of excerpts from said records or minutes, at
his expense.
Any officer or agent of the corporation who shall refuse to
allow any director, trustees, stockholder or member of the
corporation to examine and copy excerpts from its records or
minutes, in accordance with the provisions of this Code, shall
be liable to such director, trustee, stockholder or member for
damages, and in addition, shall be guilty of an offense which
shall be punishable under Section 144 of this Code: Provided,
That if such refusal is made pursuant to a resolution or order
of the board of directors or trustees, the liability under this
section for such action shall be imposed upon the directors or
trustees who voted for such refusal: and Provided, further,
That it shall be a defense to any action under this section that
the person demanding to examine and copy excerpts from the
corporations records and minutes has improperly used any
information secured through any prior examination of the
records or minutes of such corporation or of any other
corporation, or was not acting in good faith or for a legitimate
purpose in making his demand.
Stock corporations must also keep a book to be known as the
"stock and transfer book", in which must be kept a record of all
stocks in the names of the stockholders alphabetically
arranged; the installments paid and unpaid on all stock for
which subscription has been made, and the date of payment of
any installment; a statement of every alienation, sale or transfer
of stock made, the date thereof, and by and to whom made;
and such other entries as the by-laws may prescribe. The stock
and transfer book shall be kept in the principal office of the
corporation or in the office of its stock transfer agent and shall
be open for inspection by any director or stockholder of the
corporation at reasonable hours on business days.
No stock transfer agent or one engaged principally in the
business of registering transfers of stocks in behalf of a stock
corporation shall be allowed to operate in the Philippines
unless he secures a license from the Securities and Exchange
Commission and pays a fee as may be fixed by the
Commission, which shall be renewable annually: Provided,
That a stock corporation is not precluded from performing or
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making transfer of its own stocks, in which case all the rules
and regulations imposed on stock transfer agents, except the
payment of a license fee herein provided, shall be applicable.
(51a and 32a; P.B. No. 268.)
Chua Guan vs. Samahang Magsasaka, 62 PHIL 472
Monserat vs. Ceran, 58 PHIL 469
f. Lost or Destroyed Certificates (Sec. 73 of the
Corporation Code)
Section 73. Lost or destroyed certificates. The following
procedure shall be followed for the issuance by a corporation
of new certificates of stock in lieu of those which have been
lost, stolen or destroyed:
1. The registered owner of a certificate of stock in a corporation
or his legal representative shall file with the corporation an
affidavit in triplicate setting forth, if possible, the
circumstances as to how the certificate was lost, stolen or
destroyed, the number of shares represented by such
certificate, the serial number of the certificate and the name of
the corporation which issued the same. He shall also submit
such other information and evidence which he may deem
necessary;
2. After verifying the affidavit and other information and
evidence with the books of the corporation, said corporation
shall publish a notice in a newspaper of general circulation
published in the place where the corporation has its principal
office, once a week for three (3) consecutive weeks at the
expense of the registered owner of the certificate of stock
which has been lost, stolen or destroyed. The notice shall state
the name of said corporation, the name of the registered owner
and the serial number of said certificate, and the number of
shares represented by such certificate, and that after the
expiration of one (1) year from the date of the last publication,
if no contest has been presented to said corporation regarding
said certificate of stock, the right to make such contest shall be
barred and said corporation shall cancel in its books the
certificate of stock which has been lost, stolen or destroyed and
issue in lieu thereof new certificate of stock, unless the
registered owner files a bond or other security in lieu thereof
as may be required, effective for a period of one (1) year, for
such amount and in such form and with such sureties as may
be satisfactory to the board of directors, in which case a new
certificate may be issued even before the expiration of the one
(1) year period provided herein: Provided, That if a contest has
been presented to said corporation or if an action is pending in
court regarding the ownership of said certificate of stock
which has been lost, stolen or destroyed, the issuance of the
new certificate of stock in lieu thereof shall be suspended until
the final decision by the court regarding the ownership of said
certificate of stock which has been lost, stolen or destroyed.
Except in case of fraud, bad faith, or negligence on the part of
the corporation and its officers, no action may be brought
against any corporation which shall have issued certificate of

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stock in lieu of those lost, stolen or destroyed pursuant to the

procedure above-described. (R.A. 201a)
2. Transfer of Securities
a. Transfer of Shareholding (Section 63 of the Corporation
Code)
Section 63. Certificate of stock and transfer of shares. The
capital stock of stock corporations shall be divided into shares
for which certificates signed by the president or vice president,
countersigned by the secretary or assistant secretary, and
sealed with the seal of the corporation shall be issued in
accordance with the by-laws. Shares of stock so issued are
personal property and may be transferred by delivery of the
certificate or certificates indorsed by the owner or his attorneyin-fact or other person legally authorized to make the transfer.
No transfer, however, shall be valid, except as between the
parties, until the transfer is recorded in the books of the
corporation showing the names of the parties to the
transaction, the date of the transfer, the number of the
certificate or certificates and the number of shares transferred.
No shares of stock against which the corporation holds any
unpaid claim shall be transferable in the books of the
corporation. (35)
Uson vs. Diosomito, 61 PHIL 535
Escano vs. Filipinas Mining, 74 PHIL 711
Ponce vs. Alsons Cement (GR No. 139802 [2002])
Tan vs. SEC (GR No. 95696 [1992])
b. Remedy if Transfer is Refused
Hager vs. Bryan, 19 PHIL 138
Batong Buhay vs. CA, 147 SCRA 4
Won vs. Wack Wack Golf Club, 104 PHIL 466
d. Validity of Restrictions
Lambert vs. Fox, 26 PHIL 588
Fleishcher vs. Botica Nolasco, 47 PHIL 583
Padgett vs. Babcock and Templeton, 59 PHIL 232
e.
Forged Transfers
Sta. Maria vs. Hongkong and Shanghai, 89 PHIL 780
De Los Santos vs. Republic, 96 PHIL 577
f.
Non-transferability of Membership in a
Non-Stock Corporation (Section 90 of the Corporation
Code)

III. MANAGEMENT STRUCTURE

A. CORPORATE GOVERNANCE
1. Powers of the Board or Trustees
(Section 23 of the Corporation Code)
Gamboa vs. Victoriano, 90 SCRA 40 (1979)
Gokongwei vs. SEC, 89 SCRA 336, (1979)

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a. Must act as a body (Section 25 of the Corporation Code)

Islamic Directorate vs. CA, GR No. 117897 [14 May
1997]
Ramirez vs. Orientalist, 38 PHIL 634 (1918)
Board of liquidators vs. Kalaw, 20 SCRA 987
(1967)
Acuna vs. Batac Producers, 20 SCRA 562 (1967)
Harden vs. Benguet Consolidated, 58 PHIL 1140
(1948)
b. Executive Committee (Section 35 of the Corporation
Code)
B.
ROLE OF SHAREHOLDERS
Right to Vote and Attend Meetings (Section 89 of the
Corporation Code)
Price vs. Martin, 58 PHIL 707
a. Instances:
- Election of Directors and Trustees
(Section 24 of the
Corporation Code)
- Amendment of Articles of
Incorporation
(Section 16 of the Corporation
Code)
- Investment in another Business
(Section 42 of the Corporation
Code)
Dela Rama vs. Ma-ao Sugar, 27
SCRA 247
Gokongwei vs. SEC, 89 SCRA 336,
(1979)
- Merger and Consolidation
(Section 77 of the Corporation
Code)
- Increase and Decrease of Capital
Stock
(Section 38 of the Corporation
Code)
- Adoption, Amendment, and Repeal of By-Laws
(Section 48 of the Corporation
Code)
- Declaration of Stock Dividends
(Section 43 of the Corporation
Code)
- Management Contracts
(Section 44 of the Corporation
Code)
- Fixing of Consideration for Par
Value Shares
(Section 62 of the Corporation
Code)
b. Treasury Shares (Section 57 of the
Corporation Code)

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c. Conduct of Stockholders or Members

Meetings

- Kinds and Requirements of

Meetings

(Sections 49 and 50 of the

Corporation Code)

- Place and Time of Meeting

(Section 51 and 93 of the

Corporation Code)

- Quorum (Section 52 of the

Corporation Code)
Lanuza vs. Court of Appeals (GR No. 131394
[2005])

Stockholders

d. Contracts and Agreements Affecting

Corporation Code)
Corporation Code)

a.

Proxy (Section 58 of the

b.

VTA (Section 59 of the

Lee vs. Court of Appeals,

205 SCRA 752 [1992]
NIDC vs. Aquino, 163 SCRA 153
c.
Pooling agreements (Section 100
of the Corporation Code)
C.
ENFORCEMENT OF RIGHTS OF
SHAREHOLDERS
a. Right to Inspect
1. Specified Records (Sections 74 and 75 of
the Corporation Code)
2. Remedies
Philpots vs. Phil Manufacturing,
40 PHIL 471
Pardo vs. Hercules, 46 PHIL 964
Veraguth vs. Isabela Sugar, 57
SCRA 266
Gonzales vs. PNB, 122 SCRA 489
3. Confidential Nature of SEC
Examinations
(Section 142 of the Corporation
Code)
b.
Appraisal Right (Sections 81 to 86 of the
Corporation Code)
c.
Derivative Suits
Richardson vs. Arizona Fuels
Corp., 614 P.2d 636
Bitong vs. CA (GR No. 123553 [1998])
SMC vs. Khan, 176 SCRA 447
Pascual vs. Orosco, 19 PHIL 83
Evangelista vs. Santos, 86 PHIL
387

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Republic Bank vs. Cuadero, 19

SCRA 671
D.

Reyes vs. Tan, 3 SCRA 198

ROLE OF DIRECTORS AND OFFICERS

1.
Function of the Board of Directors
a.
Role of directors, officers and trustees
Generally:
Rural Bank Of Milaor vs. Ocfemia (GR No. 137686
[2000])
2.

Election and Tenure of Directors/Trustees

a.

Qualifications of directors and trustees

(Section 44 of the Corporation Code)
Lee vs. Court of Appeals, 205
SCRA 752 [1992]
Gokongwei vs. SEC, 89 SCRA 336, (1979)
Detective & Protective Bureau vs.
Cloribel, 26 SCRA 255 (1968)

Code)

Directors (Sections 24 and 26 of the Corporation

Grace Christian HS vs. CA, GR No.

108905, [23 October 1997]

Trustees (Section 92 and 138 of the Corporation Code)
a. Cumulative Voting (Villianueva, Philippine Corporate
Law)
1. Cole Formula
2. Glassner Formula
3. DHondt Remainders Table
b. Vacancy in the board
(Section 29 of the Corporation Code)
c. Term of office; Hold-Over Principle
(Section 23 of the Corporation Code)
Ponce vs. Encarnacion, 94 PHIL 81
(1953)
d.
Removal of directors or trustees
- Section 28 of the Corporation Code
Roxas vs. Dela Rosa, 49 PHIL 609 (1926)
4.
a.

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(Section 25 of the Corporation Code)

Ongkingco vs. NLRC, 270 SCRA 613 [1997]
Tabang vs. NLRC, 266 SCRA 462 [1997]
Gurrea vs. Lezama, 103 PHIL 553 (1958)
PSBA vs. Leano, 127 SCRA 778 (1984)
Pearson & George vs. NLRC, 67 SCAD 698, 30 Jan 1996 (113928)
Reahs Corporation vs. NLRC, GR No. 117473 [14 April
1997]
6.

Duties of Directors and Officers

a. Duty of Obedience
b. Duty of Diligence; Business Judgement Rule
(Section 31 of the Corporation Code)
Smith vs. Van Gorkom, 488 A.2nd
858 (1985)
Montelibano vs. Bacold-Murica, 5 SCRA 36 (1962)
Board of Liquidators vs. Kalaw, 20 SCRA 987
(1967)
c. Duty of Loyalty; Doctrine of Corporate Opportunity
(Section 31 and 34 of the Corporation Code)
d. Corporate Dealings
(Section 32 of the Corporation Code)
Mead vs. McCullough, 21 PHIL 95
(1911)
Prime White Cement vs. IAC, 220
SCRA 103 (1993)
e. Contracts between corporations with interlocking
directors
(Section 33 of the Corporation Code)

IV.

FUNDAMENTAL CHANGES

A.

CHARTER AMENDMENTS

a.Articles of Incorporation (Section 16 of the Corporation

Code)
b.By Laws (Section 48 of the Corporation Code)

Exercise of Directors Functions

B.

Meetings of directors or trustees

(Section 49 and 53 of the Corporation

a.Concept of Merger and Consolidation

PNB vs. Andrada Electric (GR No. 142936 [2002])
b. Procedure
- Plan of Merger or Consolidation
(Section 76 of the Corporation Code)
- Stockholders or Members Approval
(Section 77 of the Corporation Code)
- Articles of Merger or Consolidation
(Section 78 of the Corporation Code)
- Approval by the SEC

Code)
Expertravel & Tours, Inc. vs. CA (GR No. 152392 [2005])
b.
Compensation for directors or trustees
(Section 30 of the Corporation Code)
Western Institute of Technology vs. Salas (GR No. 113032
[1997])
5.

(BO2)

Officers

COMBINATIONS

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(Section 79 of the Corporation Code)

c. Effects of Merger or Consolidation
(Section 80 of the Corporation Code)
Associated Bank vs. CA (GR No. 123793 [1998])
Filipinas Port Services, Inc. vs. NLRC (GR No.
97237 [1991])
REHABILITATION
PVB Employees Union-N.U.B.E. vs. Vega (G.R. No.
105364 [2001])
PAL vs. Spouses Sadic (GR No. 146698 [2002])
RCBC vs. IAC (GR No. 74851 [1999])

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V.

DISSOLUTION
a. Dissolution (Section 177 of the Corporation

Code)

1. Voluntary
- No creditors are affected
(Section 188 of the Corporation Code)
- Creditors are affected
(Section 119 of the Corporation Code)
2. Involuntary Dissolution
(Section 121 of the Corporation Code, Section 6)
(Section 2 of Rule 66 of the Rules of Court)
Quo-Warranto
Republic vs. Bisaya Land Transportation, 81 SCRA 9
Government vs. Philippine Sugar Estate, 38 PHIL 15
Republic vs. Security Credit, 19 SCRA 58
3. Expiration of Term (Section 122 of the
Corporation Code)
4. Shortening of Corporate Term
(Sec. 120 of the Corporation Code)
5. Non-Use of Corporate Charter and
Continuous Inoperation
(Section 22 of the Corporation
Code)
b. Liquidation of Corporate Assets
(Section 122 of the Corporation Code)
Buenaflor vs. Camarines Sur Industry, 108 SCRA 472
National Abaca vs. Pore, 2 SCRA 989
Tan Tiong Bio vs. CIR, 100 PHIL 86
Gelano vs CA, 103 SCRA 90
c. Methods of Liquidation
Board of Liquidators vs. Kalaw, 20 SCRA 987
China Banking vs. Michelin, 58 PHIL 261
Republic vs. Marsman, 44 SCRA 418
Alhambra Sugar vs. SEC, 24 SCRA 269
d.

Rules for Non-Stock Corporations

Rules on Foundations
(Sections 94 and 95 of the Corporation Code)
e.
Right to Proportionate Share of
Remaining Assets upon Dissolution

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Foreign Corporation
a. Definition (Section 123 of the Corporation

Code)

C.

D.

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Avon Insurance PLC vs. CA (GR No. 97642 [1997])

b. Concept of Doing Business
(Article 44 of the Omnibus Investments

Code)

(Section 1 (f) of the Implementing Rules of the

Omnibus Investments Code)
- Application for License
(Section 124 and 125 of the Corporation Code)
(Article 48 of the Omnibus
Investments Code)
- Issuance of a License (Section 126 of the
Corporation Code)
(Article 49 of the Omnibus
Investments Code)
- Amendment of License (Section 131 of
the Corporation Code)
Columbia Pictures, Inc. vs. CA
(GR No. 110318 [1996])
Granger Associates vs. Microwave
Systems, 189 SCRA 631
Marubeni vs. Tensuan, 190 SCRA 105
Facilities Management vs. Dela Osa, 89 SCRA 131
Top-Weld vs. ECER, 138 SCRA 118 (GR 44944 (1985)]
Schmid vs. Oberly, 116 SCRA 186
Mentholatum vs. Mangaliman, 72 PHIL 525
Aetna Casualty vs. Pacific Star Line, 80 SCRA 635
Agilent Technologies Singapore (PTE) LTD. vs.
Integrated Silicon Technology Philippines
Corporation
(GR No. 154618 [2004])
- Effects of Failure to Obtain License
(Sec. 133 of the Corporation Code)
Commissioner vs. KMK Gani, 182 SCRA 591
Marshal Wells vs. Elser, 46 PHIL 71
Western Equipment vs. Reyes, 51 PHIL 115
c. Applications and Effect of Local Laws on the Right of a
foreign Corporation to Sue (SCRA Annotation 114 SCRA
429)
d. Resident Agent (Sections 127 and 128 of the
Corporation Code)
e. Applicable Laws to Foreign Corporations
(Section129 of the Corporation Code)
- Grey vs. Insular Life, 67 PHIL 139
f.

Amendment of Articles of Incorporation

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(Section 130 of the Corporation Code)

g. Merger and Consolidation (Section 132 of the
Corporation Code)

(BO2)

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i. Withdrawal of Foreign Corporation

(Section 136 of the Corporation Code)

h. Revocation of License (Section 134 and 135 of the

Corporation Code)

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