CORPORATION LAW FINALS REVIEWER 2012

(Alex.Paula.Mae.Jian.Macri.Venus.Althea) 3. PARTNERSHIP 1767 Civil Code -by a contract of partnership, 2 or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves. May be brought about by express or implied consent established for the common benefit of all parties presupposes a personal relationship between the partners based on mutual trust and confidence death or incapacity of one partner results in DISSOLUTION JOINT VENTURE In the nature of a partnership contract, created for the purpose of prosecuting a particular business transactions a one-time grouping of 2 or more persons in a specified undertaking Similarities with a partnership in both, there is a community of interest in the undertaking sharing of profits and losses mutual right of controlled Difference from partnership GR: Corporations cannot enter into partnerships EX: When allowed by the SEC when the following conditions are met: 1. If the Articles of Incorporation expressly authorizes the corporation to enter into contracts of partnership 2. the Articles of Partnership MUST PROVIDE: that all partners will manage the partnership 3. The Articles of Partnership MUST PROVIDE: that ALL PARTNERS are JOINTLY AND SEVERALLY LIABLE for the obligations of the partnership

1) Introduction
1. KINDS OF BUSINESS ORGANIZATION 4 FORMS OF BUSINESS ESTABLISHMENTS IN THE PHILS: Sole proprietorship Partnership Joint Venture Corporation Corporation is the most important, because it allows combination of resources of investors to raise the much needed capital for large scale business or enterprise. It creates employment opportunities. SOLE PROPRIETORSHIP A one-man form of business entity owns all the assets personally answers all liabilities suffers all the losses and enjoys all the profits to the exlusion of others PROS: has none of the bureaucratic processes in a corporation makes his own decisions, can act without delay or formalities he owns all the profits, does not share themselves CONS: the owner has unlimited liability for all debts of the enterprise, can be held answerable even beyond his capital or investment in the business even his personal properties NOT USED IN THE BUSINESS may be subject to attachment/foreclosure by creditors limited capital and resources

4.

2.

JOINT VENTURE

PARTNERSHIP distinct and

2) Definition and Attributes

ATTRIBUTES 1. It is an ARTIFICIAL BEING It has a juridical personality, separate and distinct from the persons composing it Exists independently from the stockholders, members or officers 2. CREATED BY OPERATION OF LAW Mere agreement of the persons composing it does not grant its independent existence as a juridical entity States consent can only be granted through compliance with the requirements imposed by law 3. RIGHT OF SUCCESSION Unlike in partnership, the death, incapacity or civil interdiction of one or more of the stockholders does not result in its dissolution. A corporations existence is independent of the individuals or persons composing it. 4. W/ POWERS, ATTRIBUTES, AND PROPERTIES EXPRESSLY AUTHORIZED BY LAW OR INCIDENT TO ITS EXISTENCE A corporation can exercise only such powers, and hold such properties as are granted to it by the enabling statutes. LBC v. CA 1. Carloto, incumbent President-Manager of Rural Bank of Labason alleged: That on Nov 12, 1984 he was in Cebu City transacting business with the Central Bank Regional Office He was instructed to go to Manila on or before Nov. 21, 1984 to follow-up the Rural Banks plan of payment of rediscounting obligations with the main office of Central Bank.

do not have a distinct and separate Partnerships have personality from the persons separate personality composing it

Only for a particular or single Object is a general business of a transaction particular kind (Note: although there may be partnership for a single transaction Corporations may enter into Joint Corporations are generally not eligible Ventures to be a partner in a partnership Ratio: because (1) when a corporation enters into a partnership, its identity is lost or merged with that of another; (2) the discretion of the officials is placed in other hands than those permitted by the law of its creation 4. CORPORATION = Sec. 1: An artificial being, created by operation of law, with the right of succession, and with the powers, attributes and properties expressly authorized by law or incident to its existence

HISTORICAL BACKGROUND In the Philippines, the concept evolved from Spanish law on sociedad anonimas, similar to American corporations governed by Code of Commerce of Spain, which was extended to the Philippines in 1988

He purchased a round trip ticket to Manila, phoned his sister ro send him Php1000 for pocket money and some rediscounting papers thru LBC DIPOLOG. 2. Nov 16, 1984 documents arrived without the cashpack. 3. Nov 24, 1984 he was compelled to go to Dipolog City to claim the money at LBC, but to no avail. 4. Nov 27, 1984 he went back to Cebu City at LBC, was advised that the money was returned to LBC Dipolog. 5. Dec 15, 1984 only on this date did he receive the money. 6. Carloto filed action for DAMAGES arising from non-performance of Obligation: Because of the delay of the cashpack, he failed to submit the rediscounting documents to Central Bank on time. So his rural bank was made to pay Php32000 as penalty interest, and he suffered embarrassment and humiliation. That LBC wantonly and recklessly disregarded its obligations W Rural Bank of Labason (an artificial person) can be awarded moral damages NO. 1. A corporataion, an artificial person, and having existence only in legal contemplation, has no feelings, no emotions, no senses. It cannot experience physical suffering and mental anguish. A corporation is not entitled to moral damages. A corporation may have a good reputation which if besmirched, may also be a ground for the award of moral damages (Mambulao Lumber vs. PNB) In Simex vs. CA (1990), the court awarded moral damages to a juridical entity, in lieu of nominal damages. The court cited Article 2205 Civil Code: actual and compensatory damages may be awarded to a juridical entity for injury to plaintiffs business or commercial credits. ADVANTAGES OF CORPORATE FORM OF BUSINESS 1. Capacity to act as a single unit 2. Limited Shareholders liability 3. Continuity of existence 4. Feasibility of greater undertaking 5. Transferability of shares

6. 7.

Centralized management Standardized method of organization, management and finance

DISADVANTAGES OF THE CORPORATE FORM OF BUSINESS 1. A formal proceeding is required before a valid and binding corporate act can be had. 2. The business transactions of a corporation is limited to the State of its incorporation. Still requires a license from a foreign state. 3. Transfers of shares may result in uniting incompatible and conflicting interests (because of the very nature of shares of stock which are personal properties, transferable at will of the owners) 4. Minority shareholders have practically no say in the conduct of corporate affairs 5. In large corporations, stockholders voting rights may become fictitious because of: disinterest in management, wide-scale ownership and inaccessible place of meeting. 6. Double taxation may be imposed on corporate income. DISTINCTIONS BET. A CORPORATION AND A PARTNERSHIP CORPORATION Created by law or by operation of law. (2, 5) Requires at least (5) incorporators; except a corporation sole. (10, 100) Can exercise only those powers and functions expressly granted to it by law; and those that are necessary/ incidental to its existence. (2, in re: 45) Must transact business though the BOD, unless validly delegated expressly or impliedly. (23) Has the right of succession; continues to exist despite death, withdrawal, incapacity or civil PARTNERSHIP Created by mere agreement of the parties(1767, NCC) Requires at least (2) natural persons. (1767, NCC) Can do anything by agreement of the parties. Provided: not contrary to law, morals, good customs and public policy or order. (1306, NCC) Any one of the partners may validly bind the partnership. Unless: agreement to the contrary. (1308, NCC) Since a partnership is based on mutual trust and confidence, the death, incapacity, insolvency, civil

interdiction of the SH/ members. (2)

Any SH can transfer, sell or assign his shares of stock without the consent of other SH. The transferee becomes SH of the corp (63) Liability of each sH is limited only to the extent of their subscription or their promised contributions.

Corporate existence is limited to only 50 years. Unless: Extended by amendment in accordance with Sec. 11. After this term, it will exist only for (3) years for the purpose of liquidation. (122) A corporation cannot be dissolved by the mere agreement of SH. The consent of the State is necessary for it to cease as a body corporate.

interdiction or withdrawal of one of the partners will result in dissolution. (1830, pars. 6 and 7, NCC) A partner cannot transfer his rights or interest in the partnership without the consent of the other partners (1813, NCC) All partners, including industrial ones (except a limited partner, in limited partnership) are liable PRO RATA with all their property and after all the partnership property has been exhausted, for all the partnership liability. (1824, NCC) May exist for an indefinite period, subject only to the causes of dissolution provided for by the law of its creation. (1830, NCC)

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officers, nor any liability incurred by any such stockholders, members, directors or officers, shall be removed or impaired either by the subsequent dissolution of said corporation or by any subsequent amendment or repeal of this Code or any part thereof. The Corpo Code places all corporations registered under its provision to be under the control and supervision of the SEC. (19, 144) (PD 902-A, Sec. 3)

CLASSIFICATION OF CORPORATIONS A. Sec. 3 CLASSES OF CORPORATIONS corporations formed under this Code may either be Stock or Non-stock corporations. STOCK corporations corporations which have capital stock, divided into shares, and are authorized to distribute to the holders or such shares dividends or allotments of the surplus profits on the basis of the shares. NON STOCK corporations all other private corporations. B. (2) requisites to be classified as stock corporations: capital stock divided into shares authority to distribute dividends or allotments of surplus profits to its stockholders, based on the shares held by each of them C. Whereas non-stock corporations those where no part of their income is distributable as dividends to its members, trustees or officers subject to the provision on dissolution (87) CIR vs. CLUB FILIPINO INC. DE CEBU (1968) Club operates a clubhouse, and a bar restaurant where it sells wines and liquors, meals and short orders to its members and their guests. 1951 the club declared stock dividends because of capital surplus arising from re-evaluation of its real properties. No cash dividends were distributed to the stockholders.

Partners may dissolve their partnership at will or any time they deem fit.

GOVERNMENT POWERS IN RELATION TO CORPORATIONS. 1. The State regulates corporations through the exercise of its police power, eminent domain, and taxation. 2. However, a corporation is protected by statutory provisions (esp: Constitution), from arbitrary exercise of the powers of the government. Due Process Clause Equal Protection Clause Non-impairment of obligations and contract Sec. 145: no rights or remedy in favor or against any corporation, its stockholders, members, directors or

1952 BIR assessed the Club fixed and percentage taxes as a keeper of restaurant /bar where wines and liquors are served. W Club is liable for the taxes No. Mere operation of a bar and restaurant does not ipso facto give rise to liability for fixed and percentage. For liability to attach, the operator must be engaged in the business as a barkeeper and restauranteur. Business means activities for profit or livelihood. Here, the bar and restaurant (although generates profits) is a necessary incident to the purpose of the club. That a club makes some profit does not make it a profit-making club. The fact that the capital of the club is divided into shares does not detract from the fact that it is not engaged in the business of operator of bar and restaurant. Whether or not the Club is engaged in business is determined by its purpose as stated in its articles/by-laws. W Club is a stock corporation No. There are (2) requisites before a corporation can be nd considered a stock corporation. Here, the 2 requisite is not present. Nowhere in its Articles of incorporation or by-laws could be found an authority for the distribution of its dividends or surplus profits. CORPORATIONS CREATED BY SPECIAL LAWS OR CHARTERS Sec. 4 Corporation created by special laws or charters Corporations created by special laws or charters shall be governed primarily by the provisions of the special law or charter creating them , supplemented by the provisions of this Code, in so far as they are applicable. These are corporations created through legislative act, not by virtue of their compliance with the requirements under the Corporation Code. Examples are: (1) PNOC, (2) NDC, (3) GSIS.

These corporations are government-owned or controlled, they operate under a special law or charter. Registration with the SEC is not required for them to acquire legal and juridical personality. There are not immune from suits, unless provided so by the law of their creation. Note: When the government engages in a particular business through the instrumentality of a corporation, it divests itself of its sovereign character, hence it subjects itself to the rules governing private corporations. Officers and employees of GOCC created by special law are governed by the Civil Service Law. But their subsidiaries, organized under the provisions of the Corporation Code, are governed by the Labor Code. TEST: To determine whether employees are governed by Civil Service Law, look at the manner of their creation. If by special law covered. If by Corporation Code Labor Code.

PNOC-EDC vs. NLRC (1991) 1. Danilo Merced, an EE of PNOC-EDC, a subsidiary of PNOC filed a complaint for illegal dismissal, retirement benefits, separation pay, unpaid wages against PNOC-EDC with the NLRC. 2. PNOC-EDC filed M2D: The Civil Service Commission, not the NLRC, has jurisdiction over the case. What law governs the EEs of PNOC-EDC? Labor Code. 1. PNOC-EDC vs. Leogardo (1989) - under the present law, the test in determining whether a GOCC is subject to the CSL is the manner of its creation. GOCCs created by special charter are subject to the Civil Service Law. GOCCs incorporated under the Corporation Law are subject to Labor Code. 2. Since the PNOC-EDC was incorporated under the Corporation Law, then its employees are subject to the provisions of the Labor Code. OTHER CLASSES OF CORPORATIONS 1. PUBLIC AND PRIVATE CORPORATIONS (under Act 1459) This classification was eliminated because of confusion re: governments shareholdings in corporations incorporated under the Corporation Law. Corporations, although private, were referred to as public because the

shares of stock are owned and controlled by the government. PUBLIC CORPS those formed/organized for the government, or any of its political subdivisions. Its purpose is the general good and welfare. It is created for political/ governmental purposes. It is vested with political powers to be exercised for purposes connected with the public good, in the administration of civil government. In short, its an instrument of the government. Note: the fact that some/all of the stocks in a corporation are held by the government does not make it a public corporation. PRIVATE CORPS those formed for a private purpose, for the immediate benefit and advantage of the individuals or member composing it.

Established for purposes other than religion. Exist for secular or business purpose May be further classified into (1) Eleemosynary, or (2) Civil o ELEEMOSYNARY created for charitable and benevolent purposes (eg. Corporations organized for the purpose of maintaining hospital and houses for the sick, aged and poor.) o CIVIL created for the benefit of its members (pecuniary or otherwise)

NATIONAL COAL COMPANY VS. CIR NCC filed suit to recover sum of money which it paid as taxes to BIR under protest. It claims exemption from taxes under the Administration Code. The Philippine government owns substantially all of the shares of NCC. W NCC is a public corporation NO, it is a private corporation. The mere fact that the government is the majority SH does not make it a public corporation. Since it is a private corporation, it cannot claim any preference/right/privilege over other private corporation in the mining of coal. 2. ECCLESIASTICAL AND LAY CORPORATIONS ECCLESIASTICAL/ RELIGIOUS Composed exclusively of ecclesiastics Organized for spiritual purposes or for administering properties held for religious one Organized to secure public worship/ to perpetuate the right of a particular religion They are futher classified as (1) religious societies, and (2) corporation sole. LAY CORPORATIONS

3. AGGREGATE AND SOLE CORPORATIONS AGGREGATE CORPORATIONS Composed of a number of individuals vested with corporate powers These are corporations registered under the Corporation Code, consisting of at least (5) incorporators. CORPORATION SOLE Consist of one person only Created as a body corporate and politic in order to give them some legal capacity and advantage which they can not have as natural persons. A Corporation Sole may be formed by: o Chief Archbishop o Bishop o Priest, minister, rabbi or other presiding elder of religious denominations, sects or churches 4. CLOSE AND OPEN CORPORATIONS CLOSE CORPORATIONS (Sec. 96) Those whose shares of stock are held by limited number of persons like the family or other closely-knit group. There are no public investors. The shareholders are active in the conduct of the corporate affairs. OPEN CORPORATIONS Openly accepts outsiders or stockholders or investors. Compared to close corporations, they are authorized and empowered to list in the stock exchange

Can offer their shares to the public, so stock ownership can be widely dispersed.

5. DOMESTIC AND FOREIGN CORPORATIONS DOMESTIC CORPORATIONS Those organized/created by virtue of Philippine Laws, either by legislative act (special law) or under the General Corporation Law. FOREIGN CORPORATIONS (125) Those organized under any laws other than those of the Philippines; and whose laws allow Filipino citizens and corporations to do business in its own country or state. 6. PARENT/HOLDING COMPANIES AND SUBSIDIARIES/AFFILIATES HOLDING COMPANIES corporation that confine their activities to owning stocks in, and supervising management of other companies. Usually owns a controlling interest in the companies whose stocks it holds It exercises control by the power to elect management Have a passive portfolio Holds securities merely for purposes of control and management. Compared to: INVESTMENT COMPANIES Active in the buy and sell of shares of stock or securities SUBSIDIARIES Companies which a parent company owns at least a majority of shares It is a corporation under the control of another corporation AFFILIATES Corporations which are subject to common control and operated as part of a system. Also called sister companies since the stockholdings of a corporation is not substantial enough to control the former.

7.QUASI-PUBLIC CORPORATIONS These are private corporations which have accepted from the State the grant of a franchise or contract involving the performance of public duties Not strictly public in the sense of being organized for government purposes but whose operations contribute to the convenience or welfare of the general public (eg. Telegraph, telephone companies, gas, water, electric companies) Also called PUBLIC SERVICE CORPORATIONS QUASI CORPORATIONS Applies to public bodies or municipal corporations (eg. Townships, countries, school districts, road or highway districts) which, though not vested with the general powers of corporations, are organized by statutes or immemorial usage, as aggregate corporations with precise duties which may be enforced, and privileges which may be maintained, by suits of law. Possess some corporate functions and attributes, but they are primarily political subdivisions agencies in the administration of civil government and their corporate functions are granted to enable them more readily to perform their public duties.

DE JURE CORPORATIONS Juridical entities which are created or organized in compliance with the statutory requirements of incorporation Its right to exist as a corporation cannot be attacked even by the State in a Quo Warranto proceeding. DE FACTO CORPORATIONS Corporations which exist by virtue of an irregularity or defect in the organization or constitution or from some omission to comply with the conditions precedent by which corporations de jure are created However, there is a COLORABLE COMPLIANCE with the requirements of the law

Its existence can only be attacked by a direct action of QW proceedings

CORPORATION BY ESTOPPEL Those defectively formed Neither a corporation de jure or de facto Considered as corporations in relation only to those who cannot deny their corporate existence due to their agreement, admission or conduct. Sec. 21 all persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof.

PROMOTION STAGE Q: What is the liability of corporation in contract entered into by the promoter? A: 1. If corporation adopts/ratifies/accepts the benefits Corporation becomes liable. 2. GR: Promoter is personally liable for contracts made by him for the benefit of proposed corporation PROCESS OF INCORPORATION SEC 14 CONTENTS OF ARTICLES OF INCORPORATION All Corporations shall file with the SEC its AI In any of the official languages Duly signed and acknowledged by all incorporators SUBSTANTIALLY containing the following, except as otherwise provided by code/special law 1. Name 2. Purpose 3. Place of Principal Office must be within Philippines 4. Term 5. Incorporators 6. How many directors? 7. Name, Nationality and Residence of acting directors & trustees until election 8. If stock corporation: Amount of authorized capital stock in lawful money # of shares into which it is divided 1. If PAR VALUE SHARES: 1. The par value of each 2. NNR of original subscribers 3. Amount subscribed by each 4. Amount paid by each 2. IF SOME/ALL ARE W/O PAR State so. 9. If Non Stock: Amount of capital Contributors 1. NNR 2. Amount contributed by each

3) Formation and Organization

3 STAGES: 1. 2. 3. CREATION REORGANIZATION DISSOLUTION AND WINDING UP

CREATION 1. PROMOTION the act of getting a corporation organized Promoter/organizer/projector brings persons to unite to form a corporation Includes: procurement of subscription to capital stock 2. PROCESS OF INCORPORATION Formal drafting of the articles of incorporation + preparing of other documents Subsequent filing Approval of SEC SEC issues certificate of incorporation 3. ORGANIZATION AND COMMENCEMENT OF BUSINESS Adoption of by laws Election of corporate officers Transacting business

10. Other matters which incorporators may deem necessary and convenient basta not inconsistent with law. PREFATORY PARAGRAPH Articles must specify the nature of the corporation (stock, nonstock, close, corporation sole, religious corp) CORPORATE NAME Why important? 1. Corp can act and perform legal acts through its name 2. Designates the corporation 3. Distinguishes the corporation from SH and members 4. Distinguishes the corporation from all other corporations Corporation cannot use any other name, UNLESS AMENDED (37) Sec. 18. No corporate name may be allowed if name is: 1. Identical or deceptively/confusingly similar to an existing corporation, or any other name already protected by law 2. Patently deceptive/confusing/ contrary to laws When change of name is approved SEC issues Amended Certificate of Incorporation Note: SEC requires Verification SLIP from its records division. Guidelines: 1. Required: Corporation or Incorporation in full/ abbreviated form 2. If proposed name has a word already used as part of name/style of a registered entity dapat may (2) other words different and distinct from company name 3. Other guidelines: see book.

Dapat lawful purpose Must not be for practice of profession reserved exclusively for professional partnerships If purpose/objective is under the supervision of a government agency PRIOR CLEARANCE & APPROVAL REQUIRED Purposes should be capable of being lawfully combined

PRINCIPAL OFFICE Muse be within the Philippines Specify the province and city/municipality Distinguished from business operations Why important? 1. Because it establishes the residence of the corporation 2. For venue of actions for/against the corporation 3. Where chattel mortgage of shares should be registered TERM Why important? Because it determines when corporation will lose its juridical personality NOTE: despite termination of existence, corporation continues as a body corporate for (1) defending suits for or against it; (2) gradually closing its affairs Sec. 11 period not exceeding 50 years from date of incorporation. Unless: (1) sooner dissolved; (2) extended Extension allowed for periods not exceeding 50 years in any single instance, by an amendment Provided: extension must not be made earlier than 5 years before expiry unless justifiable reasons for earlier extension INCORPORATORS Sec. 5 1. Corporators SH/M those composing a corporation 2. Incorporators those SH/M mentioned in the AI as (1) originally forming and composing and (2) who are signatories to the Articles. He can be a corporator if he continues to be a SH/M. Qualifications for Incorporators of Private Corporations (Sec. 10)

PURPOSE CLAUSE Defines, confers, limits the scope of authority of the corporation (45) a corporation has such powers as are expressly granted to it by law, and by its Articles, and those which are incidental to such powers Important so: 1. SH can know the line of business where he risks his money 2. BOD may know limits of its authority

Natural person 5 to 15 in number legal age majority dapat Philippine Resident EXCEPT: industries where ownership of shares is reserved exclusively to Filipinos IF stock SH must own/subscribe to at least 1 share of the capital stock

Juridical entities (Corporations and partnerships) can be stockholders. DIRECTORS/TRUSTEES GR: (5) to (15) Directors or trustees EX: o Educational institutions na nonstock number of trustees must be divisible by (5) o Close Corporations all SH are considered as part of BOD Minimum disqualification laid down in Code (sec. 23, 27) by laws may provide additional disqualification Qualifications (sec. 23): o Every director must own at least (1) share o Trustees of non-stock corp must be a member thereof o Majority of Directors and Trustees must be residents of the Phils Note: o Even aliens may be directors Provided: residency requirement is met EXCEPT: industry exclusively reserved for Filipino citizens Their number shall only be in proportion to their equity in the capital stock Disqualifications: (sec. 27) - Absolute o Conviction of Final Judgment of Offense punishable by imprisonment 6yrs ++ Violations of Corpo Code committed within 5 years before date of his election/ appointment

CAPITALIZATION 14(8) AUTHORIZED CAPITAL o The maximum amount to be secure and paid in or secured to be paid o The maximum number of shares that corporation can issue SUBSCRIBED CAPITAL STOCK o The number of shares (and its total value) for which there are contracts of purchases or subscriptions o That part of the authorized capital stock which has been subscribed by subscribers/SH PAID UP CAPITAL STOCK/PAID IN CAPITAL o Actual amount already paid to the corporation in consideration of subscription made thereon Either in cash/property/services rendered Basta capable of valuation If property, its fair value must be equal to the par value of shares subscribed o SEC. 62 CLASSIFICATION OF SHARES OF STOCK o SHARES OF STOCK the unit of proprietary interest in the corporation The interest of the owner in the management of the corporation in the surplus profits and in the distribution of assets o STOCK CERTIFICATE the document evidencing the interest CLASSES: o COMMON STOCKS Entitles owner to equal pro rata division of properties, if any Usually with right to vote (unless otherwise stated) o PREFERRED SHARES Subject to limitations in Sec. 6 Issued with a stated par value

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Preference must be stated in Articles and Certificate of Stock. Otherwise: No preference. PREFERRENCE AS TO DIVIDENDS Privilege of being paid first over other SH, IF there are profits available for payment of dividends Only if there are profits AND if BOD declares dividends The amount of preference is stated in the contract of subscription CUMULATIVE PREFERRED SHARES Right to claim back dividends not previously paid regardless if declared or not GR: NON CUMULATIVE EX: STATED NA CUMULATIVE NONCUMULATIVE PREFERRED SHARE Right to claim payment of CURRENT dividends only, not back dividends, WHEN AND IF dividends are paid Advantageous to corporation if there are years where profits where not earned PREFERRENCE AS TO VOTING RIGHTS Usually, doe not have voting rights But in light of Section 6: o GR: PREFERRED SHARES HAS VOTING RIGHTS o EX: IF CLEARLY WITHHELD PREFERRENCE UPON LIQUIDATION As to (1) liquidation of dividends; (2) distribution of corporate assets GR: NO PREFERRENCE EX: SO STATED

PAR VALUE VS. NO-PAR VALUE SHARES PAR VALUE SHARE o Shares whose value is fixed in the Articles/ Certificate o Purpose is to fix the minimum subscription price o Indicates the amount which the original subscribers are supposed to contribute to the capital as basis of privilege of PROFIT SHARING with limited liability o NOTE: par value may not be the (1) true value; (2) fair market value; (3) book value WATERED STOCKS o Shares issued at les than par o SH remains liable for difference between what he paid and actual par value NO PAR VALUE SHARES o Do not represent any stated proportionate interest in the capital stock, but only an ALIQUOT part of the whole number of such shares o Can be issued by STOCK CORPORATION subject to limitations When issued deemed fully paid and nonassessable Should not be worth P5 or less Consideration paid constitutes capital Can NOT be issued as preferred stock Can not be issued by banks, etc. o Advantages: Flexibility in price Deemed fully paid VOTING VS. NONVOTING SEC. 6 GR: ALL KINDS OF SHARES HAVE VOTING RIGHTS EXCEPT: PREFERRED SHARES, REDEEMABLE SHARES can be deprived of voting rights When do you vote: 1. 2.

election of directors other matters requiring SH to vote/ approval

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 FOUNDERS SHARES SEC. 7 have certain rights and privileges not enjoyed by other SH may be provided for by the articles of incorporation REDEEMABLE SHARES SEC. 8 those issued by a corporation subject to redemption (as provided by the subscription contract redeemable shares grants the corporation the RIGHT TO REACQUIRE the shares, at its option/ at option of the holder o based on face/issued value + premium o depending on the terms of the contract at a fixed or future date o redemption may be either optional or mandatory GR: A corporation may acquire its own shares IF IT HAS UNRESTRICTED RETAINED EARNINGS EX: SEC. 8 corporations can redeem redeemable shares regardless it has URE. TREASURY SHARES SEC. 9 Can be issued again, for a price (even for less than par) So purchaser will not be liable for the difference between the purchase price and the par value (kasi the full value had previously been paid in full) While the corporation has possession of the treasury shares: o They have no dividends o They have no voting rights o But they can be declared as dividends CIR v. Manning: A STOCK DIVIDEND CANNOT BE DECLARED OUT OF OUT OF OUTSTANDING CORPORATE STOCK. It can only be declared from retained earnings. CAPITAL REQUIREMENT SEC. 12 STOCK Corporations minimum capital stock required Stock corporations incorporated under this code are not required to have any minimum authorized capital stock

EX: otherwise specifically provided for by Special Law and subject to provisions of Sec. 13 No minimum capitalization requirement, but there is minimum paid up capital Law does not require that each subscriber pay 25% of his subscription o Basta 25% of total subscription paid SEC can require payment of higher minimum paid-up capital

RESTRICTIONS AND PREFERENCES ON TRANSFER OF SHARES: GR: Corporations are not required to provide restrictions/preferences re: transfer of shares, sale or assignment in their Articles. EX: Closed Corporations (sec. 96) required to subject their shares to restrictions Corporations can restrict or grant preferences (eg. Right of first refusal) o But must be indicated in Articles, and in all stock certificates The No-transfer to aliens clause o Required by SEC, as a matter of policy to be included in the Articles of Incorporation of all stock corporations Not just corporations that will engage in a business reserved to citizens o the Philippines (Sec. 15 TREASURER Sec. 15 Corporation must indicate the name of the treasurer, until his successor has been elected and qualified in accordance with the CBL He is authorized to receive in the name of the corporation all subscriptions, contributions, donations paid by subscribers/members EXECUTION CLAUSE Part of the Articles where incorporators sign the document o Witnessed by (2) disinterested persons

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Important bec. the articles serve as a CONTRACT bet the signatories thereof

NOTARIAL ACKNOWLEDGMENT Part of the articles where incorporators acknowledge before a notary public that they have executed and signed in their own free, voluntary account REGISTRATION PROCEDURE AND REQUIREMENTS 2 MODES: 1. EXPRESS LANE 2. REGULAR/ORRDINARY PROCEDURE EXPRESS LANE For companies with only one business purpose Without need of hiring a lawyer Pros: (1) fast; (2) time and cost-saving Cons: (1) can only have one purpose; (2) if corp will expand, file amendment to include the purpose REGULAR PROCESS For corporations with more than (1) purpose Also for corporations which provide classes of shares of stock Takes an average of (5) working days before the certificate of incorporation is released After the filing of the articles and the supporting documents, the SEC will examine them to determine compliance with requirements. Only substantial and not strict compliance is required. From the time of issuance of certificate of incorporation, the corporation becomes vested with a juridical personality, with power to sue and be sued GROUNDS FOR REFUSAL SEC. 17 not exclusive That the articles/ any amendment thereto is NOT SUBSTANTIALLY IN ACCORDANCE WITH THE FORM prescribed in the Corpo Code That the purpose/s are PATENTLY UNCONSTITUTIONAL ,ILLEGAL, IMMORAL or contrary to government rules and regulations

That the treasurers affidavit re: the amount of capital stock subscribed and/or paid is false That the percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with Other grounds: o That the corporate name is not legally permissible o That the minimum capital requirement is not sufficient

COMMENCEMENT OF CORPORATE EXISTENCE Sec. 19 From the date of issuance of its certificate of incorporation or registration CAGAYAN FISHING DEVT CO. VS. TEODORO SANDIKO (1937) May 31, 1930 Manuel Tabora sold his (4) parcels of land to Cagayan Fishing, which is under the process of incorporation. Tabora has a loan from PNB, wherein his lands where mortgaged as security Condition of the sale: that the land title shall not be transferred to corporations name until it has fully and completely paid Taboras indebtedness to PNB. Oct 22, 1930 Corporation filed its Articles of Incorporation. Oct 28, 1931 BOD adopted resolution selling the (4) parcels to Sandiko. W the subsequent sale of the properties to Sandiko is valid NO, bec. Corporation was not yet in existence when sale made. At the time of the sale to Cagayan Fishing,it was not yet incorporated. It was not even a de facto corporation at that time. Since it did not have legal existence then, it did not possess juridical personality to enter in the contract. Only a duly organized corporation has the power to purchase and hold real property, enter into contract or transact business. DEFECTIVELY FORMED CORPORATIONS Under Philippine jurisprudence, a corporation may be considered as existing despite non-compliance, substantial compliance of the Corporation Code. These are:

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o o

DE FACTO CORPORATION CORPORATION BY ESTOPPEL

4) Corporate Charter and Its Amendments

Corporate Charter

DE FACTO CORPORATION It is not a de jure corporation, but it exists for all practical purposes as a corporate body by virtue of its (1) bona fide attempt to incorporate, and (2) exercise of corporate powers. It exists as a corporation if the ff. conditions are met: o There is a valid statute o An attempt in good faith to form the corporation, enough to be a colorable compliance o Exercise of corporate powers (eg. Transaction of business) o Good faith in claiming to be and doing business as a corporation A de facto corporation cannot be collaterally attacked, but can be directly attacked by THE STATE IN A QUO WARRANTO PROCEEDING. It is in all respects a de jure corporation, the only difference being the State may question its existence in a direct proceeding. DE JURE Corporate existence cannot be directly attacked, either directly or collaterally, even by the state DE FACTO Corporate existence can be directly attacked on a QW proceeding by the STATE. (Private persons cannot directly or collaterally attack its existence)

Definition: Instrument or authority from the sovereign power Synonymous with: Act of incorporation (where corporation formed under special act of legislature) and Articles of Incorporation (where formed under a general law) A three-fold contract: between corporation-state re. primary franchise to be and act as a corporation 2. between corporations-stockholders/members re. rights & obligations 3. between and among stockholders/members re. their relationship with each other Primary v. Secondary Franchise of a corporation Primary franchise: state conferment to be and act as a corporation (ie, the certificate of incorporation) Secondary/special franchise: powers and privileges vested in the corporate body (ie, licenses and authority) 1.

Corporate Entity Theory Sec. 19: The corporation acquires juridical personality only upon the issuance of the certificate of incorporation. Its property is vested in the corporation itself, not on the SH/members; hence, personal creditors of the latter cannot attach corporate properties to satisfy their claims. Sulo ng Bayan v. Araneta F: Reivindicatory action filed by Sulo in behalf of its members who were ejected by Araneta. H: Dismissed. The corporation has no personality to bring an action for and in behalf of its SHs/members absent proof of assignment of rights to the

MUNICIPALITY OF MALABANG vs. BENITO ET AL (1969)

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corporation - for recovery of property which belongs to the latter in their personal capacities. The corporate entity theory is confined to legitimate transactions and is subject to equitable limitations to prevent its being used as a cloak for fraud or illegality or to work an injustice. Caram v. CA F: The Carams, claiming to be mere investors, questioned being held personally and solidarily liable with co-defendant corporation. H: Granted. Circumstances were considered. There was a factual finding that the Carams were financiers and that the corporation was bona fide, hence the former were absolved from liability. The corporation alone is liable for corporate acts duly authorized by its directors and officers. Rustan Pulp v. IAC H: The President and manager of a corporation who entered into and signed a contract in his official capacity, cannot be made liable in his individual capacity in the absence of stipulation to that effect. Cruz v. Dalisay H: The corporation is not liable for the debts, obligations or liabilities of its stockholders even if the stockholder concerned is its president. The sheriff has no discretion to pierce the veil of corporate fiction and levy the corporate property to execute a personal judgment on any of its officers. Palay Inc. v. Clave F: The Corporate President was being made to solidarily refund a sum of money with the corporation because he allegedly was one and the same with the corporation as he was the controlling SH.

H: No badge of fraud on his part. Mere ownership by a single SH of all or nearly all of the capital stock is not, of itself, sufficient ground to disregard the separate corporate personality. Soriano v. CA F: Petitioners held solidarily liable in their personal capacity because they indicated in the receipt their official designation in the corporation. H: Reversed. There was a factual finding that the receipt pertained to the association rather than to the undersigned officials. There was no proof that the petitioner-signatories used the personality of the corporation as a protective shield for any wrongdoing. Thus, the general rule on corporate liability applies, cause of action lies solely against the corporation. Piercing the Veil of Corporate Fiction General Rule: Corporations are separate and distinct entities from its SHs/members and from other corporations to which it is connected. Exception: The law will regard the corporation as a mere association of persons and hold officers and SHs directly liable when the notion of corporate entity is used to: defeat public convenience, justify wrong, protect fraud, defend crime, act as a mere dummy with no business purpose for the sole benefit of the SHs Palacio v Fely Transportation F: A jeep owned by Calingasan injured Palacio. After his employees conviction in a criminal case, Calingasan sold the jeep to Fely Transportation (with Calingasan as President and GM). I: WoN Fely Transportation can be held subsidiarily liable with the employee -

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H: YES. Calingasan and Fely regarded as one person. It is evident that the main purpose of forming the corporation was to evade the subsidiary civil liability resulting from the employees conviction. Although Calingasan was not yet a party in the case, the court can substitute him in the place of the defendant corporation as a real party in interest. Marvel Building Corp. v. David F: Plaintiff-stockholders sought to enjoin CIR from selling at public auction various properties registered in the name of the corporation to satisfy its claim for the war profits taxes assessed against Maria Castro (who allegedly owns all the shares). H: Denied. Circumstantial evidence held to be sufficient to declare that the plaintiffs were dummies. They should have come to court to assert that they actually paid for their subscriptions. Real SHs would never have consented that Castro keep the funds without receipts or accounting and manage the business without their knowledge. Yutivo & Sons Co. v. CTA F: CTA went after Yutivo to collect taxes assessed against Southern Motors. Yutivo raised separate corporate entity as a defense. H: SM was a mere instrumentality of Yutivo. Yutivo principally financed its business and actually extended all the credit to the latter starting capital, vehicles, advances and loans. It was created to be a mere subsidiary to sell the vehicles at retail and maintain stores for spare parts and service repair. CIR v. Norton & Harrison Co. F: Norton and Jackbilt entered into an agreement whereby Norton was made exclusive distributor of concrete blocks manufactured by the latter. Jackbilt would deliver the products and Norton would receive the payment. Norton then bought all the outstanding stock of Jackbilt. CTA relieved Norton of liability for Jackbilts deficiency sales taxes.

H: Reversed. Jackbilt is merely a department of Norton. Ownership of all the stocks in a corporation does not necessarily breed an identity of corporate interest between the two companies and be considered as a sufficient ground for disregarding their distinct personalities. However, in this case, there were sufficient grounds to disregard the notion Norton owned all of Jackbilts stocks, constituted its board of directors, financed its operations, treated its employees as its own, and gave compensation to the board. La Campania Coffee v. KKM H: La Campania Gawgaw and La Campania Coffee were under the same management with the same office and payroll. Laborers of one were sometimes made to do work for the other. Hence, they were considered as one corporation. The notion of separate corporate entity not available when the purpose is to defeat the ends of the law. Emilio Cano Enterprises v. Court of Industrial Relations F: ULP case. The property of the corporation was being made to answer for the judgment rendered against its officials. Petitioner moved to quash writ of execution. H: Dismissed. It is a closed family corporation. It was sufficient representation of the corporation that Emilio and Rodolfo Cano were sued in their official not private - capacities. Verily, the order against them is an order against the corporation. Spirit of the law trumps technicalities. Telephone Engineering Service Co. v. WCC F: The widow of an UMACOR employee sued TESCO for death compensation. WCC rendered an award against TESCO. TESCO only disputed the er-ee rel on appeal. H: Dismissed. TESCO admitted that UMACOR is a sister corporation. Also, it represented and defended itself as the employer of the deceased. Claparols v. Court of Industrial Relations

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H: CSC was a successor of CSNP and its emergence was timed to avoid the financial liability attached to its predecessor. Both were owned and controlled by the same person and there was no break in the succession. Ninety percent of the subscribed shares of CSC was owned by petitioner himself and all the assets of CSNP were turned over to CSC. National Federation of Labor Union (NAFLU) v. Ople F: Lawman Industrial transferred its business operations to Libra Garments, which later changed its name to Dolphin Garments. Defendant cannot deny reinstatement to the plaintiffs simply because Lawman has ceased its operations. H: Veil should be pierced as it was deliberately and maliciously designed to evade its financial obligations to its employees. AC Ransom Labor Union v. NLRC F: The officers of AC Ransom were being held solidarily liable with the corporation for the payment of backwages to the 22 strikers. At the time the ULP case was proceeding before the CIR, Ransom organized a run away corporation, Rosario, to evade it financial obligations. Both corporations were closed corporations owned and managed by members of the same family. It engaged in the same line of business, offering the same line of products and occupied the same buildings, factories and bodegas. H: Officers of Ransom are solidarily lliable. Another instance when the fiction should be disregarded is when the organization proves to be a convenient instrument to avoid payment of backwages and reinstatement of employees. Concept Builders Inc. v. NLRC Probative factors of identity that will justify piercing the corporate veil: 1. 2. Stock ownership by one or common ownership of both corporations Identity of directors and officers

3. Manner of keeping corporate books and records 4. Methods of conducting the business Instrumentality Rule: Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality of the other, the fiction of the corporate entity of the instrumentality may be disregarded. The control neces sary to invoke the rule is not complete or majority stock control, but such domination of finances, policies and practices that the corporation has no separate will. Control must be shown to have been exercised at the time the acts complained of took place. Moreover, the control and breach of duty must proximately cause the injury or unjust loss for which the complaint is made. * The question of whether a corporation is a mere alter ego is purely factual. Mcconnel v. CA F: Park Rite occupied anothers lot without its knowledge or consent. After it was incorporated, two of the five incorporators bought out 1496/1500 shares from the other three. The office of one incorporator was the same office of the corporation. The funds of the corporation was also kept in the incorporators vault. The corporation itself had no visible assets. H: The corporation was a mere extension of the personalities of the two incorporators. The operations of the corporation were so merged with the stockholders as to be practically indistinguishable from them. Tan Boon Bee & Co. v. Jarencio F: Evidence established that PADCO was never engaged in the printing business; that the board and the officers of Graphic and PADCO were the same; that PADCCO holds 50% share of stock of Graphic. PADCOs own evidence shows that the printing machine had been in the premises of Graphic since May 1965 long before PADCO even acquired title on July 1966 from Capitol Publishing. It shows that PADCOs claim of ownership over the printing machine is not only farce and sham but also unbelievable. H: Veil should be pierced.

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Cease v. CA F: WoN the assets and properties of the corporation is also the estate of Forest Cease. H: The Board of directors and stockholders belong to one family the head of which is Forest Cease who retained the majority stocks, and hence control and management of its affairs. Liddell & Co. v. CIR Revenue officers may disregard the notion of separate corporate entity and treat the person who is actually benefitted as taxable where it serves as a shield for tax evasion. To hold otherwise would be to allow circumvention of our tax laws. When not justified When the corporation is being used to defeat public convenience, justify wrong, protect fraud, defend crime, confuse legitimate issues, or to circumvent the law or perpetuate deception, or act as an alter-ego, adjunct, or business conduit for the sole benefit of the stockholder/s of another corporation. For separate personality of the corporation to be disregarded, the wrongdoing must be clearly and convincingly established. If the petitioner does not seek to impose a claim against the officers or stockholders, piercing the veil would not be available or justified.

not sign the said PN so he can be held personally bound thereby. Since he has no personal obligation to the respondent, it is his inherent right as stockholder to dispose of his share of stok anytime he so desires. Del Rosario v. NLRC Doctrine: Substantial identity of incorporators of two corporations does not necessarily imply fraud. Indophil Textile Mill Workers Union v. Calica F: Petitioner seeks to pierce the veil of the corporate entity of Acrylic, alleging that the creation of the corporation is a device to evade the application of the CBA between the union and the respondent company. The businesses of private respondent and Acrylic are related, they have the same employees who man and provide auxilliary services to units of Acrylic, and the physical plants, offices and facilities are situated in the same compound. H: Facts not sufficient to justify piercing the corporate veil. The legal corporate entity is disregarded only if it is sought to hold the officers and stockholders directly liable for corporate debt or obligation. Here, petitioner does not seek to impose a claim against the members of Acrylic. PNB v. Ritratto Group Doctrine: The parent-subsidiary relationship between PNB and PNB-IFL is not the significant legal relationship involved in this case since the petitioner was not sued because it is the parent company of PNB-IFL. Rather, the petitioner was sued because it acted as an attorney-in0fact of PNB-IFL in initiating the foreclosure proceedings. A suit against an agent cannot, without compelling reasons, be considered a suit against the principal. Case dismissed. Amendment of Corporate Charter One of the powers granted to all registered corporations. See Sec. 36 cf Sec. 16

Remo v. IAC H: While it is true that on Dec. 1977, petitioner was still a member of the board of Akron, and that he participated in the adoption of a resolution authorizing the purchase of 13 trucks to be paid out of a loan to be secured from a lending institution, it does not appear that said resolution was intended to defraud anyone and more particularly the private respondent. It was the President of Akron who negotiated with the respondent. The word we in the promissory note refers to the corporation. Petitioner did

Requirements for Amendment:

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1. 2. 3.

Resolution by majority of the board of directors/trustees 2/3 vote or written assent of SHs holding outstanding capital stocks or of members Submit and file amendments with the SEC a. Underscore changes in the amended articles. Submit the original as well. b. A copy of the amended articles certified under oath by the corporate secretary and a majority of the board stating that such amendments have been duly approved by the required vote c. Favorable recommendation of appropriate government agency Any amendment shall take effect upon approval of the SEC or from the date of filing if not acted upon within 6 months from the date of filing (except when amendment concerns i.) increasing or decreasing the capital stock, or ii.) shortening the corporate term).

matters which are fait accompli (ie. names of incorporators, interim treasurer, number of shares and amount originally subscribed and paid out of the original authorized capital stock of the corporation, the date and place of execution of the AIC, the signatories and acknowledgment thereof)

Changing the corporate name Philippine First Insurance v. Hartigan Doctrine: Any change in the corporate identity or name does not affect the rights and obligations of the corporation. A mere change in the name does not affect the identity of the corporation nor in any manner affect the rights, privileges and obligations previously acquired or incurred by it. Republic Planters Bank v. CA Doctrine: A change in the corporate name does not make a new corporation, and whether effected by special act or under a general law, it has no effect on the identity of the corporation, or on its property rights or liabilities. The corporation continues, as before, responsible in its new name for all debts or other liabilities which it has previously contracted or incurred.

Special Amendments As to: - Increase or decrease in capital stock - Create or increase bonded indebtedness - Shortening or extending corporate term Additional requirements: Meeting of SHs/members is required. The vote must be taken at a duly-constituted in the formal requirements. SEC may reject the amendments. See Secs. 37-38

Amendment of Corporate Term

Provisions subject to Amendments General Rule: Any provision or matter stated in the articles of incorporation is subject to amendment Except: otherwise provided by the Code or by special law

General Rule: Corporate existence cannot exceed 50 years Except: Dissolved sooner or the period indicated in the AIC is amended extending the same Procedure: 1. Approval Majority of the board

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2. 3. 4.

5.

Service (personal or through mail) of written notice and time and place of meeting to every stockholder or member Ratification 2/3 of SH holding outstanding capital stock or trustees In case of extension: Extension should not be for periods exceeding 50 years at a single instance, provided that no extension can be made earlier than 5 years prior to the original expiry date (unless there are justifiable reasons for an earlier extension as may be determined by the SEC0 In case of extension: Dissenting stockholder ay exercise his appraisal rights

that the stockholders may have all the profits but shall turn over the management of the enterprise to the Board of Directors.

Classification of Powers 1. 2. 3. 4. 5. Expressly conferred - granted by the AIC, by-laws or official act of the board Incidental acts as are naturally and ordinarily done which are reasonable and necessary to carry out the corporate purpose/s Inherent acts that go with the office Apparent acts, which although not actually granted, the principal knowingly allows or permits to be done Powers arising out of customs, usage or emergency Corporate powers and functions may be delegated to individual directors or other officers or agents. However, whether or not such acts bind the corporation depends on the nature of the agency created or the powers conferred by statute, corporate charter, the corporate action of the board, or whether it was necessary or incidental to ones office. A corporation is bound by the acts of its corporate officers if they act within the scope of the powers above enumerated

Alhambra Cigar v. SEC Doctrine: The privilege of extension is purely statutory, hence all the conditions precedent must be complied with before the expiration of the term as stated in the AIC.

5) Board of Directors/ Trustees

Powers of the Board See Sec. 23 conduct all business control and hold all properties

Term: 1 year until their successors are elected and qualified (unless otherwise provided in the Code) Ramirez v. Orientalist Doctrine: The board of directors is the supreme authority in mattes of management of the regular and ordinary business affairs of the corporation. Their authority, however, does not extend to the fundamental changes in the corporate charter such as amendments or substantial changes thereof which belong to SHs as a whole. The equitable principle is

ABS-CBN v. CA Doctrine: Corporate powers, such as power to enter into contracts, are exercised by the board of directors. However, the board may delegate such powers to either an executive committee or officials or contracted managers Ramirez v. Orientalist D: If a man is found acting for a corporation with the external indicia of authority, any person not having notice of want of authority may rely upon

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those appearances; and if it be found that the directors had permitted the agent to exercise that authority and thereby held him out as a person competent to bind the corporation, or had acquiesced in a contract and retained the benefit supposed to have been conferred by it, the corporation will be bound, notwithstanding the actual authority may never have been granted. The public is not supposed nor required to know the transactions which happen around the table where the corporate board of directors or SHs are convoked. The fact that the power to make corporate contract is vested in the board does not signify that a formal vote of the board must always be taken before contractual liability can be fixed upon a corporation. Barreto v. La Previsora Filipina F: The appellees contend that the article is only a provision for compensation of directors. It authorized the giving of continuous compensation to particular directors after their employment has terminated for past services rendered gratuitously by the to the corporation. H: Not allowed. Misapplication of funds to the prejudice of the substantial rights of the SHs (appellants in this case). While corporations are expressly authorized by the Code to adopt by-laws, Sec. 20 limits such authority to the adoption of by-laws which are not inconsistent with the law. Contracts between a corporation and third persons must be made by or under the authority of the board and not by the SHs. Here, there was no consent (SHs voted against the provision) and consideration.

Qualification, Director: owns at least one share of the capital stock (stock corporations) or is a member of the non-stock corporation majority of the board must be Philippine residents See Sec. 27 Disqualifications: Convicted by final judgment of an offense punishable by imprisonment for a period exceeding 6 years Convicted for a violation of the Corporation Code committed within 5 years prior to the date of election or appointment

Lee v. CA F: Petitioners, by virtue of the VTA, disposed of all their shares through assignment and delivery in favor of DBP as trustee. H: The most immediate effect of a Voting Trust Agreement on the status of a stockholder who is a party to its execution from legal titleholder, he becomes the equitable or beneficial owner The change in his status deprives the stockholder of the right to qualify as a director. Detective and Protective Bureau v. Cloribel H: One who could not be a director (because of non-ownership of even a single share) could not be a managing director. If no election is conducted or no qualified candidate is elected, the incumbent director shall continue to act as such in a hold-over capacity until an election is held and a qualified candidate is elected.

(Dis)Qualifications See Sec. 23 par. 2

Election and Voting See Sec. 24

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Majority of the outstanding capital stock, in person or by their duly authorized representative (through a written proxy), must be present at the election of the directors In non-stock corporations: Majority of the members entitled to vote, in person or by proxy (if allowed by the AIC), must be present in the election If quorum is not reached, the meeting may be adjourned Voting: Viva voce (default); By ballot (upon request of any voting SH or member) Cumulative voting is a matter of right. But in non-stock corporations, cumulative voting is not available, unless allowed by the AIC or by-laws. o Formula: no. of directors x shares o Voting SH may distribute his votes among the candidates as he may see fit o This allows the minority to have a rightful representation in the board See Sec. 25 Except in a close corporation where other corporate officers may be elected directly by the stockholders, the Code requires the board to elect said officers Officers to be elected: - President (must be a director) - Secretary (Resident and Citizen of the Phils) - Other officers provided for in the by-laws Any two or more positions may be held concurrently by the same person, except Pres-Sec and Pres-Treas. Validity and Binding Effect of Actions of Corporation Officers See Sec. 25 par 2. Quorum requirement for a valid board meeting: Majority of the board as fixed in the AIC (unless AIC provides for a greater majority) ...for valid corporate act: Majority of the directors/trustees present at the meeting at which there is a quorum

Except when it concerns the election of corporate officers: Majority of all the members of the board.

Lopez Realty v. Pontecha D: Any action of the board without a meeting and required voting and quorum requirement will not bind the corporation unless subsequently ratified, expressly (in a subsequent meeting) or impliedly (corporations subsequent conduct). Individual directors, however, can rightfully be considered as agents of the corporation. And although they cannot bind the corporation by their individual acts, this is subject to certain exceptions such as: by delegation of authority where expressly conferred where the officer or agent is clothed with actual or apparent authority

Yao Ka Sin Trading v. CA (The court looked into the by-laws to arrive at the conclusion that the bylaws does not confer upon the president the authority to enter into contracts for the corporation independently of the Board of Directors) Pua Casim & Co. v. Neumark and Co. The general rule is that a business manager or other officer of a corporation, has no implied power to borrow money in its behalf. However, when the business manager is clothed with apparent authority to borrow money and the amount borrowed does not exceed the ordinary requirements of the business, it has often been held that the authority is implied, then the corporation is bound. Here, there were ample indications that the corporation was in need of funds to carry on its business and it does not appear that the amount borrowed was disproportionate to the volume of the business.

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Yu Chuck v. Kong Li Po The general rule is that the power to bind a corporation by contract lies with its board, but this power may either expressly or impliedly be delegated to other officers or agents of the corporation, and it is wellsettled that except where the authority of employing servants and agents is expressly vested in the board, an officer or agent who has general control and management of the corporations business, or a specific part thereof, may bind the corporation by the employment of such agents and employees as are usual and necessary in the conduct of such business. But the contracts of employment must be reasonable. Re length of employment: In the absence of express limitations, a manager has authority to hire an employee for such a period as is customary and proper under the circumstances. But unless he is expressly authorized or held out as having such authority, he cannot make a contract of employment for a long period (such as for 3 years), although the contract is not rendered invalid by the mere fact that the employment extends beyond the term of the managers own employment. Re ratification: Before a contract can be ratified, knowledge of its existence must be brought home to the parties who have authority to ratify it or circumstances must be shown from which such knowledge may be presumed. The fact that the president was required by the by-laws to sign the contracts does not mean he has the power to make such contracts. Francisco v. GSIS H: The telegram sent by one purporting to be authorized by the corporation to enter into transactions was held to be binding. The defendant did not disown the telegram sent, and it also kept on receiving the remittances sent by the plaintiff. Board of Liquidators v. Kalaw Nature of General Managers position: Has implied authority to make any contract or do any other act which is necessary or appropriate to the conduct of the ordinary business of the corporation.

H: In this case, the by-laws provide for prior directorate approval of contracts. However, because of the nature of the copra industry (where time is of the essence) and the fact that previous contracts not approved by the board were not questioned, the court held the contracts signed by Kalaw to be binding. Where similar acts have been approved by the directors as a matter of general practice, custom and policy, the general manager may bind the company without formal authorization of the board of directors. Buenaseda v. Bowen & Co., Inc. Acquiescence, availment of the benefits afforded by the agreement, and recognition/adoption are equivalent to an implied ratification of the agreement and binds the corporation even without formal resolution passed and recorded. Removal and Filling up of vacancies Corporate directors may be removed or ousted with or without cause may not be used to deprive minority stockholders or members of the right of representation which they may be entitled by law and provided further that the requirements imposed by Sec. 28 are complied with.

See Sec. 28 Corporate by-laws may provide for causes/ grounds for the removal of a director o If for a cause, the proviso that removal shall not deprive the minority of their rightful representation in the board shall not be applicable Requirements for removal: 1. Removal should take place at the general or special meeting duly called for that purpose 2. Removal must be by the vote of the stockholders holding or representing 2/3 of the outstanding

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capital stock or the members entitled to vote in cases of non-stock corporations 3. There must be previous notice to the stockholders/members of the intention to propose such removal at the meeting either by publication or on written notice to the SHs/members o Meeting must be called by the Secretary On order of the President or written demand of the SHs representing a majority of the OCS or members Should the Secretary fail or refuse, of it there is no one authorized to make the call, the same may be addressed directly to the SHs or members by and SH/member signing the demand PD 902-A as amended by RA 8799, the court has proper court has power and authority to hear and decide cases involving controversies in the election or appointment of directors, trustees, officers or managers of such corporation, partnership or association. Hence, the court has power to remove or oust a director even motu propio by appointment of a management committee to undertake the management of the corporation. o In case of deadlock in a close corporations, SEC is authorized to issue and order as it deems appropriate canceling, altering or enjoining any resolution or other act of the corporation or its board of directors or directing or prohibiting any act of the corporation or the board thereby effectively taking away the rights of the directors thereby affectively taking away the rights of the directors to act as manager of the corporation. o In case of vacancy due to removal: There may be an election of a replacement at the same meeting without further notice or at any subsequent general or special meeting after proper notice.

Vacancies in the board may occur not only by removal or by expiration of term, may be filled by the vote of at least a majority of the remaining directors/trustees , IF still constituting a quorum. o Otherwise, vacancies must be filled out in a regular or special meeting o If there is an increase in the number of directors/trustees, the directorship/trusteeship must be filled by an election in a regular or special meeting See Sec. 26 Any change in the constitution of the board of directors/trustees must be reported to the SEC within 30 days from the election Should a director, trustee or officer die, resign or in any manner cease to hold office, his heirs, the secretary or any officer shall immediately report such to the SEC

Premium Marble v. CA The objective of Sec. 26 is to give the public information, under sanction of oath of responsible officers, of the nature of the business, financial condition and operational status of the company so that those dealing with it and those who intend to do business with it may know. Compensation of Directors General Rule: Directors are not entitled to any compensation except reasonable per diems Except: When by-laws provide, or by vote of SHs representing the majority of the OCS and provided that the yearly compensation does not exceed 10% of the net income before income tax of the corporation, or when the director performs special or extraordinary service, or the corporate officers are not directors

See Sec. 29

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See Sec. 30 Ratio: The office is usually filled up by those chiefly interested in the welfare of the institution by virtue of their interest in stock or other advantages The courts may look into the reasonableness of compensation of directors and corporate officers. Ballantine states that courts will generally not undertake to review fairness of official salaries, at the suit of a stockholder attacking them as excessive unless wrongdoing and oppression or possible abuse of fiduciary position are shown. Rogers v. Hill F: A minority stockholder of the American Tobacco Company brought suit to question the bonus payment and stock subscription privilege (aside from the directors fixed salary of over $2M) H: If a bonus payment has no relation to the value of the services for which it is given, it is in reality a gift in part, and the majority stockholders have no power to give away corporate property against the protest of the minority. If there is wastage of corporate assets, the courts may be justified to look into the reasonableness and fairness of the compensation despite the fact that the grant thereof is authorized pursuant to the by-laws and by the vote of the majority of the holders of the OCS.

H: Granted. Contrary to the by-laws provision granting to the stockholders the power to determine the compensation. Western Institute of Technology v. Salas H: When the compensation is being given to a person in his capacity as an officer, and not as a board member, Sec. 30 does not apply. Government v. El Hogar Filipino Issue: WoN the courts may declare the provisions of a corporate by-laws granting compensation to the members of the board as null and void. H: NO. If a mistake has been made (such as in this case where the compensation for the directors has become disproportionate to the service they render), or the rule adopted in the by-laws has been found to work harmful results, the remedy is in the hands of the SHs who have the power at any lawful meeting to change the rule. The remedy lies in publicity and competition, rather than in a court proceeding. Liability of Corporate General Rule: Corporate directors, officers and agents are not liable for obligations incurred by the corporation through their acts IF they did so within the scope of their authority and in good faith. MAM Realty v. NLRC H: A corporate officer cannot be held solidarily liable with the corporation in the termination of an employee in the absence of malice or bad faith. A corporation, being a juridical entity, may act only through its directors, officers and employees. Obligations incurred by them, acting as such corporate agents, are not theirs but the direct accountabilities of the corporation they represent. However, secondary liability may be incurred when exceptional circumstances warrant. Tramat v. CA Personal liability of a corporate officer may validly attach in instances allowed by law (Secs. 31, 32, 34, 65, 74, 97) where a stockholder, to the

Central Cooperative v. Tibe F: Complaint filed by CCE against Tibe for the certian amounts he received from the corporation (cash advances, commutable per diems for attending board meetings, transpo and representation exoenses) where he served as board member. All these sums were with the approval of the general manager, treaurer and auditor.

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extent that he takes an active part in the management and operation of the business affairs of a close corporation, is liable for corporate torts. Instances when personal liability attaches: He assents to a patently unlawful act of the corporation, or for bad faith or gross negligence in directing its affairs, or for conflict of interest, resulting in damages to the corporation, its stockholders or other persons, or He consents to the issuance of watered stocks, or having knowledge of it, does not file his written objection thereto with the corporate secretary, or He agrees to hold himself personally and solidarily liable with the corporation, or He is made, by specific provision of law, to personally answer for his action

for which they can be held solidarily liable with Crispa for all money claims of the illegally terminated employees.

3-Fold Duty of Directors OBEDIENCE. DILIGENCE. LOYALTY. See Sec. 31

Willfully and knowingly voting or assenting to patently unlawful acts = violation of obedience Gross negligence or bad faith in directing the affairs of the corporation = violation of diligence Acquiring personal or pecuniary interest in conflict with duty as director = violation of loyalty

Llamado v. CA Personal liability may also attach to the extent that the statutes so provide as in the case of BP 22 which makes the responsible officer of a corporation issuing a bouncing check criminally liable therefor. As a treasurer of the corporation who signed a check in his capacity as an officer, lack of involvement in the negotiation for the transaction is not a defense. Uichico v. NLRC In labor cases, corporate directors and officers are solidarily liable with the corporation for the termination of employment of corporate employee done with malice or in bad faith. In this case, it is undisputed that petitioners have a direct hand in the illegal dismissal of respondent employees. They were the ones who, as high-ranking officers and directors of Crispa Inc, signed the Board resolution retrenching private respondents on the feigned ground of serious business losses that had no basis apart from an unsigned and unaudited Profit and Loss Statement which had no evidentiary value. This is indicative of bad faith on the part of petitioners

Degree of diligence required is relative. Test: That which an ordinary prudent director could reasonably be expected to exercise in a like position under similar circumstances. If directors willfully do acts which they know or ought to know to be unauthorized, they are clearly liable for the resulting damage.

Montelibano v. Bacolod Murcia Milling Business judgment rule: Questions of policy and management are left solely to the board and the courts are without authority to substitute its judgment. The directors are the business managers of the corporation, and as long as they act in good faith, its actuations are not subject to judicial

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review. Hence, directors are not liable for losses due to imprudence or honest error of judgment. I: WoN directors are liable for the acts of their co-directors H: Generally NO. Except: he connives/participates in it he is negligent in not discovering or acting to prevent it

within the scope of Guths fiduciary duty, even if he had not utilized the corporate facilities to engage in competing business.

Distinction between Secs. 31 and 34 regarding ratification: Sec 31 par.2 makes a director liable to account for profits if he attempts to acquire or acquires any interest adverse to the corporation in respect to any matter reposed in him in confidence as to which equity imposes a disability upon him to deal in his own behalf is not subject to ratification by the stockholders In Sec, 34, if a director acquires for himself a business opportunity which should belong to the corporation, he is bound to account for such profits unless his act is ratified by the SHs representing 2/3 of the OCS. Acquisition here is merely that of a business opportunity which has not been reposed in him in confidence. Strong v. Repide If it were conceded that the ordinary relations between directors and shareholders in a business corporation are not of such a fiduciary nature as to make it the duty of a director to disclose to a shareholder the general knowledge which he may possess regarding the value of the shares of the company before he purchases any from a shareholder, yet there are cases wherem by reason of special facts, such duty exists. In this case, he was not only the director, but he owned of the shares, he was the administrator general with broad powers, and he was the one who engaged in the negotiations which finally led to the sale of the companys lands to the government at a price which very greatly enhanced the value of the stock. Self-dealing Directors

Directors of private corporations, while not strictly regarded as trustees, are considered in equity as bearing a fiduciary relation to the corporation and its SHs. They are expected to act with utmost candor and fair dealing for the interest of the corporation and without taint of selfish motives. When duty of loyalty is violated (Secs. 31 and 34) - acquires personal or pecuniary interest in conflict with his duty - attempts/acquires an adverse interest in respect to any matter which has been reposed in him in confidence - acquires for himself, by virtue of his office, a business opportunity which should belong to the corporation

Guth v. Loft F: Guth, president of Loft Inc., engaged in the manufacture and sale of beverages and candies bought the Pepsi secret formula and trademark from a bankrupt corporation, and with M organized a new corporation with the financial aid of Loft. Guth used Lofts capital, plant facilities, materials, credit and employees to perfect the mixture, and the product was sold to Loft for distribution at cost plus 10%. H: Guth had appropriated a business opportunity so closely associated with the existing business activities of Lift so essential to them as to bring it

Self-dealing director one who deals business with his own corporation

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See Sec. 32 While contracts of directors with his own corporation are voidable at the option of the latter, if all the conditions set forth thereat are present, the contract is valid and enforceable. Where ay of the first 2 conditions is absent, the contract becomes voidable but is subject to ratification by the SHs holding at least 2/3 of the OCS or 2/3 of the members The law, however, imposes 3 requirements in order for ratification to set in: o Must be at a meeting duly called for that purpose o Full disclosure of the adverse interest of the director must be made o Contract is fair and reasonable under the circumstances Question is always factual. And the ultimate question is whether the contract was honest and beneficial

Mead v. McCullough Doctrine: A director or an officer by authority of a majority of the stockholders and board of directors - may deal with the corporation. So long as a purely private corporation remains solvent, its directors are agents or trustees of all the stockholders. Once insolvent, becomes trustees of all creditors. The sale or transfer made by the quorum of the board of directors and majority of stockholders was held to be valid in this case because the corporation has been going from bad to worse. Also, the sale was done in good faith and for adequate consideration. Interlocking Directors

Prime White Cement v. IAC H: In the absence of an express delegation, a contract entered into by the president may still bind the corporation if the board should ratify the same expressly or impliedly. And even in the absence of such express/implied authority by ratification, the president as such may as a general rule, bind the corporation by a contract in the ordinary course of business, provided that the same is reasonable under the circumstances. HOWEVER, in this case, respondent Te was not an ordinary SH, he was a member of the Board and auditor of the corporation. A director of a corporation holds a position of trust and such, he owes a duty of loyalty to the corporation. In case his interests conflict with those of the corporation, he cannot sacrifice the latter to his own benefit. As corporate managers, directors are committed to seek the maximum amount of profits for the corporation. This trust relationship is not a matter of statutory or technical law. It springs from the fact that directors have the control and guidance of corporate affairs and property and hence of the property interests of the SHs.

Interlocking directors Directors in X corporation deals with Y corporation of which they are also directors See Sec. 33: General Rule: Contracts entered into by interlocking director/s are upheld if there is not bad faith or unfairness or collusion. However, if the interest of the interlocking directors/s in one corporation is substantial (more than 20%) and merely nominal in the other, the contract becomes voidable subject to the provisions on selfdealing directors. may involve a violation of the duty of loyalty there may be a dual agency

Derivative Suit Derivative Suit - a relief available to minority shareholders against erring directors or officers (aside from the personal suit and

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representative/class suit); an action based on injury to the corporation to enforce a corporate right wherein the corporation itself is joined as a necessary party and recovery is in favor of and for the corporation. Personal suit one brought for direct injury of a SHs rig hts, eg denied the right to inspect corporate books or exercise of preemptive rights Class suit one or more members of a class sue as a class for all to whom the right was denied.

obvious that the demand on the Board to institute action and prosecute the same effectively would have been useless, and the law does not require litigants to perform useless acts. Republic Bank v. Cuaderno F: This is an appeal from a dismissal of the case against respondent Roman for alleged fraudulent grant of loans to relatives (while he was chairman of the Board of Directors of Republic Bank and its Executive Loan Committee) and for the selection of respondents Cuaderno and Dizon (as technical consultant and chairman of the board respectively) in order to shield himself from the alleged wrongdoing and from any prosecution that may be instituted against him. The complaint also alleges that the present composition of the board of directors of the bank are constituted by men chosen by respondent Roman so that it was futile to ask them, in the first place, to institute this action on behalf of the bank. H: In a derivative suit, the corporation is the real party in interest and the stockholder is merely a nominal party. Normally, it is the corporation through its board of directors that should bring the suit. But where, as in this case and it is alleged in the complaint, that the members of the board of directors of the bank were the nominees and creatures of respondent Roman, thus, any demand for an intra-corporate remedy would be futile, the stockholder is permitted to bring a derivative suit. As to the question of should the corporation be made a party, the English practice is to make the corporation a party plaintiff while in the US the practice is to make it a party defendant. However, in our jurisdiction what is important is that the corporation should be made a party in order to make the courts judgment binding upon it, and thus bar future litigation of the issues. Misjoinder of parties (in a derivative suit) is not a ground to dismiss the action. Western Institute v. Salas H: The case is not a derivative suit but merely an appeal from the civil aspect of the criminal cases for estafa and falsification of documents.

Pascual v. Orozco Doctrine: A derivative suit is granted to any stockholder to institute a case to remedy a wrong done directly to the corporation and indirectly to the stockholders. Where corporate directors have committed breach of trust either by their frauds, ultra vires acts or negligence, and the corporation through the said board, is unable or unwilling to institute the suit to remedy the wrong, a single stockholder on behalf of himself and other stockholders and for the benefit of the corporation, may institute the case to bring about redress of the wrong done directly to the corporation and indirectly to the stockholders. A stockholder in a corporation who was not such at the time of the transactions complained of, or whose shares had not devolved upon him since by operation of law, cannot maintain suits of this character, unless such transactions continue and are injurious to the stockholder, or affect him specifically in some way. Everett v. Asia Banking Corporation H: Invoking the well-known rule that shareholders cannot ordinarily sue in equity to redress wrongs done to the corporation, but that the action must be brought by the Board, the appellees argue that the corporation is a necessary plaintiff and that plaintiff stockholders, not having made any demand on the Board to bring the action, are not proper plaintiffs. But, like most rules, the rule has its exceptions. It is alleged in the complaint that the corporation is under the complete control of the appellees and it is

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Among the basic requirements for a derivative suit to prosper is that the minority shareholders who is suing for and on behalf of the corporation must allege in his complaint before the proper forum that he is suing on a derivative cause of action on behalf of the corporation and all other shareholders similarly situated who wish to join. SMC v. Khan F: 14 corporations initially acquired shares of outstanding capital stock of San Miguel Corporation and constituted a Voting Trust thereon in favor of Andres Soriano, Jr. When the latter died Eduardo Cojuanco was elected as the substitute trustee. However, after the EDSA revolution, Cojuanco fled out of the country, and subsequently an agreement was entered into between the 14 corporations and Andres Soriano III (as an agent of several persons) for the purchase of the shares held by the former. Actually the buyer of the shares was Neptunia Corporation, a foreign corporation and wholly-owned subsidiary of another subsidiary wholly owned by San Miguel Corporation. Neptunia paid the downpayment from the proceeds of certain loans. PCGG then sequestered the shares subject of the sale so San Miguel suspended all the other installments of the price to the sellers. The 14 corporations then sued for rescission and damages. Meanwhile, PCGG directed San Miguel to issue qualifying shares to seven (7) individuals including Eduardo de los Angeles from the sequestered shares for them to hold in trust. Then, the San Miguel board of directors passed a resolution assuming the loans incurred by Neptunia for the down payment. De los Angeles assailed the resolution alleging that it was not passed by the board aside from its deleterious effects on the corporations interest. When his efforts to obtain relief within the corporation proved futile, he filed this action with the SEC. Respondent directors alleged that de los Angeles has no legal standing having been merely imposed by the PCGG and that the twenty (20) shares owned by him personally cannot fairly and adequately represent the interest of the minority.

H: The requisites of a derivative suit are: 1. the party bringing the suit should be a stockholder as of the time of the act or transactions complained of, the number of shares not being material; exhaustion of intra-corporate remedies (has made a demand on the board of directors for the appropriate relief but the latter has failed or refused to heed his plea); and the cause of action actually devolves on the corporation and not to the particular stockholder bringing the suit.

2.

3.

The bona fide ownership by a stockholder in his own right suffices to invest him with the standing to bring a derivative suit for the benefit of the corporation. The number of his shares is immaterial since he is not suing in his own behalf, or for the protection or vindication of his own particular right, or the redress of a wrong committed against him individually but in behalf and for the benefit of the corporation. It is undisputed that apart from the qualifying shares given to him by the PCGG, he owns 20 shares in his own right, as regards which he cannot from any aspect be deemed to be beholden to the PCGG, his ownership of his shares being precisely what he invokes as the source of his authority to bring the derivative suit. Furthermore, it was not necessary for de los Angeles to be a director in order to bring a derivative suit. De los Angeles complaint is confined to the issue of the validity of the assumption by the corporation of the indebtedness of Neptunia, allegedly for the benefit of certain of its officers and stockholders and is distinct from the ownership of the sequestered shares. The dispute concerns the acts of the board of directors claimed to amount to fraud and misrepresentation which may be detrimental to the interest of the stockholders, or is one arising out of intra-corporate relations between and among stockholders, or between any or all of them and the corporation of which they are stockholders (meaning that the cause of action still belongs to the corporation). In effect the result of the acts of the directors of San Miguel is the use of corporate assets for the benefit of certain directors/stockholders to the extent that the corporation will not be able to devote its assets in acquiring its own shares. But even without the presence of a self-

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interested director, still the transaction would result to a premature retirement of the shares (meaning a reduction of capital). In a derivative suit, the number of shares of a suing stockholder is immaterial. Even assuming that the suing stockholder had only qualifying shares, the law requires only one share with out any distinction or qualification. Besides, it is precisely within the scope of PCGGs duty to preserve the assets of the corporation. Chase v. Buencamino H: Chase has personality to file derivative suit as an Ampartus stockholder. Evidence show that he was recognized as a stockholder and was even an incorporator with 600 paid-up shares representing 1/3 interest in Ampartus, and that would be enough for Chase to have personality to institute a derivative suit. More importantly, Chase filed the action not for his own benefit, but for the corporations. Reyes v. Tan H: It is not denied by petitioners that the allocation of dollar to the corporation for the importation of raw materials was suspended. The importation of textiles instead of raw materials, as well as the failure of the board of directors to take action against those directly responsible for the misuse of dollar allocations constitute fraud, or consent thereto on the part of the directors. Therefore, a breach of trust was committed which justified the derivative suit by a minority stockholder on behalf of the corporation. Gamboa v. Victoriano H: An individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are the ones to be sued or hold the control of the corporation. In such actions, the suing stockholder is regarded as a nominal party, with the corporation as the real party in interest. In the case at bar, the plaintiffs

alleged that they were vindicating their own individual interest or prejudice, and not that of the corporation. At any rate, it is yet too early in the proceedings since the issues have not been joined. Besides, misjoinder of parties is not ground to dismiss an action. Evangelista v. Santos H: In the present case, the plaintiff stockholders have brought the action not for the benefit of the corporation but for their own benefit, since they ask that the defendant make good the losses occasioned by his mismanagement and pay to them the value of their respective holdings. Clearly, this cannot be done until all corporate debts, if there be any, are paid and the existence of the corporation terminated by the limitation of its charter or by lawful dissolution in view of the provisions of Sec. 16. It results that the plaintiffs complaint shows no cause of action in their favor so that the lower court did not err in dismissing the complaint on that ground.

Executive Committee The board may delegate the powers and functions that may be lawfully delegated to other corporate officers or agents for convenience and appropriate action on matters that may require immediate attention The Code, in fact authorizes every corporation to create, in accordance with its by-laws, executives committees or perform specific powers within the competence of the board (See Sec. 35) Composed of not less than 3 members of the board Committee may act and bind the corporation by the majority vote of all its members except with respect to those matters provided in Sec. 35, ie: o Approval of any action for which shareholders approval is also required o Filling of vacancies in the board o Amendment or repeal of by-laws or the adoption of new by-laws

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Amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable Distribution of cash dividends to the shareholders

and loan association, trust company, insurance company, public utility, educational institution or other special corporations governed by special laws, unless accompanied by a certificate of the appropriate government agency to the effect that such by-laws or amendments are in accordance with law. Rules and ordinances made by a corporation for its own government To regulate the conduct and define the duties of the stockholders or members towards the corporation and among themselves Private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns The power to make and adopt by-laws is inherent in every corporation as one of its necessary and indispensable legal incidents Express power granted to all corporations and specifically required Subordinate to the articles of incorporation as well as the Corporation Code In case of any discrepancy: articles of incorporation > by-laws

6) Corporation Power and Authority

ALEX

7) By-Laws
Sec. 46. Adoption of by-laws. - Every corporation formed under this Code must, within one (1) month after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission, adopt a code of by-laws for its government not inconsistent with this Code. For the adoption of by-laws by the corporation the affirmative vote of the stockholders representing at least a majority of the outstanding capital stock, or of at least a majority of the members in case of non-stock corporations, shall be necessary. The by-laws shall be signed by the stockholders or members voting for them and shall be kept in the principal office of the corporation, subject to the inspection of the stockholders or members during office hours. A copy thereof, duly certified to by a majority of the directors or trustees countersigned by the secretary of the corporation, shall be filed with the Securities and Exchange Commission which shall be attached to the original articles of incorporation. Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed prior to incorporation; in such case, such by-laws shall be approved and signed by all the incorporators and submitted to the Securities and Exchange Commission, together with the articles of incorporation. In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange Commission of a certification that the by-laws are not inconsistent with this Code. The Securities and Exchange Commission shall not accept for filing the bylaws or any amendment thereto of any bank, banking institution, building

Contents of the By-Laws Sec 47 1. 2. 3. 4. 5. 6. 7. The time, place and manner of calling and conducting regular or special meetings of the directors or trustees; The time and manner of calling and conducting regular or special meetings of the stockholders or members; The required quorum in meetings of stockholders or members and the manner of voting therein; The form for proxies of stockholders and members and the manner of voting them; The qualifications, duties and compensation of directors or trustees, officers and employees; The time for holding the annual election of directors of trustees and the mode or manner of giving notice thereof; The manner of election or appointment and the term of office of all officers other than directors or trustees;

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The penalties for violation of the by-laws; In the case of stock corporations, the manner of issuing stock certificates; and 10. Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs 8. 9. Effective only upon the approval of the SEC May adopt and file prior to incorporation must be signed by all incorporators without the need of the affirmative vote if filed after incorporation stockholders/members must consent or approve TIME: within one month after receipt of notice They are internal rules which cant bind, effect or prejudice third persons unless they have knowledge of its existence and contents

secretary and a majority of the directors or trustees, shall be filed with the Securities and Exchange Commission the same to be attached to the original articles of incorporation and original by-laws. The amended or new by-laws shall only be effective upon the issuance by the Securities and Exchange Commission of a certification that the same are not inconsistent with this Code 2 modes of amending or repealing by-laws or adopting a new one 1) majority vote of the directors or trustees + majority vote of the outstanding capital stock or members at a regular or special meeting called for that purpose 2) by the board of directors alone when delegated by 2/3 of the outstanding capital stock or members

Amendments to the By-laws: Sec 48 The board of directors or trustees, by a majority vote thereof, and the owners of at least a majority of the outstanding capital stock, or at least a majority of the members of a non-stock corporation, at a regular or special meeting duly called for the purpose, may amend or repeal any by-laws or adopt new by-laws. The owners of two-thirds (2/3) of the outstanding capital stock or twothirds (2/3) of the members in a non-stock corporation may delegate to the board of directors or trustees the power to amend or repeal any bylaws or adopt new by-laws: Provided, That any power delegated to the board of directors or trustees to amend or repeal any by-laws or adopt new by-laws shall be considered as revoked whenever stockholders owning or representing a majority of the outstanding capital stock or a majority of the members in non-stock corporations, shall so vote at a regular or special meeting. Whenever any amendment or new by-laws are adopted, such amendment or new by-laws shall be attached to the original by-laws in the office of the corporation, and a copy thereof, duly certified under oath by the corporate Loyola Grand Villas Association v CA LGV Homeowners Assoc didnt file its corporate by -laws. Thus it was dissolved automatically. There was allegedly non-user of corporate charter because HIGC, the homeowners organization had not received any report on the associations activities. W/N the failure to adopt and file its by-laws resulted in its dissolution: NO. A copy thereof, duly certified SHALL be filed with the SEC. Mandatory but automatic dissolution was never the intention of the legislature. By-laws are only subordinate to the articles of incorporation. The SEC is only empowered to suspend or revoke the franchise or certificate of registration of a corporation only after NOTICE and HEARING. Consequence: penalty only

Fleisher v Botica Nolasco Gonzales, original owner of shares of stock assigned and delivered said shares to Fleishcer in consideration of a large sum of money. Miciano, secretary-treasurer of corporation offered to buy from

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Fleishcer on behalf on the corporation. By virtue of Art 12 of the by-laws, corporation had the preferential right to buy from Gonzales said shares. W/N Fleischer is bound by the provisions of the by-laws: NO By-laws must not be inconsistent with the Corporation Code. Shares of stock are personal property and may be transferred by delivery of the certificate indorsed by the owner. Code contemplates no restriction as to whom they may be transferred or sold. By-laws are intended merely for the protection of the corporation and prescribe regulation, not restriction. It cant take away or abridge the substantial rights of a stockholder. By-laws are valid if they are reasonable and calculated to carry into effect the objects of the corporation.

terminate the terms of existing officers nor dissolve the corporation. Gokongwei v SEC Gokongwei wants SMC by laws to be declared null and cancelled on ground that directors amdended the by-laws without authority from at least 2/3 of the outstanding capital stock. Also, in amending the by-laws, directors purposely provided for his qualifications: no person shall qualify or be eligible for nomination or election to the BoD if he is engaged in any business which competes with or antagonistic to that of the corporation of if he is an officer, manager or controlling person of or the owner of 10% more of any outstanding class of shares Alleged that the corporations have no inherent power to disqualify a SH from being elected as director Held: VALID. Gokongwei (president and substantial SH of URC, direct competitor) cannot devote an unselfish and undivided loyalty to the corporation being an owner of a competitor corp. This provision is essentially a preventive measure to assure SH of SMC of reasonable protection from the unrestrained self-interest of those charged. Access to confidential information may result either in the promotion of the competitor at the expense of SMC. Corporate officers are not permitted to use their position of trust and confidence to further their private interests. BoD has access to sensitive and highly confidential information. Sound principles of corporate management counsel against sharing sensitive information with a director whose fiduciary of loyalty may well require that he disclose this info to a competitive rival. Corporate opportunity recognition by the courts that the fiduciary standards could not be upheld where the fiduciary was acting for 2 entities with competing interests.

Govt v El Hogar Filipino By-law provision: board of directors empowered to cancel shares and return to owner the balance resulting from the liquidation by reason of their conduct or for other motive, the continuation as members is not desirable. Valid or not? NO Patently null. It is in direct conflict with Corpo Law which expressly declares that the board of directors shall not hve the power to force the surrender and withdrawal of unmatured stock except in case of liquidation of the corporation or of the forfeiture of the stock for delinquency. Another provision: because of the failure of the corporation to hold annual meetings, directors fill the vacancies in the directorate by choosing suitable persons from among the stockholders Valid or not? YES SHs non-attendance at such meetings is doubtless to be interpreted in part as expressing their satisfaction at the way in which things have been conducted. Upon the failure of a quorum at any annual meeting, the directorate naturally holds over and continues to function until another directorate is chosen and qualified. Mere failure of a corporation to elect officers does not

Summary: elements of a valid by-laws 1) 2) not contrary to law, public policy or morals not inconsistent with articles of incorporation

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3) general and uniform in its effect or applicable to all alike or those similarly situated 4) not impair obligations and contracts or vested rights 5) reasonable

8) Meetings
Sec 49: Meetings of directors, trustees, stockholders or members may be regular or special. Meetings - Duly convened assembly either of stockholders, members, directors, trustees, managers for any legal purpose or for the transaction of business of a common interest

General: management of corporate affairs vested in the board of directors (although in some instances the stockholders or members consent or vote is required Stockholders have no power to act as or for the corporation EXCEPT at a corporate meeting called and conducted according to law Regular meetings held annually; Special meetings any time deemed necessary

Requirements for a valid Stockholders Meeting 1. Must be held on the date fixed in the by-laws or in accordance with law a. Absent any date, must be held on any day of April as may be determined by the board of directors b. Exceptions: where the annual meeting cant be held on the appointed time for valid and meritorious reasons such as force majeure or the inability to obtain the required quorum may be postponed to a reasonable future date. Prior notice must be given a. At least 2 weeks prior to the regular meetings b. 1 week prior notice for special meetings c. allows by-laws to provide a different period for sending out notice d. failure to give the same render resolution voidable at the option of the stockholder who was not notified e. notice may be waived. f. SH who is present and participates without objection cant complain of failure to give notice or defects in notice g. Meeting duly called for the purpose thus notice may state the agenda or business matters

1) Stockholders Meeting Regular meetings of stockholders or members shall be held annually on a date fixed in the by-laws, or if not so fixed, on any date in April of every year as determined by the board of directors or trustees: Provided, That written notice of regular meetings shall be sent to all stockholders or members of record at least two (2) weeks prior to the meeting, unless a different period is required by the by-laws. Special meetings of stockholders or members shall be held at any time deemed necessary or as provided in the by-laws: Provided, however, That at least one (1) week written notice shall be sent to all stockholders or members, unless otherwise provided in the by-laws. Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member. Whenever, for any cause, there is no person authorized to call a meeting, the Secretaries and Exchange Commission, upon petition of a stockholder or member on a showing of good cause therefor, may issue an order to the petitioning stockholder or member directing him to call a meeting of the corporation by giving proper notice required by this Code or by the by-laws. The petitioning stockholder or member shall preside thereat until at least a majority of the stockholders or members present have been chosen one of their number as presiding officer

2.

Examples of the agenda and business matters which need to be stated: 1) 2) removal of directors/trustees filing up of vacancies in the office of directors or trustees

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3) ratification of contract of the corporation with any of its directors or trustees 4) extension or shortening of corporate term 5) increase or decrease capital stock or incurring, creating or increasing bonded indebtedness 6) sale or other disposition of all or substantially all of the assets of the corporation 7) investment of corporate funds in another corporation or business or for any other purpose 8) declaration of stock dividends 9) entering into a management contract with another corporation 10) amendment or repeal of the by-laws or adoption of a new one 11) fixing the issue price of no-par value shares by the stockholders 12) merger or consolidation 13) dissolution of the corporation Board of Directors v Tan By- law provision: notice of a regular annual meeting or of a special meeting ma be given by posting copies of said notice at different departments NOT LESS THAN 5 DAYS PRIOR to the date of the meeting. Notice of election was given two days prior to the set election notice requirement not complied with. Election null and void. It must be held at the proper place

provided all the stockholders or members of the corporation are present or duly represented at the meeting City or municipality where the principal office of the corporation is located As far as practicable: inside the principal office Law allows a non-stock corp to provide in its by-laws any place of members meetings provided that PROPER NOTICE is sent indicating the date, time and place Must be within the Philippines Metro Manila considered as one city or municipality

4.

It must be called by the proper party Authority rests with the board of directors President has NO power to call a meeting in the absence of a by-law provision or a board resolution making it his duty to do so President may preside at the meeting of directors Law empowers the proper forum to issue an order upon petition of a SH or member to the petitioning stockholder or member directing him to call a meeting by giving proper notice Petitioning stockholder or member shall preside

3.

Ponce v Encarnacion Gapol prayed for an order directing him to call a meeting of the stockholders and to preside at such meeting. 2 days later, without notice to the petitioner, the court issued the order. Petitioners learned only of this order later. Held: the requirement that on the showing of good cause therefor, the court may grant to a stockholder the authority to call such meeting and to preside thereat does NOT mean that the petition must be set for hearing with notice served upon the board of directors. The court was satisfied that there was a showing of good cause authorizing Gapol to call a meeting for the purpose of electing the BoD because the chairman had failed to do so.

Section 51: Stockholders' or members' meetings, whether regular or special, shall be held in the city or municipality where the principal office of the corporation is located, and if practicable in the principal office of the corporation: Provided, That Metro Manila shall, for purposes of this section, be considered a city or municipality. Notice of meetings shall be in writing, and the time and place thereof stated therein. All proceedings had and any business transacted at any meeting of the stockholders or members, if within the powers or authority of the corporation, shall be valid even if the meeting be improperly held or called,

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 SEC Case (Afable v Agellon): under the present set-up of the law, the Ponce cause would apply only where there is NO person authorized to call the meeting, thus an ex parte proceeding may be allowed. However, where there is an officer authorized to call the meeting and that officer refuses, fails or neglects to call the meeting, then the Ponce case will NOT apply.

Corporations are authorized to prescribe in their by-laws the number of members or outstanding capital stock required to be present to constitute a quorum However, where the number necessary to constitute a quorum is prescribed by Corpo Code, the by-law will have to be consistent with Code or else it will have no force and effect If the voting requirement is met, any resolution passed in the meeting, even if improperly held or called will be VALID if all SH or mems are present or duly represented.

Likewise, while the Ponce case held that the questioned order was likened to a writ of preliminary injunction, now the said writ can no longer be issued without notice of hearing under BP 224 amending Rules of Court Rule 58.

2) Directors /Trustees MEETING Section 53: Regular meetings of the board of directors or trustees of every corporation shall be held monthly, unless the by-laws provide otherwise. Special meetings of the board of directors or trustees may be held at any time upon the call of the president or as provided in the by-laws. Meetings of directors or trustees of corporations may be held anywhere in or outside of the Philippines, unless the by-laws provide otherwise. Notice of regular or special meetings stating the date, time and place of the meeting must be sent to every director or trustee at least one (1) day prior to the scheduled meeting, unless otherwise provided by the by-laws. A director or trustee may waive this requirement, either expressly or impliedly Regular monthly; Special any time upon Presidents call or any person authorized to do so provided in the by-laws May be held ANYWHERE even outside the Philippines unless the by-laws provide otherwise Notice at least 1 day before. Notice determines legality and binding effect. SEC opinion: special meeting conducted in the absence of some of the directors and without any notice to them is illegal and the action at such meeting, although by a majority of the directors is invalid UNLESS ratified subsequently

Summary: persons who may call the meeting 1) authorized under the by-laws 2) absent any provision, president 3) secretary, on order of the president or on written demand of the SHs representing majority 4) on order of the proper forum pursuant to Sec 50 5. Quorum and voting Requirements must be met Section 52: Unless otherwise provided for in this Code or in the by-laws, a quorum shall consist of the stockholders representing a majority of the outstanding capital stock or a majority of the members in the case of nonstock corporations GR:Quorum requirement: majority of the outstanding capital stock o E: e.g. removal of a director at least 2/3 Voting requirement: majority No quorum= no binding force Basis: total number of registered voting members for non-stock; total subscription of the stockholders for stock

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SEC Opinion 2: special meeting held where ALL directors were present and participated even without formal notice is considered valid. Teleconferencing and videoconferencing: a reality in the light of RA 8792 GR: majority of the members of the board of directors or trustees as fixed in the articles of incorporation will constitute a quorum for the transaction of corporate business o E: in case of election of corporate officers which requires the vote of a majority of ALL members of the board NO PROXY FOR DIRECTOR/TRUSTEE - Unlike a stockholder or a member, a director or trustee cannot attend or vote by proxy at any board meeting

Section 55: In case of pledged or mortgaged shares in stock corporations, the pledgor or mortgagor shall have the right to attend and vote at meetings of stockholders, unless the pledgee or mortgagee is expressly given by the pledgor or mortgagor such right in writing which is recorded on the appropriate corporate books. (n) Executors, administrators, receivers, and other legal representatives duly appointed by the court may attend and vote in behalf of the stockholders or members without need of any written proxy If legal title remains with pledgor/mortgagor they still have the right to vote; if transferred and registered pledgee and mortgagee will have the right to vote Administrators must be appointed by court. Statutory grant to vote on shares belonging to the estate of the decedent although not qualified to be elected as director

Section 54: PRESIDENT shall PRESIDE unless by-laws provide otherwise The president shall preside at all meetings of the directors or trustee as well as of the stockholders or members, unless the by-laws provide otherwise Sec 50: a petitioning stockholder may preside Stockholders Right to Vote and Manner of Voting Right to vote inherent in and incidental to the ownership Property right - a stockholder can vote his shares the way he pleases except only in so far as it may be restricted by law. Court cant deprive a stockholder of his right to vote except up on a clear showing of the lawful denial under articles or by-laws Exceptions to inherent right to vote: ( PUT-D) 1. Non-voting shares: preferred and redeemable shares 2. Treasury shares while they remain in treasury 3. Shares of stock of declared delinquent 4. Unregistered transferees of shares of stock May vote personally or through a rep by way of proxy, voting trust agreement or by executor/administrator/receiver/legal rep Pledgees/mortgagees not entitled to vote in absence of the agreement to contrary.

Sec. 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. Joint-ownership both must agree upon the vote o Consent is not required if there is a written proxy signed by all co-owners

Sec. 57. Voting right for treasury shares. - Treasury shares shall have no voting right as long as such shares remain in the Treasury Treasury shares shares of stock which have been issued and fully paid BUT reacquired by the corporation either by purchase, redemption, donation or other lawful means

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Reason for no voting right- prevent or deter the incumbent directors and officers from perpetuating themselves as such or from prolonging their stay

Duration and Effectivity: fixed by its own terms but not for more than 5 years subject to extension for not more than 5 years for each renewal Revocability: need not be made by formal notice in writing; may be expressed to the proxy holder, to the election committee by a subsequent proxy to another or by the sale of the shares Unless coupled with interest Orally or by conduct Voting Trust Sec. 59. Voting trusts. - One or more stockholders of a stock corporation may create a voting trust for the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to the shares for a period not exceeding five (5) years at any time: Provided, That in the case of a voting trust specifically required as a condition in a loan agreement, said voting trust may be for a period exceeding five (5) years but shall automatically expire upon full payment of the loan. A voting trust agreement must be in writing and notarized, and shall specify the terms and conditions thereof. A certified copy of such agreement shall be filed with the corporation and with the Securities and Exchange Commission; otherwise, said agreement is ineffective and unenforceable. The certificate or certificates of stock covered by the voting trust agreement shall be canceled and new ones shall be issued in the name of the trustee or trustees stating that they are issued pursuant to said agreement. In the books of the corporation, it shall be noted that the transfer in the name of the trustee or trustees is made pursuant to said voting trust agreement.

Proxy and Other Representative Voting Sec. 58. Proxies. - Stockholders and members may vote in person or by proxy in all meetings of stockholders or members. Proxies shall in writing, signed by the stockholder or member and filed before the scheduled meeting with the corporate secretary. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. No proxy shall be valid and effective for a period longer than five (5) years at any one time Species of absentee voting by mail by a one way ballot for the slate or proposals suggested by the management Properly the authority given by the SH or mem to another to vote for him at a SH/Mem meeting Also refers to the instrument or paper evidencing the authority Right granted to all stockholders, not absolute if in non-stock (it may be denied)

Requirements 1) in writing 2) signed by the stockholder or member or his duly authorized representative 3) filed on or before the scheduled meeting with corporate secretary 4) notarization unless not provided 5) SEC Memo Circular: for publicly listed corporations 2 Types 1. General general discretionary power of attorney to vote for directors and all ordinary matters. NOT an authority to vote for fundamental changes in the corporate charter or for unusual transactions Limited restricts the authority to vote on specified matters and may direct the manner in which the vote will be casted.

The trustee or trustees shall execute and deliver to the transferors voting trust certificates, which shall be transferable in the same manner and with the same effect as certificates of stock. The voting trust agreement filed with the corporation shall be subject to examination by any stockholder of the corporation in the same manner as

2.

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any other corporate book or record: Provided, That both the transferor and the trustee or trustees may exercise the right of inspection of all corporate books and records in accordance with the provisions of this Code. Any other stockholder may transfer his shares to the same trustee or trustees upon the terms and conditions stated in the voting trust agreement, and thereupon shall be bound by all the provisions of said agreement. No voting trust agreement shall be entered into for the purpose of circumventing the law against monopolies and illegal combinations in restraint of trade or used for purposes of fraud. Unless expressly renewed, all rights granted in a voting trust agreement shall automatically expire at the end of the agreed period, and the voting trust certificates as well as the certificates of stock in the name of the trustee or trustees shall thereby be deemed canceled and new certificates of stock shall be reissued in the name of the transferors. The voting trustee or trustees may vote by proxy unless the agreement provides otherwise. Defined as one created by an agreement between a group of stockholders of a corporation and a trustee or a group of identical agreements between individual stockholders and a common trustee, whereby it is provided that for a term of years or for a period contingent upon a certain event or until the agreement is either with or without reservation to the owners or person designated by them the power to direct how such control shall be issued Devise of binding stockholders to vote as a unit and thus assuring a desirable stability and continuity in management in situations where it is needed Think: SHAM OWNER

inspect the books of the corporation, the right to sell certain interests in the liquidation of the corporation Three criteria o Voting rights of the stock are separated from the other attributes of ownership o Voting rights granted are intended to be irrevocable for a definite period of time o Principal purpose: acquire voting control of the corporation Voting trust agreement may confer upon a trustee not only the stockholders voting rights but also other rights pertaining to his shares as long as the VTA is not entered for the purpose of circumventing the law Beneficial owner ceases to be recognized as a shareholder of record and may be deprived not only of any right to vote for directors but also to b elected as such, notice of info as against the corporation or any voice in making most fundamental changes such as mergers and consolidation, sale of assets, etc.

VOTING TRUST V PROXY - see table VOTING TRUST 1) beneficial owner of the shares ceases to be SH of record of the corporation legal title of shares is transferred to trustee 2) trustee votes as owner of the shares 3) beneficial owner of the shares is disqualified to be a director 4) purpose is to acquire voting control of the corporation 5) irrevocable 6) trustee can act and vote at any meeting during the duration of the agreement PROXY 1) legal title remains the beneficial owner

Lee v CA Results in the separation of the voting rights of a stockholder form his other rights such as the right to receive dividends, the right to

2) Proxy holder votes merely as an agent 3) owner of the shares may be elected 4) generally used to secure voting and quorum requirements or for representing absentee SH 5) revocable unless coupled with interest 6) holder act as such only at a particular meeting

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7) vote in person or by proxy 8) duration of a voting trust agreement may exceed five years 9) for it to be valid and effective must be notarized and filed with SEC

7) must vote in person May not exceed five years at any one time 9) need not be notarized unless required nor is it required to be filed

By purchase or acquisition of shares from existing stockholders

SUBSCRIPTION CONTRACT Subscription - Mutual agreement of the subscribers to take and pay for the stocks of a corporation

NIDC v Aquino VTA executed for five years over 60% of the outstanding paid up and subscribed shall executed by stockholders in favor of NIDC (for loans) the parties were NIDC and certain stockholders of Batjak (corp). Batjak was not a signatory itself. Batjak also mortgaged some of their properties. Foreclosed for failure to pay. Unable to redeem. Now, Batjak wants NIDC to give back their properties considering the VTA has been terminated. Held: from the provisions of the VTA, it is clear what was assigned to NIDC was the power to vote the shares of stock (60%) and the authority to execute any agreement or document necessary to express the consent or assent to any matter. Nowhere in the said provision is mention made of any transfer or assignment to NIDC of the assets, operations and management. NIDC was constituted as trustee only of the voting rights What was to be returned by NIDC as trustee of Batjaks SH upon the termination of the VTA were the certificates of shares of stock belonging to the stockholders, not the properties or assets of Batjak itself which were never delivered under the terms of VTA. The acquisition by the NIDC of the properties in question was not made or effected under the capacity of a trustee but as a foreclosing creditor.

Subscription contract (Sec 60) any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription within the meaning of this title, notwithstanding the fact that the parties refer to it as a purchase or some other contract once a person buys or subscribes to the unissued stocks, the person then becomes entitled to all the rights to a stockholder and subjected to all liabilities that attach thereunder upon execution and effectivity of the contract or upon acceptance a subscription contract need NOT be in writing such that an oral contract is subscription is valid and enforceable. May be conditional, may be upon special terms subscription upon special terms is an absolute subscription, making the subscriber a stockholder and rendering him liable as such as soon as the subscription is accepted, the special term being an independent stipulation. In case of doubt: absolute subscription! Conditional subscriptions are valid provided there is noting in the charter or enabling act prohibiting the same o Providing the conditions are not such as to render their performance beyond the powers of the corporation or in violation of law or contrary to public policy.

Trillana v Quezon College, Inc.

9) Stock and Stockholders

A person may become a stockholder in three ways o By a contract of subscription with the corporation o By purchase of treasury shares from the corporation

Crisostomo sent a letter to the board of trustees of corp to enter his subscription of 200 shares. However he wasnt able to pay before his death. Now the corp is claiming for the collection of 20,000 representing the value of the subscription.

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Subscription is not valid and enforceable. There was a condition which said: babayaran ko ang lahat pagkatapos na ako ay makapgpahuli ng isda. There is nothing to show that corp accepted the terms of the payment. Said acceptance is essential. It was a facultative obligation thus void under the civil code. It solely depended upon her own will.

Stock Issuance generally the initial and primary source of corporate capital thus the consideration thereof should not be less than its par or issued price. Sec. 62. Considering for stocks. - Stocks shall not be issued for a consideration less than the par or issued price thereof. Consideration for the issuance of stock may be any or a combination of any two or more of the following: 1. Actual cash paid to the corporation; A corporation is not restricted in receiving money Code allows a corporation to issue its stocks in exchange of property tangible or intangible 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; Value of the property must be at least equal to the par Tangible o appraisal report of an independent appraiser o Zonal valuation as certified by the BIR o Market value indicated in the real estate tax declaration Intangible o Patents or copyrights o Value - Initially determined by the incorporators/board of directors o Subject to SEC approval Labor performed for or services actually rendered to the corporation; Must be capable of valuation, and must be fairly valued True value rule motives of those making the

Pre-Incorporation Subscriptions Subscriptions for shares of stock of a corporation still to be formed However, the validity and binding effect of a pre-incorporation subscription is now recognized at least by analogy

Section 61: A subscription for shares of stock of a corporation still to be formed shall be irrevocable for a period of at least six (6) months from the date of subscription, unless all of the other subscribers consent to the revocation, or unless the incorporation of said corporation fails to materialize within said period or within a longer period as may be stipulated in the contract of subscription: Provided, That no preincorporation subscription may be revoked after the submission of the articles of incorporation to the Securities and Exchange Commission Gives an immediate binding effect on pre-incorporation subscriptions as against the subscribers of the capital stock of a corporation still to be formed MANDATORY. Why? Coz of sec 13 and 14 which mandate that a corporation may be registered as such only if at least 25% of its authorized capital stock has been subscribed and at least 25% paid. These subscriptions are irrevocable for at least 6 months o Unless a) all subscribers consent to the revocation o b) the incorporation of said corporation fails to materialize within said period or within a longer period as may be stipulated in the contract of subscription they are irrevocable AFTER the submission of the articles of incorporation

2.

3.

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valuation are disregarded and the sole and decisive factor is w/n the property or services are in fact worth the value placed on them Good faith rule based on the proposition that the value of the property or services is a matter about which there can be an honest difference of opinion

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 Issue transaction by which a person becomes the owner of the shares Par/issue price while it may not reflect the true value of the shares which constantly fluctuates, it merely indicates the amount which the original subscribers are supposed to contribute to the corporate capital as the basis of the privilege of profit sharing with limited liability

4.

Previously incurred indebtedness of the corporation; Set-off or satisfaction of debt lawful and valid Equivalent to payment for the stock in cash Amounts transferred from unrestricted retained earnings to stated capital; and Declaration and distribution of stock dividend where corporate earnings are capitalized rather than being distributed as cash dividend Converts income into capital Outstanding shares exchanged for stocks in the event of reclassification or conversion. Shares of stock surrendered to the corporation in exchange for new or different type of shares Take place by amendment of the articles of incorporation in the event that the corporation may wish to provide for a classification of its shares or by virtue of existing provisions thereof

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6.

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.

National Exchange Co v Dexter I hereby subscribe to 300 sharespayable from the first dividends declared of the capital stock of shares of said company owned by me at the time the dividends are declared, until the full amount of this subscription has been paid. Dexter had a balance of 15000 still unpaid on his subscription as there were no further dividends declared. Action to recover the value of shares. Hes not relieved from personal liability. He still has to pay. Subscribers are bound to pay full par value in cash or its equivalent and any attempt to discriminate in favor of one subscriber by relieving him of this liability wholly or in part is forbidden. GR: an agreement between a corporation and a particular subscriber by which the subscription is not to be payable or is to be payable in part only is illegal and void as in fraud of other creditors or stockholders or both and cannot be enforced. Certificate of Stock and their Transfer The piece of paper or document which evidences the ownership of shares and a convenient instrument for the transfer of the title Shares of stock are personal properties and the owners thereof have the unbridled right to transfer the same to anyone they please subject only to reasonable charter provisions

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 Sec. 63. Certificate of stock and transfer of shares. - The capital stock of stock corporations shall be divided into shares for which certificates signed 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 endorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred. No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. Signed by the President OR vice president Countersigned by secretary or assistant secretary Sealed with the corporate seal and the entire value thereof should have been paid full payment = right to have the issuance of certificate of stock + exercise all rights of a stockholder even if not yet fully paid though, he can exercise ALL rights of a stockholder and the corresponding liability that attach

While it may be transferred by endorsement + delivery, it is merely quasi-negotiable, it is non-negotiable in that the transferee takes it without prejudice to all the rights and defenses which the true and lawful owner may have o Except in so far as the principles governing estoppel may apply The doctrine that a bona-fide purchaser of such certificate will acquire no better title to the shares than his transferor had, and that he took the shares subject to all rights, remedies and defenses which the true and lawful owner may have no matter how innocent or ignorant, will have NO application where estoppel governs If the legal owner thereof by his act or negligence is estopped from claiming ownership (when he clothes another with apparent authority to dispose of the same), a purchaser in good faith and without notice will acquire a better title as against the owner so estopped.

Transfer and Delivery of Certificate Must be recorded in the books of the corporation to be valid De Erquiaga v CA: until registration is accomplished, the transfer, though valid between the parties cannot be effective as against the corporation o Purpose of registration: 2 fold o 1) enable the transferee to exercise all the rights of a stockholder o 2) to inform the corporation of any change in shares of ownership so that it can ascertain the person entitled to the rights and subject to the liabilities of a stockholder

Section 72: Rights of unpaid shares: Holders of subscribed shares not fully paid which are NOT delinquent shall have all the rights of a stockholder. The issuance of a stock certificate is NOT a condition sine quanon to consider a subscriber a stockholder

Necessity of Registration 1. 2. 3. 4. enable the corporation to know who tis stockholders are enable the transferee to exercise his rights as stockholder afford the corporation an opportunity to object or refuse registration of the transfer avoid fictitious and fraudulent transfers

Negotiability Certificate of stock = not regarded as a negotiable instrument

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5.

protect creditors who have the right to look upon stockholders in case of non-payment or watered shares

Remedy for refusal to record: Mandamus Two Modes for Transferring Shares of Stock 1) by Endorsement of the stock coupled with delivery 2) by a duly notarized deed Note: SEC: when a corporation has already issued stock certificates, any transfer of the shares can only be effectively made by endorsement and delivery of the stock certificate o While a formal contract of sale in a notarized document is equivalent to actual delivery of the certificate itself, this mode of transfer is available only if no certificate of stock has been issued Preferential Rights: right of existing stockholders and or the corporation, giving them the first option to purchase the shares of a selling stockholder within a reasonable period not exceeding 30 days provided that the same is contained in the articles of incorporation and in all of the stock certificates Monserrat v Ceron Monserrat assigned to Ceron the usufruct of half of the common shares of stock of the corporation (certificate of stock 7). Said transfer gave the transferee only the RIGHT TO ENJOY during his lifetime, the profits PROHIBITING him from exercising any act implying absolute ownership. Stock Cert 7 issued to Ceron Ceron mortgaged shares of stock to Matute. Ceron endorsed to matute the certificate of stock. He didn't inform Matute of the usufruct. Ceron defaulted thus Matute foreclosed shares. Monserrat is now claiming ownership W/N it is necessary to enter upon the books of the corporation a mortgage constituted on common shares of stock in order that such mortgage may be valid and may have the force and effect as against the third persons

Held: For any transfer to be valid, it must be registered in the books. Is there transfer here? NO. Chattel mortgage is not transfer. Its only a mere security. Transfer any act by which property of one person is vested in antoher and transfer of shares implies any means whereby one may be divested of and another acquire ownership of stock. Only the transfer or absolute conveyance of the ownership of the title to a share need be entered and noted upon the books in the corporation. Matute acquired in good faith Cerons right and title to shares.

Chua Guan v Samahang Magsasaka Toco mortgaged his shares to Chua Chiu to guarantee the payment of a debt. The certificates of stock were delivered to the mortgagee. The mortgage was duly registered. Chua then assigned all his rights and interests in the mortgage to plaintiff. This was again registered. Toco having defaulted, plaintiff foreclosed on the mortgage and delivered the certificate of stock and copies to the sheriff. Sheriff executed in plaintiffs favor a certificate of sale of said shares. Prior to this, nine attachments had been issued and served and noted on the books of the corporation against the shares of Toco. Which takes priority? Mortgage or Writ of attachment? Held: Registration of said chattel mortgage in the office of the corporation was not necessary and had no legal effect. The attaching creditors are entitled priority over the defectively registered mortgage. Registration should be in the province where the owner is domiciled: o Situs of the shares of stock is at the domicile of the owner. Uson v Diosomito Levy upon Diosomitos 75 shares of stock. However, he already sold these shares to Barcelon and delivered to him the corresponding certificates. However, Barcelon didnt present these certificates to the corporation for registration until after levy was made.

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Held: Diosomito, at the time of the levy is still the owner of the shares of stock. The bona fide transfer of the shares, not registered or noted on the books of the corporation is not valid as against a subsequent lawful attachment.

Title may be vested in the transferee by the delivery of the duly indorsed certificate of stock. However, no transfer shall be valid except as between the parties until the transfer is property recorded in the books of the corporation.

Padgett v Babcocks & Templeton Padgett was an employee of the corporation and bought 35 shares. He was also the recipient of 9 shares by way of bonus the word non-transferable appears on each and every one of these certificates. Is this restriction valid? May the corporation be compelled to buy the shares of a selling stockholder? Held: The restriction is null and void on the ground that it constitutes an unreasonable limitation of the right of ownership and is in restraint of trade. Any restriction on a stockholders right to dispose must be construed strictly. There is no existing law nor authority in support of the claim that the corporation is obliged to buy his shares of stock at par value.

Lambert v Fox Agreement of incorporators: not to sell, transfer or otherwise dispose of any part of their present holding of stock til after on year from the date. Not an illegal restraint. The suspension of the power to sell has a beneficial purpose, results in the protection of the corporation as well as of the individual parties to the contract and is reasonable as to thelength of time of the suspension. Embassy Farm v CA It is clear that although EBE has indorsed in blank the shares outstanding in his name, he has not delivered the certificate of stock to AGA because the latter has not fully complied with his obligations under the MOA. There being no delivery of the indorsed shares of stock, AGA cannot therefore effectively transfer to other person or his nominees the undelivered shares of stock.

Razon v IAC the shares of stock here were registered in the name of Chuidian only as nominal stockholder and with the agreement that said shares of stock were owned and held by the petitioner but Chuidian was given the option to buy the same The petitioner had in his possession the certificate of stock until the time he delivered it for deposit with PBC under the parties joint custody. Chuidian died. Admin of estate now claims the shares. Who is the rightful owner? Held: Chuidian. For an effective transfer of shares of stock , the mode and manner of transfer as prescribed by law must be followed. Title may be vested in the transferee by delivery of the duly indorsed certificate of stock. However, no transfer shall be valid except as between the parties until the transfer is properly recorded in the books of the corporation. Here, there is no dispute that the questioned shares are in the name of Chuidian in the book of the corporation. From the point of view of the corporation, Chuidian was the owner. In order for a transfer of stock certificate to be effective, the certificate must be properly indorsed and that title to such certificate of stock is vested in the transferee by the delivery of the duly indorsed certificate of stock. INDORSEMENT IS MANDATORY! Rural Bank v Salinas Sec 63 contemplates no restriction as to whom the stocks may be transferered. The only limitation imposed by law is when the corporation holds any unpaid claim against the shares intended to be transferred. Whenever a corporation refused to transfer and register stock mandamus will lie to compel the officers of the corporation to transfer. REGISTRATION MINISTERIAL DUTY

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 Tay v SEC Pledged his shares of stock. Endorsed these shares and delivered the same to petitioner. Failed to pay thus petitioner filed a petition for mandamus praying that an order be issued directing the corporate secretary to register the stock transfers and issue new certificates Held: PETITIONERS ownership over the shares was not et perfected when the complaint was filed. The contract of pledge does not make him the owner of the shares pledged. in order that a writ of mandamus ay issue, it is essential that the person petitioning for the same has a clear legal right to the thing demanded and that it is the imperative duty of the corporation to perform the act required. Mandamus will not issue to establish a legal right but only to enforce one that is already clearly established. Theres no showing here that petitioner made any attempt to foreclose or sell the shares through public or private auction.

For a valid transfer of shares, there must be o Delivery of the stock certificate o Certificate must be endorsed by the owner or his attorney-in-fact or other persons legally authorized o To be valid against third parties, the transfer must be recorded in the books of the corporation.

Tan v SEC Since the certificate of stocks were already cancelled, which cancellation was also reported to the commission, there was no necessity for the same certificate to be endorsed The certificate is not stock in the corporation, it is merely evidence of the holders interest and status in the corporation. Won v Wack Wack Golf Non-stock corporation issued to Teruyaa membership certificate which was assigned to MT Reyes. Reyes filed an action seeking for an order to have his shares registered in corps books the assignment and to issue a new certificate. However, when the complaint was filed, eleven years have already lapsed and that therefore the complaint was filed beyond the 5-year period fixed in Art 1149 of the Civil Code. There is no fixed period for registering an assignment, so this claim isnt barred. Immediate registration is only important and corporation may be compelled to do so because the registration is proof of ownership against third persons. De Los Santos v McGrath There is no evidence that there was a transfer of shares. What was evident was only a mere trust agreement. Transfer shall not be valid except as between the parties until it is entered and noted upon the books of the corporation. No such entry in the name of the plaintiffs have been made. The transfer allegedly effected is void and good as non-existent Certificate of stock are not negotiable instruments. Consequently a transferee under a forged assignment acquires no title which

Nava v Peers Marketing Po, subscriber has not paid fully the amount of his subscription. payment of the subscription does not entitle the subscriber to a certificate of stock. No shares of stock against which the corporation holds any unpaid claim shall be transferable on the books of the corporation Without a stock certificate, which is the evidence of ownership of corporate stock, the assignment of corporate shares is effective only between the parties to the transaction. Rural Bank of Lipa v CA With no endorsement, said assignment was not sufficient to effect the transfer of shares. The rule is that the delivery of the stock certificate duly endorsed b the owner is the operative act of transfer of shares from the lawful owner to the transferee. Thus, title may be vested in the transferee only by delivery of the duly indorsed certificate of stock.

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can be asserted against the true owner UNLESS his own negligence has been such as to create an estoppel against him. Lopez Realty v Expert Travel FORGED and UNAUTHORIZED TRANSFERS Forged and unauthorized transfer must be distinguished from an unauthorized issuance of stock certificate FORGED TRANSFER what is forged is the transfer of the certificate from the true and lawful owner to another person Purchaser no matter how innocent they may have been will acquire no title as against the lawful owner by virtue of non-negotiability of certificates of stock Purchaser will have no remedy or right against the corporation because he took the shares not by virtue of misrepresentation made by the corporation but on the faith of a forged endorsement or unauthorized transfer Corporation incurs no liability to the person in whose favor the certificate is endorsed or issued UNAUTHORIZED ISSUANCE act of the corporation in issuing the certificate If good faith buyer, he may rightfully acquire title since the corporation will be estopped to deny the validity thereof The subsequent purchaser in gf took the shares, not by virtue of a forged transfer but on reliance of the genuineness of the certificate issued by the corporation.

with interest and expenses (in case of delinquent shares), if any is due, has been paid. Subscriptions to shares of stock are indivisible such that a subscriber to such shares will not be entitled to the issuance of a stock certificate until he has paid the full amount of the subscription. Once a subscriber pays in full his subscription, he becomes entitled to be issued a stock certificate

Sec 148: Applicability to existing corporations All corporations lawfully existing and doing business in the Phils on the date of the effectivity of this code and authorized licensed or registered by the SEC shall be deemed to have been authorized licensed or registered under the provision of this code Provided that any such corp is affected by the new requirements of this code, said corporation shall be given a period of not more than 2 years from the effectivity of this code within which to comply.

Thus he may compel the corporation to recognize him as a stockholder or claim reimbursement and damages.

Fua Cun v Summers Impt: The lower court erred in ruling that Chua Soco by paying of the subscription price of 500 shares, in effect became the owner of 250 shares. The plaintiffs rights consist in an equity in 500 shares and upon payment of the unpaid portion of the subscription price he becomes entitled to the issuance of the certificate for said 500 shares. So, he must pay the full price first before he could be issued a certificate. Watered Stocks Section 65: 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

Issuance of Stock Certificates Sec. 64. Issuance of stock certificates. - No certificate of stock shall be issued to a subscriber until the full amount of his subscription together

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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 One which is issued by the corporation as fully paid-up shares, when in fact the whole amount of the value has not been paid Watered means fictitiously paid-up There is a solidary liability upon all consenting directors and officers of the water in the stocks. The law does not make any distinction as to the right of the corporation and its creditors to enforce payment of the water in the stocks thus it applies to all creditors whether prior or subsequent to the issuance of the watered stock

Fletchers effects of issuance of watered stocks 1) as to corporation Injury to or fraud upon the public State may institute a quowarranto proceeding to forfeit its charter for misuse or abuse of franchise Subscription is void Subscriber liable to pay the full par or issued value to render it valid and effective Estopped from raising nay objection May compel the payment of the water in the stock solidarily against the responsible and consenting directors and officers inclusive of the holder May enforce payment of the difference in price or the water in the stock solidarily against the responsible directors/officers Right is the same as that of transferor But if a certificate of stock has been issued and duly indorsed to a bona fide purchaser, he cant be held liable as against the corporation

2) as between corporation and subscriber

How Watered stock may be issued 1) For a monetary consideration less than its par/issued value 2) For a consideration in property (tangible/intangible) valued in excess of its fair value 3) Gratuitously or under agreement that nothing shall be paid at all 4) In the guise of stock dividends when there are NO surplus profits of the corporation Effects 1) corporation is derived of its capital hurting business prospects 2) stockholders who paid their subscriptions in full are injured by the reduction of their proportionate interest 3) present and future creditors are deprived of the corporate assets Bases for Liability 1) Trust Fund Doctrine treats the capital stock of the corporation inclusive of the unpaid portion of subscriptions to said capital as a trust fund which the creditors have a right to look up to or mandated to pay the value in full of their shares 2) Fraud or Misrepresentation Theory liability is based on the false rep made by the corporation and the stockholder concerned to the creditors that the true par value/issued price has been paid/promised to be paid in full

3) as to consenting stockholders 4) as to dissenting stockholders

5) as to creditors

6) as against transferees of the watered stock

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Sec. 66. Interest on unpaid subscriptions. Subscribers for stock shall pay to the corporation interest on all unpaid subscriptions from the date of subscription, if so required by, and at the rate of interest fixed in the by-laws. If no rate of interest is fixed in the by-laws, such rate shall be deemed to be the legal rate. = 12%

shall thereupon become delinquent and shall be subject to sale as hereinafter provided, unless the board of directors orders otherwise. (38) Sec 68: Delinquency Sale Summarized Procedure (Ladia ) 1) The Board of Directors, by a formal resolution, declares the whole/percentage of unpaid subscriptions to be due and payable on a specified date. If contract of subscription provides the dates when payment is due, NO CALL/DECLARATION is necessary 2) Stockholders concerned given notice of the board resolution = 1) personally or 2) by registered mail. Publication = not required unless by-laws say so Notice of Call = not required if contract of subscription stipulates a specific date 3) Payment shall be made on the date specified in the call or on the date provided for in the contract 4) Failure to pay: render the entire balance due and payable. May be liable for interest Delinquency sale 5) If within 30 days FROM date stated in the call or as provided in the contract of subscription, no payment is made, all stock covered by the subscription shall become delinquent and shall be subject to a delinquency sale. 6) The board, by resolution, orders the sale of the delinquent stock, stating the amount due and the date time and place of sale 7) Sale = from 30-60 days from date stocks became delinquent 8) Notice of the sale (w/copy of board resolution) = sent to every delinquent stockholder either personally or by registered mail 9) Publication of the notice of sale = made 1s week for 2 consecutive weeks in the newspaper of general circulation in the province or city where the principle office is located 10) Sale at public auction if no payment is made by the delinquent stockholder in favor of the bidder who offered to pay the full amount

Enforcement and Payment of Unpaid Subscriptions Unpaid subscriptions shall be paid either 1. 2. on the date fixed in the contract of subscription on the date specified by the board of directors pursuant to a CALL declaring any or all unpaid portion payable

2 remedies for enforcement of payment 1. by board action in accordance with procedure in 67-79 2. collection case under 70 Failure or refusal of corp to collect will not prevent the creditors/receiver of the corp to institute a court action

Sec. 67. Payment of balance of subscription. - Subject to the provisions of the contract of subscription, the board of directors of any stock corporation may at any time declare due and payable to the corporation unpaid subscriptions to the capital stock and may collect the same or such percentage thereof, in either case with accrued interest, if any, as it may deem necessary. Payment of any unpaid subscription or any percentage thereof, together with the interest accrued, if any, shall be made on the date specified in the contract of subscription or on the date stated in the call made by the board. Failure to pay on such date shall render the entire balance due and payable and shall make the stockholder liable for interest at the legal rate on such balance, unless a different rate of interest is provided in the by-laws, computed from such date until full payment. If within thirty (30) days from the said date no payment is made, all stocks covered by said subscription

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11) 12) 13) 14)

of the balance INCLUSIVE of interest, cost of ad, expenses for the smallest number of shares Registration or transfer of the shares in the name of the bidder + issuance of the stock certificate Remaining shares = credited in favor of the delinquent stockholder (entitled to issuance of a certificate of stock covering such shares If NO Bidder = corporation may bid for the same and the total amount due shall be credited or paid in full in the corporate books The shares so purchased by the corporation shall be vested in the latter as TREASURY SHARES.

Velasco v Poizat a subscription for shares of stock does not require an express promise to pay the amount subscribed. But a stock subscription is a subsisting liability from the time the subscription is made since it requires the subscriber to pay interest quarterly from the date unless he is relived from such liability by the by-laws 2 remedies: 1) permitting the corporation to put up the unpaid stock and dispose of it for the account of the delinquent subscriber and 2) action in court De Silva v Aboitiz and Co plaintiff was declared delinquent thus he filed a complaint against the corporation. He alleged that according to article 46 of their by-laws, all shares subscribed to by the incorporators that were not paid of at the time of the incorporation, shall be paid out of the 70 percent of the profit obtained and the subscriber shall not receive any divided until said shares were paid in full. By declaring him to be delinquent, it violated and disregarded his right under the by-laws. Held: it is discretionary on the part of the BoD to do whatever is provided relative to the application of the part of the 70 percet of the profit. If the board does not wish to make use of said authority it has 2 other remedies (quoting Velasco v Poizat) Article 46 of by-laws cannot be maintained that said article has prescribed an operative method for the payment of said subscription continuously until full payment. Here, BoD made use of its discretionary power to take advantage of the first 2 of the remedies. Lingayen Gulf v Baltazar law requires that notice of any call for the payment of unpaid subscription should be made not only personally but also by publication. Sec 40 is mandatory as regards publication: MUST

Highest Bidder Who offers to pay the full amount of the balance Irregularities No recovery of the stock sold may be had unless: See 69 Sec. 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 2 conditions before an action to recover delinquent stocks irregularly sold 1) party seeking to maintain such action first pays or tenders to the party holding the stock the sum for which the shares were sold plus interest from the date of the sale 2) action shall be commenced by the filing of the complaint within six months from sale Sec. 70. Court action to recover unpaid subscription. - Nothing in this Code shall prevent the corporation from collecting by action in a court of proper jurisdiction the amount due on any unpaid subscription, with accrued interest, costs and expenses

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GR: valid and binding subscription for stock of a corporation cannot be cancelled so as to release the subscriber from liability thereon without the consent of all the stockholders/subscribers E: pursuant to a bona fide compromise or to set off a debt due from the corporation, a release supported by consideration

Apocada v NLRC Unpaid subscriptions are not due and payable until a call is made by the corporation for the payment Call = board resolution Lumanlac v Cura Subscription to the capital of a corporation constitute a fund to which the creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts. PNB v Bitulok Sawmill A corporation has no power to release an original subscriber to its capital stock without a valuable consideration Lingayen gulf case case: corporation involved was insolvent, in which case all unpaid stock subscriptions became payable on demand and are immediately recoverable in an action instituted by the assignee. Keller v COB Group A stockholder is personally liable for the financial obligations of a corporation to the extent of his unpaid subscriptions. Garcia v Suarez Obligation to pay interest and to pay the amount subscription is different Subscription to the capital stock of the corporation, otherwise stipulated, is not payable at the moment subscriptions but on a subsequent date may be fixed corporation

Here, the board of directors of the compania hispano Filipina, not having declared due and payable the stock subscribed by the appellant, the prescriptive period of the action for the collection thereof only commenced to run from June when plaintiff in his capacity as receiver and in the exercise of the power conferred upon him by the said section 38 of the corporation law, demanded of the appellant to pay the balance of his subscription.

Effects of Delinquency Sec. 71. Effect of delinquency. - No delinquent stock shall be voted for be entitled to vote or to representation at any stockholder's meeting, nor shall the holder thereof be entitled to any of the rights of a stockholder except the right to dividends in accordance with the provisions of this Code, until and unless he pays the amount due on his subscription with accrued interest, and the costs and expenses of advertisement, if any Any cash dividends due on delinquent stockholders shall first be applied to the unpaid balance on his subscription plus cost and expenses while stock dividends shall be withheld until his unpaid subscription is paid in full

Right of unpaid Shares Sec. 72. Rights of unpaid shares. - Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder. If the shares are not delinquent however, subscribers to the capital stock of a corp, though not fully paid, are entitled to all the rights of a SH = they can vote and be voted and entitled to receive all dividends due their shares The only exception: shares of stock, not fully paid are NOT entitled to be issued a certificate of stock

of the unless of the by the

Lost or destroyed certificates Sec. 73. Lost or destroyed certificates. - The following procedure shall be

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

corporation which shall have issued certificate of stock in lieu of those lost, stolen or destroyed pursuant to the procedure above-described Rationale: avoid duplication of certificates of stock and Avoidance of fictitious and fraudulent transfers For the protection of the corporation against damage BoD has the authority to decide the amount and the kind of surety bond that may be required for the issuance of a certificate of stock

Rights and liabilities of Stockholders 1) participation in the management of the corporate affairs by exercising their right to vote and be voted upon either personally or by proxy enter into VTA receive dividends transfer shares of stock issued a certificate of stock upon full payment exercise pre-emptive rights exercise their appraisal right recover shares of stock unlawfully sold for delinquency institute and file a derivative suit inspect the books of the corporation furnished by the most recent financial statements issued a new stock certificate for lost/destroyed one have the corpo dissolved participate in the distribution of the assets of the corpo for closed corporation petition the SEC to arbitrate in the event of deadlock for closed corporation withdraw for any reason and compel corporation to purchase his shares

2) 3) 4) 5) 6) 7) 8) 9) 10) 11) 12) 13) 14) 15) 16)

Obligations and Liabilities 1) 2) 3) pay corpo the balance of unpaid shares pay any interest on his unpaid subscription answer to the creditors for the unpaid portion

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4) to answer the water in his stocks 5) liable as general partners for all debts liabilities and damages 6) personally liable for torts (closed corpo; active parcipation in the management of corpo affairs)

10) Corporate Books and Records

Books and Records to be Kept Sec. 74. Books to be kept; stock transfer agent. - Every corporation shall keep and carefully preserve at its principal office a record of all business transactions and minutes of all meetings of stockholders or members, or of the board of directors or trustees, in which shall be set forth in detail the time and place of holding the meeting, how authorized, the notice given, whether the meeting was regular or special, if special its object, those present and absent, and every act done or ordered done at the meeting. Upon the demand of any director, trustee, stockholder or member, the time when any director, trustee, stockholder or member entered or left the meeting must be noted in the minutes; and on a similar demand, the yeas and nays must be taken on any motion or proposition, and a record thereof carefully made. The protest of any director, trustee, stockholder or member on any action or proposed action must be recorded in full on his demand. The records of all business transactions of the corporation and the minutes of any meetings shall be open to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, 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 corporation's records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand. 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 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 What must be kept: 1) records of all business transactions journals, ledger, contracts, vouchers and receipts, financial statements and other books of accounts, income tax returns, VTA principal office 2) minutes of all meetings of SH and directors/trustees a. date, time and place of meeting b. how notarized c. notice given

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3)

whether meeting is regular or special and if special, the purpose specified e. present and absent members/stockholders f. every act done Stock and Transfer book names of the SH, amount paid or unpaid, statement of every alienation, sale or transfer d. Kept in principal office of corp e. Or in the office of its stock transfer agent

d.

Right of Inspection Subject to inspection by any director, stockholder/member Reasonable hours on business day Copy of excerpts of said records may be demanded

Without regard to motive Reason: necessary that they may be equipped with all the info and data with regard to the affairs of the company in order that he may manage and direct its operations Right to ccess to highly sensitive and confidential information which the stockholders dont have o Marketing strategies o Pricing structure o Budget for expansion/diversification o Research and development o Sources of funding, availability of personnel, proposals of mergers or tie-ups

trustee, Remedies of Stockholders for unjustifiable refusal of their right to inspect 1) Mandamus Corporate secretary shall be included as a party since he is charged with the custody of all documents or records 2) Damages Against the corporation or responsible officer Criminal complaint Violation of his right to inspect and copy Offense punishable (fine or imprisonment) Liability imposed upon the directors or trustees if refusal is pursuant to board resolution

Sec. 75. Right to financial statements. - Within ten (10) days from receipt of a written request of any stockholder or member, the corporation shall furnish to him its most recent financial statement, which shall include a balance sheet as of the end of the last taxable year and a profit or loss statement for said taxable year, showing in reasonable detail its assets and liabilities and the result of its operations. At the regular meeting of stockholders or members, the board of directors or trustees shall present to such stockholders or members a financial report of the operations of the corporation for the preceding year, which shall include financial statements, duly signed and certified by an independent certified public accountant. However, if the paid-up capital of the corporation is less than P50,000.00, the financial statements may be certified under oath by the treasurer or any responsible officer of the corporation

3)

Possible Defenses 1) person demanding has improperly used any info 2) bad faith 3) right is limited /restricted by special law or law of its creation WG Philpotts v Phil Manufacturing Corp held: right exercisable either by himself or by any proper representative or attorney-in-fact, either with or without the attendance of the stockholder

Right of director/trustee to inspect Absolute and unqualified

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right is personal but inspection/examination may be made by another may be aided by experts and counsel

Pardo v Hercules Lumber by-law: every shareholder may examine the books of the company upon the days which the BoD shall annually fix VOID. board of directors CANNOT choose specific performance and particular dates; the general right given by the statute may not be lawfully abridged to the extent attempted in this resolution that th th stockholders can only inspect from the 15 to 25 of every month a by-law unduly restricting the right of inspection is undoubtedly invalid Vegaruth v Isabela Sugar the secretary was justified when he refused to furnish the shareholder certified copies of the minutes of the meeting because said resolution wasnt signed yet. Although the records of all business transactions of the corporation and the minutes of any meeting shall be open to inspection, the minutes must be approved first before copies are secured. Although prior approval of president before the books can be inspected by any shareholder = void resolution Gokongwei v SEC Inspection as to wholly-owned subsidiary: where a corporation owns approximately no property except the shares of stock of subsidiary corporations which are merely agents, the legal fiction of distinct corporate entities may be disregarded Purpose of inspection must be germane to petitioners interest as a shareholder, proper and lawful in character and not inimical to the interest of the corporation Mandamus at the suit of a SH was refused where the subsidiary corporation is a separate and distinct corporation and with its books and records in another jurisdiction Allied corporations: persons inspecting must have an interest

Gonzales v PNB Rules: o Records must be kept at principal office of the corporation o Inspection must be made on business days o SH may demand a copy of the excerpts of the records or minutes o Refusal to allow such inspection shall subject the erring officer/agent to civil and criminal liabilities Limitations o Expressly required as a condition for such examination that the one requesting it must not have been Guilty of using improperly any info secured through a prior exam Person asking for such exam must be acting in good faith and for a legitimate purpose o Must state reasons and purposes for inspection

11) Merger and Consolidation

Requirements and Procedure Section 76. Plan or merger of consolidation. - Two or more corporations may merge into a single corporation which shall be one of the constituent corporations or may consolidate into a new single corporation which shall be the consolidated corporation. The board of directors or trustees of each corporation, party to the merger or consolidation, shall approve a plan of merger or consolidation setting forth the following: 1. The names of the corporations proposing to merge or consolidate, hereinafter referred to as the constituent corporations; 2. The terms of the merger or consolidation and the mode of carrying the same into effect;

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3. A statement of the changes, if any, in the articles of incorporation of the surviving corporation in case of merger; and, with respect to the consolidated corporation in case of consolidation, all the statements required to be set forth in the articles of incorporation for corporations organized under this Code; and 4. Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable. (n) Section 77. Stockholder's or member's approval. - Upon approval by majority vote of each of the board of directors or trustees of the constituent corporations of the plan of merger or consolidation, the same shall be submitted for approval by the stockholders or members of each of such corporations at separate corporate meetings duly called for the purpose. Notice of such meetings shall be given to all stockholders or members of the respective corporations, at least two (2) weeks prior to the date of the meeting, either personally or by registered mail. Said notice shall state the purpose of the meeting and shall include a copy or a summary of the plan of merger or consolidation. The affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock of each corporation in the case of stock corporations or at least two-thirds (2/3) of the members in the case of non-stock corporations shall be necessary for the approval of such plan. Any dissenting stockholder in stock corporations may exercise his appraisal right in accordance with the Code: Provided, That if after the approval by the stockholders of such plan, the board of directors decides to abandon the plan, the appraisal right shall be extinguished. Any amendment to the plan of merger or consolidation may be made, provided such amendment is approved by majority vote of the respective boards of directors or trustees of all the constituent corporations and ratified by the affirmative vote of stockholders representing at least twothirds (2/3) of the outstanding capital stock or of two-thirds (2/3) of the members of each of the constituent corporations. Such plan, together with any amendment, shall be considered as the agreement of merger or consolidation. (n)

Section 78. Articles of merger or consolidation. - After the approval by the stockholders or members as required by the preceding section, articles of merger or articles of consolidation shall be executed by each of the constituent corporations, to be signed by the president or vice-president and certified by the secretary or assistant secretary of each corporation setting forth: 1. The plan of the merger or the plan of consolidation; 2. As to stock corporations, the number of shares outstanding, or in the case of non-stock corporations, the number of members; and 3. As to each corporation, the number of shares or members voting for and against such plan, respectively. (n) Section 79. Effectivity of merger or consolidation. - The articles of merger or of consolidation, signed and certified as herein above required, shall be submitted to the Securities and Exchange Commission in quadruplicate for its approval: Provided, That in the case of merger or consolidation of banks or banking institutions, building and loan associations, trust companies, insurance companies, public utilities, educational institutions and other special corporations governed by special laws, the favorable recommendation of the appropriate government agency shall first be obtained. If the Commission is satisfied that the merger or consolidation of the corporations concerned is not inconsistent with the provisions of this Code and existing laws, it shall issue a certificate of merger or of consolidation, at which time the merger or consolidation shall be effective. If, upon investigation, the Securities and Exchange Commission has reason to believe that the proposed merger or consolidation is contrary to or inconsistent with the provisions of this Code or existing laws, it shall set a hearing to give the corporations concerned the opportunity to be heard. Written notice of the date, time and place of hearing shall be given to each constituent corporation at least two (2) weeks before said hearing. The Commission shall thereafter proceed as provided in this Code. (n)

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Effects of Merger/Consolidation Section 80. Effects of merger or consolidation. - The merger or consolidation shall have the following effects: 1. The constituent corporations shall become a single corporation which, in case of merger, shall be the surviving corporation designated in the plan of merger; and, in case of consolidation, shall be the consolidated corporation designated in the plan of consolidation; 2. The separate existence of the constituent corporations shall cease, except that of the surviving or the consolidated corporation; 3. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a corporation organized under this Code; 4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights, privileges, immunities and franchises of each of the constituent corporations; and all property, real or personal, and all receivables due on whatever account, including subscriptions to shares and other choses in action, and all and every other interest of, or belonging to, or due to each constituent corporation, shall be deemed transferred to and vested in such surviving or consolidated corporation without further act or deed; and 5. The surviving or consolidated corporation shall be responsible and liable for all the liabilities and obligations of each of the constituent corporations in the same manner as if such surviving or consolidated corporation had itself incurred such liabilities or obligations; and any pending claim, action or proceeding brought by or against any of such constituent corporations may be prosecuted by or against the surviving or consolidated

corporation. The rights of creditors or liens upon the property of any of such constituent corporations shall not be impaired by such merger or consolidation. (n) Merger a union affected by absorbing one or more existing corporations by another which survives and continues the business. Consolidation the uniting or amalgamation of two or more existing corporations to form a new corporation. The parties, called the constituent corporations, in a consolidation are all dissolved, while the constituent corporations except the surviving or absorbing corporation, in the case of a merger, are the only ones dissolved. Merger and consolidation are the two most common types of corporate reorganization. It signifies the various proceedings and transactions by which a succession of corporations is brought about, involving as it does the carrying out, by proper agreements and legal proceedings of a business plan or scheme for winding up the affairs of or foreclosing the mortgage or mortgages upon the property of the insolvent corporation. Merger and consolidation is also a method of voluntary reorganization or recapitalization. While merger and consolidation is a right granted by law, Sec. 20 of Act 3518 proscribes illegal combinations (that lessen competition, restrains commerce and creates monopolies) and Article 186 of the Revised Penal Code imposes a penalty imprisonment and/or fine.

Associated Bank v Philippine Islands Defendant Sarmiento executed a promissory note in favor of Associated Bank. Two years prior, Associated Banking Corporation and Citizens Bank & Trust Company (absorbed company) merged to form Associated Bank. AB tried to collect but Defendant maintained his contention that the note was executed in favor of CBTC only. Although SEC records do not show when the merger was approved, the agreement itself provided all contracts, irrespective of execution date, entered into with CBTC shall be understood as pertaining to the surviving corporation.

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BPI v BPI Employees Union In its merger, BPI absorbed the employees of FEBTC. BPI Employees Union wanted these employees to join them but the latter refused, compelling the former to enforce its union shop clause requiring them to join if they wanted to remain as regular employees. BPI protested their inclusion, contending that they cannot be considered new employees. The Supreme Court said it is more in keeping with the dictates of social justice and the State policy of according full protection to labor to deem employment contracts as automatically assumed by the surviving corporation in a merger, even in the absence of an express stipulation in the articles of merger or the merger plan. But the legal fiction in the law on mergers (that the surviving corporation continues the corporate existence of the nonsurviving corporation) is mainly a tool to adjudicate the rights and obligations between and among the merged corporations and the persons that deal with them. Such a legal fiction cannot be unduly extended to an interpretation of a Union Shop Clause so as to defeat its purpose under labor law.

Section 81. Instances of appraisal right. - Any stockholder of a corporation shall have the right to dissent and demand payment of the fair value of his shares in the following instances: 1. In case any amendment to the articles of incorporation has the effect of changing or restricting the rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or of extending or shortening the term of corporate existence; 2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in the Code; and 3. In case of merger or consolidation. (n) This list is not exclusive: The investment of funds in another corporation or business for any purpose other than its primary purpose. (Sec. 42) The right of a stockholder in a close corporation with sufficient assets to compel the latter, for any reason, to purchase his shares at their fair value which shall not be less than its par or issued value. (Sec. 105)

12) Appraisal Right

Definition and When Exercised

Requirements and Procedure Appraisal right is the method of paying a shareholder for the taking of his property, a means of avoiding the conversion of his property into another not of his own choosing, and compensation for the abrogation of the common-law rule that a single stockholder could block a certain corporate act. It is a statutory right granted to dissenting stockholders on certain corporate or business decisions, to demand payment of the fair market value of their shares. Section 82. How right is exercised. - The appraisal right may be exercised by any stockholder who shall have voted against the proposed corporate action, by making a written demand on the corporation within thirty (30) days after the date on which the vote was taken for payment of the fair value of his shares: Provided, That failure to make the demand within such period shall be deemed a waiver of the appraisal right. If the proposed corporate action is implemented or affected, the corporation shall pay to such stockholder, upon surrender of the certificate or certificates of stock representing his shares, the fair value thereof as of the day prior to the date on which the vote was taken, excluding any appreciation or depreciation in anticipation of such corporate action.

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If within a period of sixty (60) days from the date the corporate action was approved by the stockholders, the withdrawing stockholder and the corporation cannot agree on the fair value of the shares, it shall be determined and appraised by three (3) disinterested persons, one of whom shall be named by the stockholder, another by the corporation, and the third by the two thus chosen. The findings of the majority of the appraisers shall be final, and their award shall be paid by the corporation within thirty (30) days after such award is made: Provided, That no payment shall be made to any dissenting stockholder unless the corporation has unrestricted retained earnings in its books to cover such payment: and Provided, further, That upon payment by the corporation of the agreed or awarded price, the stockholder shall forthwith transfer his shares to the corporation. (n) Effect of Exercise of Right Section 83. Effect of demand and termination of right. - From the time of demand for payment of the fair value of a stockholder's shares until either the abandonment of the corporate action involved or the purchase of the said shares by the corporation, all rights accruing to such shares, including voting and dividend rights, shall be suspended in accordance with the provisions of this Code, except the right of such stockholder to receive payment of the fair value thereof: Provided, That if the dissenting stockholder is not paid the value of his shares within 30 days after the award, his voting and dividend rights shall immediately be restored. (n) When Right to Payment ceases Section 84. When right to payment ceases. - No demand for payment under this Title may be withdrawn unless the corporation consents thereto. If, however, such demand for payment is withdrawn with the consent of the corporation, or if the proposed corporate action is abandoned or rescinded by the corporation or disapproved by the Securities and Exchange Commission where such approval is necessary, or if the Securities and Exchange Commission determines that such stockholder is not entitled to the appraisal right, then the right of said stockholder to be paid the fair value of his shares shall cease, his status as

a stockholder shall thereupon be restored, and all dividend distributions which would have accrued on his shares shall be paid to him. (n) Cost of Appraisal Section 85. Who bears costs of appraisal. - The costs and expenses of appraisal shall be borne by the corporation, unless the fair value ascertained by the appraisers is approximately the same as the price which the corporation may have offered to pay the stockholder, in which case they shall be borne by the latter. In the case of an action to recover such fair value, all costs and expenses shall be assessed against the corporation, unless the refusal of the stockholder to receive payment was unjustified. (n) Borne by the corporation if: If the price offered by the corp is lower than the fair market value; and Action is filed by the stockholder to recover the fair value, where the refusal to receive payment is found justified by the court. Borne by the dissenting stockholder if: the price offered by the corp is approximately the same as the fair market value; and action is filed by the stockholder and his refusal to receive payment is not justified.

Section 86. Notation on certificates; rights of transferee. - Within ten (10) days after demanding payment for his shares, a dissenting stockholder shall submit the certificates of stock representing his shares to the corporation for notation thereon that such shares are dissenting shares. His failure to do so shall, at the option of the corporation, terminate his rights under this Title. If shares represented by the certificates bearing such notation are transferred, and the certificates consequently cancelled, the rights of the transferor as a dissenting stockholder under this Title shall cease and the transferee shall have all the rights of a regular stockholder; and all dividend distributions which would have accrued on such shares shall be paid to the transferee. (n)

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Notation in the books of the corporation is necessary to give notice and guide to the corporation to determine the respective rights of the stockholder.

13) Non-Stock Corporation

Definition Section 87. Definition. - For the purposes of this Code, a non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of this Code on dissolution: Provided, That any profit which a non-stock corporation may obtain as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized, subject to the provisions of this Title. The provisions governing stock corporation, when pertinent, shall be applicable to non-stock corporations, except as may be covered by specific provisions of this Title. (n) Non-stock corporations are also known as non-profit corporations. The old notion that it has no capital stock divided into shares may no longer hold true because even if it has, a corporation is considered as non-stock so long as it does not distribute dividends. Its profits shall be used for the furtherance of its purposes and to defray its operating expenses. However, mere intangible or pecuniary benefits to the members do not change the nature of the corporation.

the respondent because the profits derived from its bar and restaurant were incidental to its primary objective of developing and cultivating sports for the recreation and entertainment of stockholders and members. The fact that its capital is divided into shares does not detract from the finding that it is not engaged in the business of operating a bar and restaurant. Purpose Section 88. Purposes. - Non-stock corporations may be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural and like chambers, or any combination thereof, subject to the special provisions of this Title governing particular classes of non-stock corporations. (n) This enumeration is not exclusive as the law itself recognizes similar or allied purposes for which non-stock corporations may be organized.

Membership and Voting Rights Section 89. Right to vote. - The right of the members of any class or classes to vote may be limited, broadened or denied to the extent specified in the articles of incorporation or the by-laws. Unless so limited, broadened or denied, each member, regardless of class, shall be entitled to one vote. Unless otherwise provided in the articles of incorporation or the by-laws, a member may vote by proxy in accordance with the provisions of this Code. (n) Voting by mail or other similar means by members of non-stock corporations may be authorized by the by-laws of non-stock corporations with the approval of, and under such conditions which may be prescribed by, the Securities and Exchange Commission.

CIR v Club Filipino de Cebu The CIR assessed the respondent civic corporation liable to pay percentage taxes on the gross receipts of its bar and restaurant. The Club declared stock dividends but no actual cash dividends were distributed to the stockholders. The Supreme Court held that tax liability cannot attach to

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Cumulative voting, granted as a matter of right in stock corporations (Sec. 24), is not generally allowed in non-stock corporations. Voting by mail or other similar means in this provision, is the only exception to the rule that votes must be cast a duly constituted meeting (Sec. 16).

Otherwise, that would be an unwarranted and undue interference with the well-established right of a corporation to determine its membership.

Cebu Country Club v Elizagaque Petitioner was accused of violating the rules governing human relations, the basic principles to be observed for the rightful relationship between human beings and for the stability of social order when it rejected respondents application for propriety membership. The amendment to the petitioner corporations By-Laws requiring the unanimous vote of the directors present at a special or regular meeting was not printed on the application form respondent filled and submitted. What was printed thereon was the original provision that was silent on the required number of votes needed for admission. Bad faith characterized their rejection of respondents application. When the right is exercised arbitrarily, unjustly or excessively and results in damage to another, a legal wrong is committed for which the wrongdoer must be held responsible

Section 90. Non-transferability of membership. - Membership in a nonstock corporation and all rights arising therefrom are personal and nontransferable, unless the articles of incorporation or the by-laws otherwise provide. (n) Section 91. Termination of membership. - Membership shall be terminated in the manner and for the causes provided in the articles of incorporation or the by-laws. Termination of membership shall have the effect of extinguishing all rights of a member in the corporation or in its property, unless otherwise provided in the articles of incorporation or the by-laws. (n) Non-stock corporations have the right to adopt rules, in their by-laws, prescribing the mode and manner in which membership thereat can be obtained or maintained, in consonance with Sec. 36. This includes the right to limit membership. In the absence of restrictions, it may act arbitrarily and exclude any persons it may see fit, and the courts have no power to interfere so long as the manner and procedure laid down in the by-laws are strictly complied with. Absent any provision in the by-laws as to who is authorized to admit members, the authority must necessarily be lodged with the board of trustees (Sec. 23).

Trustees and Offices Section 92. Election and term of trustees. - Unless otherwise provided in the articles of incorporation or the by-laws, the board of trustees of nonstock corporations, which may be more than fifteen (15) in number as may be fixed in their articles of incorporation or by-laws, shall, as soon as organized, so classify themselves that the term of office of one-third (1/3) of their number shall expire every year; and subsequent elections of trustees comprising one-third (1/3) of the board of trustees shall be held annually and trustees so elected shall have a term of three (3) years. Trustees thereafter elected to fill vacancies occurring before the expiration of a particular term shall hold office only for the unexpired period. No person shall be elected as trustee unless he is a member of the corporation.

Chinese YMCA v Ching Subsequent to a membership campaign by YMCA, several members complained that there were any counting and/or approval of membership applications that took place as required by the Constitution and By-Laws of the corporation. The Court took as evidence the applications and receipts for payments of membership fees duly filed. The trial court cannot strip members of their membership without cause.

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Unless otherwise provided in the articles of incorporation or the by-laws, officers of a non-stock corporation may be directly elected by the members. (n) Trustees refer to the governing board or body. Sec. 138, however, allows a non-stock corporation to designate their governing board by any other name. While Sec. 92 allows the term to be determined by the articles of incorporation or the by-laws, Sec. 7 limits it to 5 years as it would unduly deprive other members of the chance to take an active part in corporate management. The Courts will not generally interfere in matters involving the internal affairs of an unincorporated association unless the acts complained of are arbitrary, oppressive, fraudulent, violative of civil rights and the like. On the other hand, an incorporated association or its members may avail of the remedy of instituting an intra-corporate dispute case pursuant to Sec. 5 of P.D. 902-A as amended by R.A. 8799.

office is a matter peculiarly and exclusively to be determined by the association and, in the absence of fraud, is final and binding on the courts.

Distribution of Assets upon Dissolution Section 94. Rules of distribution. - In case dissolution of a non-stock corporation in accordance with the provisions of this Code, its assets shall be applied and distributed as follows: 1. All liabilities and obligations of the corporation shall be paid, satisfied and discharged, or adequate provision shall be made therefore; 2. Assets held by the corporation upon a condition requiring return, transfer or conveyance, and which condition occurs by reason of the dissolution, shall be returned, transferred or conveyed in accordance with such requirements; 3. Assets received and held by the corporation subject to limitations permitting their use only for charitable, religious, benevolent, educational or similar purposes, but not held upon a condition requiring return, transfer or conveyance by reason of the dissolution, shall be transferred or conveyed to one or more corporations, societies or organizations engaged in activities in the Philippines substantially similar to those of the dissolving corporation according to a plan of distribution adopted pursuant to this Chapter; 4. Assets other than those mentioned in the preceding paragraphs, if any, shall be distributed in accordance with the provisions of the articles of incorporation or the by-laws, to the extent that the articles of incorporation or the by-laws, determine the distributive rights of members, or any class or classes of members, or provide for distribution; and

Section 93. Place of meetings. - The by-laws may provide that the members of a non-stock corporation may hold their regular or special meetings at any place even outside the place where the principal office of the corporation is located: Provided, That proper notice is sent to all members indicating the date, time and place of the meeting: and Provided, further, That the place of meeting shall be within the Philippines. (n) In the absence of a by-law provision to the contrary, a non-stock corporation cannot hold membership meetings outside the borders of the city or municipality where the principal office is located (Sec. 51)

Lions Club International v CA There was an election dispute between two candidates wherein one accused the other, in conspiracy with other officers, of holding an illegal election without ballots, ballot boxes and supervision of required voting delegates. The court said the issue is not justiciable because the decision of an unincorporated association on the question of an election to

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5. In any other case, assets may be distributed to such persons, societies, organizations or corporations, whether or not organized for profit, as may be specified in a plan of distribution adopted pursuant to this Chapter. (n) Section 95. Plan of distribution of assets. - A plan providing for the distribution of assets, not inconsistent with the provisions of this Title, may be adopted by a non-stock corporation in the process of dissolution in the following manner: The board of trustees shall, by majority vote, adopt a resolution recommending a plan of distribution and directing the submission thereof to a vote at a regular or special meeting of members having voting rights. Written notice setting forth the proposed plan of distribution or a summary thereof and the date, time and place of such meeting shall be given to each member entitled to vote, within the time and in the manner provided in this Code for the giving of notice of meetings to members. Such plan of distribution shall be adopted upon approval of at least twothirds (2/3) of the members having voting rights present or represented by proxy at such meeting. (n)

Any corporation may be incorporated as a close corporation, except mining or oil companies, stock exchanges, banks, insurance companies, public utilities, educational institutions and corporations declared to be vested with public interest in accordance with the provisions of this Code. The provisions of this Title shall primarily govern close corporations: Provided, That the provisions of other Titles of this Code shall apply suppletorily except insofar as this Title otherwise provides. Title XII of the Corporation Code primarily governs close corporations. But in the absence of a special provision to the contrary, the general provisions governing ordinary corporations will apply. Provisions on close corporations are a recognition of the continued existence of family corporations. They provide a type of business organization especially designed for business associates belonging to a small closely-knit group a de facto corporation with a corporate shell. It is referred to, sometimes, as a hybrid of both the corporate and partnership forms, an incorporated partnership or a corporation de jure but a de facto partnership. This is because a close corporation may partake the nature of a partnership in that the stockholders thereof take an active role in the management of the corporate affairs either as directors, officers, or even perhaps as partners in management which is akin to the partnership form of management. Anent the last paragraph, Sec. 140 lays down a similar policy by authorizing the NEDA to recommend to the legislature the setting of maximum limits to family or group ownership of stock corporations vested with public interest, and the determination of whether or not it should be vested with public interest is within its domain.

14) Close Corporation

Definition Section 96. Definition and applicability of Title. - A close corporation, within the meaning of this Code, is one whose articles of incorporation provide that: (1) All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (2) all the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code.

Permissive Provisions Section 97. Articles of incorporation. - The articles of incorporation of a close corporation may provide: 1. For a classification of shares or rights and the qualifications for owning or holding the same and restrictions on their transfers as

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may be stated therein, subject to the provisions of the following section; 2. For a classification of directors into one or more classes, each of whom may be voted for and elected solely by a particular class of stock; and 3. For a greater quorum or voting requirements in meetings of stockholders or directors than those provided in this Code. The articles of incorporation of a close corporation may provide that the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors. So long as this provision continues in effect: 1. No meeting of stockholders need be called to elect directors; 2. Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed to be directors for the purpose of applying the provisions of this Code; and 3. The stockholders of the corporation shall be subject to all liabilities of directors. The articles of incorporation may likewise provide that all officers or employees or that specified officers or employees shall be elected or appointed by the stockholders, instead of by the board of directors. Under 1, a close corporation may thus classify its shares into different classes to be held of record only by specified persons. Under 3, the veto power of minority stockholders may be increased. Unlike in ordinary corporations, a greater quorum and voting requirement in stockholders meetings may be increased as provided for in the articles of incorporation or by-laws. Liability of directors in close corporations is more extensive, in that they are personally liable for corporate torts unless the corporation

has obtained a reasonably adequate liability insurance. Directors of ordinary corporations are liable for corporate torts only if they have been negligent or acted fraudulently in the performance of their functions. Section 98. Validity of restrictions on transfer of shares. - Restrictions on the right to transfer shares must appear in the articles of incorporation and in the by-laws as well as in the certificate of stock; otherwise, the same shall not be binding on any purchaser thereof in good faith. Said restrictions shall not be more onerous than granting the existing stockholders or the corporation the option to purchase the shares of the transferring stockholder with such reasonable terms, conditions or period stated therein. If upon the expiration of said period, the existing stockholders or the corporation fails to exercise the option to purchase, the transferring stockholder may sell his shares to any third person. Restrictions on transfers of shares need to appear in the articles of incorporation, by-laws and certificates of stock. Ordinary stock corporations only need to provide for it in the articles of incorporation and stock certificates. If the by-laws of close corporations do not contain such restriction, it will not bind third persons.

Section 99. Effects of issuance or transfer of stock in breach of qualifying conditions. 1. If stock of a close corporation is issued or transferred to any person who is not entitled under any provision of the articles of incorporation to be a holder of record of its stock, and if the certificate for such stock conspicuously shows the qualifications of the persons entitled to be holders of record thereof, such person is conclusively presumed to have notice of the fact of his ineligibility to be a stockholder. 2. If the articles of incorporation of a close corporation states the number of persons, not exceeding twenty (20), who are entitled to be holders of record of its stock, and if the certificate for such

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stock conspicuously states such number, and if the issuance or transfer of stock to any person would cause the stock to be held by more than such number of persons, the person to whom such stock is issued or transferred is conclusively presumed to have notice of this fact. 3. If a stock certificate of any close corporation conspicuously shows a restriction on transfer of stock of the corporation, the transferee of the stock is conclusively presumed to have notice of the fact that he has acquired stock in violation of the restriction, if such acquisition violates the restriction. 4. Whenever any person to whom stock of a close corporation has been issued or transferred has, or is conclusively presumed under this section to have, notice either (a) that he is a person not eligible to be a holder of stock of the corporation, or (b) that transfer of stock to him would cause the stock of the corporation to be held by more than the number of persons permitted by its articles of incorporation to hold stock of the corporation, or (c) that the transfer of stock is in violation of a restriction on transfer of stock, the corporation may, at its option, refuse to register the transfer of stock in the name of the transferee. 5. The provisions of subsection (4) shall not be applicable if the transfer of stock, though contrary to subsections (1), (2) or (3), has been consented to by all the stockholders of the close corporation, or if the close corporation has amended its articles of incorporation in accordance with this Title. 6. The term "transfer", as used in this section, is not limited to a transfer for value. 7. The provisions of this section shall not impair any right which the transferee may have to rescind the transfer or to recover under any applicable warranty, express or implied.

It appears that a selling stockholder may not be able to transfer his shares if to do so would violate the qualifying conditions indicated in the articles of incorporation unless number 5 is made to apply. The stockholder concerned is not left without any recourse as he may compel the close corporation to purchase his shares at their fair value for any reason, subject only to Sec. 105. The transferee may rescind the transaction or recover from the transferor under any applicable warranty, express or implied.

Stockholders Agreements 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

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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. Pre-incorporation agreements under par. 1 do not ordinarily survive in ordinary corporations unless it has been ratified or adopted by the corporation after incorporation, in which case binds the corporation. Agreements may also be entered into by and between the stockholders of a close corporation which relates to the management of the corporate affairs which would not otherwise be valid and binding in other corporations. This is because stockholders agreement in the latter cannot limit or restrict the discretion and powers of the Board of Directors to manage the corporate affairs.

4. All the directors have express or implied knowledge of the action in question and none of them makes prompt objection thereto in writing. If a director's meeting is held without proper call or notice, an action taken therein within the corporate powers is deemed ratified by a director who failed to attend, unless he promptly files his written objection with the secretary of the corporation after having knowledge thereof. In comparison, directors in ordinary stock corporations must act as a body at a duly constituted meeting to have a valid corporate transaction.

Pre-emptive Right Section 102. Pre-emptive right in close corporations. - The pre-emptive right of stockholders in close corporations shall extend to all stock to be issued, including reissuance of treasury shares, whether for money, property or personal services, or in payment of corporate debts, unless the articles of incorporation provide otherwise. Compared with Sec. 39 governing the pre-emptive rights of stockholders in ordinary corporations and its limitations, is a matter of right (with no limitations) in close corporations unless otherwise provided in the article of incorporation.

When Board Meeting not necessary Section 101. When board meeting is unnecessary or improperly held. Unless the by-laws provide otherwise, any action by the directors of a close corporation without a meeting shall nevertheless be deemed valid if: 1. Before or after such action is taken, written consent thereto is signed by all the directors; or 2. All the stockholders have actual or implied knowledge of the action and make no prompt objection thereto in writing; or 3. The directors are accustomed to take informal action with the express or implied acquiescence of all the stockholders; or

Section 103. Amendment of articles of incorporation. - Any amendment to the articles of incorporation which seeks to delete or remove any provision required by this Title to be contained in the articles of incorporation or to reduce a quorum or voting requirement stated in said articles of incorporation shall not be valid or effective unless approved by the affirmative vote of at least two-thirds (2/3) of the outstanding capital stock, whether with or without voting rights, or of such greater proportion of shares as may be specifically provided in the articles of incorporation for amending, deleting or removing any of the aforesaid provisions, at a meeting duly called for the purpose.

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Pursuant to Sec. 96, the general provisions of the Corporation Code will be made to apply to a close corporation.

Section 104. Deadlocks. - Notwithstanding any contrary provision in the articles of incorporation or by-laws or agreement of stockholders of a close corporation, if the directors or stockholders are so divided respecting the management of the corporation's business and affairs that the votes required for any corporate action cannot be obtained, with the consequence that the business and affairs of the corporation can no longer be conducted to the advantage of the stockholders generally, the Securities and Exchange Commission, upon written petition by any stockholder, shall have the power to arbitrate the dispute. In the exercise of such power, the Commission shall have authority to make such order as it deems appropriate, including an order: (1) cancelling or altering any provision contained in the articles of incorporation, by-laws, or any stockholder's agreement; (2) cancelling, altering or enjoining any resolution or act of the corporation or its board of directors, stockholders, or officers; (3) directing or prohibiting any act of the corporation or its board of directors, stockholders, officers, or other persons party to the action; (4) requiring the purchase at their fair value of shares of any stockholder, either by the corporation regardless of the availability of unrestricted retained earnings in its books, or by the other stockholders; (5) appointing a provisional director; (6) dissolving the corporation; or (7) granting such other relief as the circumstances may warrant. A provisional director shall be an impartial person who is neither a stockholder nor a creditor of the corporation or of any subsidiary or affiliate of the corporation, and whose further qualifications, if any, may be determined by the Commission. A provisional director is not a receiver of the corporation and does not have the title and powers of a custodian or receiver. A provisional director shall have all the rights and powers of a duly elected director of the corporation, including the right to notice of and to vote at meetings of directors, until such time as he shall be removed by order of the Commission or by all the stockholders. His compensation

shall be determined by agreement between him and the corporation subject to approval of the Commission, which may fix his compensation in the absence of agreement or in the event of disagreement between the provisional director and the corporation. Withdrawal of Stockholders/Dissolution Section 105. Withdrawal of stockholder or dissolution of corporation. - In addition and without prejudice to other rights and remedies available to a stockholder under this Title, any stockholder of a close corporation may, for any reason, compel the said corporation to purchase his shares at their fair value, which shall not be less than their par or issued value, when the corporation has sufficient assets in its books to cover its debts and liabilities exclusive of capital stock: Provided, That any stockholder of a close corporation may, by written petition to the Securities and Exchange Commission, compel the dissolution of such corporation whenever any of acts of the directors, officers or those in control of the corporation is illegal, or fraudulent, or dishonest, or oppressive or unfairly prejudicial to the corporation or any stockholder, or whenever corporate assets are being misapplied or wasted. Withdrawal of a stockholder through the exercise of his appraisal right, in ordinary corporations, can only be allowed under the conditions provided in Sec. 81.

Dulay Enterprises v CA Petitioner Dulay sold the property to respondent Veloso who in turn mortgaged it to respondent Torres. The latter filed a petition for issuance of writ of possession over the property when he bought it at public auction after foreclosure. Petitioner corporation contests Dulays authority in disposing of corporate property. The Supreme Court held the sale was valid and binding considering that the corporation is a close corporation run by the Dulay family, with petitioner Dulay acting as president, treasurer and general manager with almost absolute control over the business and affairs of the corporation.

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 Naguiat Enterprises v CA Respondent taxi drivers, who were previously employed by petitioner CFTI, filed a complaint for payment of separation pay due to termination/phase-out. The NLRC granted separation pay and held petitioner CFTI liable, as well as holding petitioners Sergio Naguiat (as President of CFTI and Naguiat Ent.) and Naguiat Enterprises jointly and severally liable. The Supreme Court held that even though CFTI and Naguiat Ent. were close family corporations owned by the Naguiat family, the respondents failed to substantiate their claim that it was Naguiat Ent. that managed, surprised and controlled their employment. It cannot, therefore, be liable. However, Sergio Naguiat is solidarily liable for corporate tort, pursuant to par. 5 of Sec. 100 of the Corp. Code, because he had actively engaged in the management and operation of CFTI, a close corporation, which failed to comply with its law-imposed obligation of granting separation pay in case of closure not due to serious business losses.

These institutions of learning, once recognized by the government as such, are mandated by law to be incorporated within 90 days under the provisions of the Corporation Code and must, perforce, comply with the requirements and procedure laid down thereunder. Their failure to do so, however, will not immune the educational institution from suit as a corporation.

Section 108. Board of trustees. - Trustees of educational institutions organized as non-stock corporations shall not be less than five (5) nor more than fifteen (15): Provided, however, That the number of trustees shall be in multiples of five (5). Unless otherwise provided in the articles of incorporation on the by-laws, the board of trustees of incorporated schools, colleges, or other institutions of learning shall, as soon as organized, so classify themselves that the term of office of one-fifth (1/5) of their number shall expire every year. Trustees thereafter elected to fill vacancies, occurring before the expiration of a particular term, shall hold office only for the unexpired period. Trustees elected thereafter to fill vacancies caused by expiration of term shall hold office for five (5) years. A majority of the trustees shall constitute a quorum for the transaction of business. The powers and authority of trustees shall be defined in the by-laws. For institutions organized as stock corporations, the number and term of directors shall be governed by the provisions on stock corporations. (169a) Among other laws that govern educational institutions, par. 2 of Sec. 4, Art. XIV of the Constitution limits the ownership of foreigners to a maximum of 40% of the capital stock. The same provision limits such ownership to non-controlling interest as well, for aliens cannot sit as a member of the governing board, and neither can they act as an officer with the power of control and administration of the institution.

15) Special Corporations

Educational Corporations Section 106. Incorporation. - Educational corporations shall be governed by special laws and by the general provisions of this Code. (n) Educational corporations are those which provide facilities for teaching or instruction. It includes both public or private schools. Public schools, or those created by the government, are subject to the law of their creation, with provisions of any special law or the Corporation Code as supplement.

Section 107. Pre-requisites to incorporation. - Except upon favorable recommendation of the Ministry of Education and Culture, the Securities and Exchange Commission shall not accept or approve the articles of incorporation and by-laws of any educational institution. (168a)

Religious Corporations

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Section 109. Classes of religious corporations. - Religious corporations may be incorporated by one or more persons. Such corporations may be classified into corporations sole and religious societies. Religious corporations shall be governed by this Chapter and by the general provisions on non-stock corporations insofar as they may be applicable. (n) A religious corporation is one composed entirely of spiritual persons, created for the furtherance of religion or perpetuating the rights of the church or for the administration of church or religious work or property.

2. That the rules, regulations and discipline of his religious denomination, sect or church are not inconsistent with his becoming a corporation sole and do not forbid it; 3. That as such chief archbishop, bishop, priest, minister, rabbi or presiding elder, he is charged with the administration of the temporalities and the management of the affairs, estate and properties of his religious denomination, sect or church within his territorial jurisdiction, describing such territorial jurisdiction; 4. The manner in which any vacancy occurring in the office of chief archbishop, bishop, priest, minister, rabbi of presiding elder is required to be filled, according to the rules, regulations or discipline of the religious denomination, sect or church to which he belongs; and 5. The place where the principal office of the corporation sole is to be established and located, which place must be within the Philippines. The articles of incorporation may include any other provision not contrary to law for the regulation of the affairs of the corporation. (n) Section 112. Submission of the articles of incorporation. - The articles of incorporation must be verified, before filing, by affidavit or affirmation of the chief archbishop, bishop, priest, minister, rabbi or presiding elder, as the case may be, and accompanied by a copy of the commission, certificate of election or letter of appointment of such chief archbishop, bishop, priest, minister, rabbi or presiding elder, duly certified to be correct by any notary public. From and after the filing with the Securities and Exchange Commission of the said articles of incorporation, verified by affidavit or affirmation, and accompanied by the documents mentioned in the preceding paragraph, such chief archbishop, bishop, priest, minister, rabbi or presiding elder shall become a corporation sole and all temporalities, estate and properties of the religious denomination, sect or church theretofore

Corporation Sole Section 110. Corporation sole. - For the purpose of administering and managing, as trustee, the affairs, property and temporalities of any religious denomination, sect or church, a corporation sole may be formed by the chief archbishop, bishop, priest, minister, rabbi or other presiding elder of such religious denomination, sect or church. (154a) A corporation sole consists of one person only and his successor in some particular station, who are incorporated by law in order to give them some legal capacities and advantages, particularly that of perpetuity, which in their natural persons they could not have had.

Section 111. Articles of incorporation. - In order to become a corporation sole, the chief archbishop, bishop, priest, minister, rabbi or presiding elder of any religious denomination, sect or church must file with the Securities and Exchange Commission articles of incorporation setting forth the following: 1. That he is the chief archbishop, bishop, priest, minister, rabbi or presiding elder of his religious denomination, sect or church and that he desires to become a corporation sole;

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administered or managed by him as such chief archbishop, bishop, priest, minister, rabbi or presiding elder shall be held in trust by him as a corporation sole, for the use, purpose, behalf and sole benefit of his religious denomination, sect or church, including hospitals, schools, colleges, orphan asylums, parsonages and cemeteries thereof. (n) The articles of incorporation of a corporation sole does not require a provision relative to its term of existence since it is supposed to exist in perpetuity. It may be dissolved though, in accordance with Sec. 115. A corporation sole, after filing the verified articles of incorporation along with the documents required, immediately becomes endowed with corporate personality. This is an exception to the rule that a corporation acquires juridical personality only upon the issuance of a certificate of incorporation.

While the corporation sole is empowered to acquire and alienate properties, the extent of its power to sell or mortgage real properties is subject to the restriction that a proper court order must first be secured for that purpose. This limitation can be lifted according to the last proviso. The registration of real property in the name of a corporation sole will not vest unto the head thereof ownership of the property which would devolve upon the church or congregation acquiring it. The constitutional requirement that 60% of the capital of the corporation must be owned by Filipino citizens before it may register land in its own name does not apply to a corporation sole. A corporation sole cannot acquire land of the public domain, unless the land has become private through open, continuous and exclusive possession for 30 years.

Section 113. Acquisition and alienation of property. - Any corporation sole may purchase and hold real estate and personal property for its church, charitable, benevolent or educational purposes, and may receive bequests or gifts for such purposes. Such corporation may sell or mortgage real property held by it by obtaining an order for that purpose from the Court of First Instance of the province where the property is situated upon proof made to the satisfaction of the court that notice of the application for leave to sell or mortgage has been given by publication or otherwise in such manner and for such time as said court may have directed, and that it is to the interest of the corporation that leave to sell or mortgage should be granted. The application for leave to sell or mortgage must be made by petition, duly verified, by the chief archbishop, bishop, priest, minister, rabbi or presiding elder acting as corporation sole, and may be opposed by any member of the religious denomination, sect or church represented by the corporation sole: Provided, That in cases where the rules, regulations and discipline of the religious denomination, sect or church, religious society or order concerned represented by such corporation sole regulate the method of acquiring, holding, selling and mortgaging real estate and personal property, such rules, regulations and discipline shall control, and the intervention of the courts shall not be necessary. (159a)

Roman Catholic Apostolic Church v LRC The Land Registration Commissioner was of the view that petitioner cannot acquire and register Philippine land in the absence of proof that at least 60% of its capital, assets or property were actually owned or controlled by Filipino citizens. The Supreme Court recognized the petitioner as a corporate sole, an unhappy freak of English Law. The corporation sole merely administrators of church property that they hold in trust. It is given the power to purchase property, and corollary to this, is able to register for the same. Director of Lands v CA Iglesia ni Cristo filed an application for the registration of land it acquired by virtue of absolute sale, contending that it and its predecessor-in-interest had been in actual, continuous, public, peaceful and adverse possession and occupation of the land in the concept of owner for more than 30 years. The Director of Lands opposed their claims. The Supreme Court held that the 1973 constitutional prohibition cannot apply because the land the 30 year period of open,

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continuous, exclusive and notorious possession and occupation required by law was completed in 1966. And under the Constitution then in force, private corporations were not prohibited from acquiring public lands less than 1,124 hectares in size. Republic v IAC The Roman Catholic Bishop of Lucena filed an application for confirmation of title to 4 lots, claiming title either through purchase or donation dating as far back as 1928. The lower court approved and ordered the registration but the Solicitor General, through a motion for reconsideration, questions the legal capacity of the corporation sole and whether or not the constitutional prohibition should apply. The Supreme Court asserted the vested right of a corporation sole to purchase and hold real and personal property pursuant to the Corporation Code. Therefore, it cannot be treated as an ordinary private corporation as to which the constitutional prohibition should apply. Filling up of Vacancies Section 114. Filling of vacancies. - The successors in office of any chief archbishop, bishop, priest, minister, rabbi or presiding elder in a corporation sole shall become the corporation sole on their accession to office and shall be permitted to transact business as such on the filing with the Securities and Exchange Commission of a copy of their commission, certificate of election, or letters of appointment, duly certified by any notary public. During any vacancy in the office of chief archbishop, bishop, priest, minister, rabbi or presiding elder of any religious denomination, sect or church incorporated as a corporation sole, the person or persons authorized and empowered by the rules, regulations or discipline of the religious denomination, sect or church represented by the corporation sole to administer the temporalities and manage the affairs, estate and

properties of the corporation sole during the vacancy shall exercise all the powers and authority of the corporation sole during such vacancy. (158a) Dissolution Section 115. Dissolution. - A corporation sole may be dissolved and its affairs settled voluntarily by submitting to the Securities and Exchange Commission a verified declaration of dissolution. The declaration of dissolution shall set forth: 1. The name of the corporation; 2. The reason for dissolution and winding up; 3. The authorization for the dissolution of the corporation by the particular religious denomination, sect or church; 4. The names and addresses of the persons who are to supervise the winding up of the affairs of the corporation. Upon approval of such declaration of dissolution by the Securities and Exchange Commission, the corporation shall cease to carry on its operations except for the purpose of winding up its affairs. (n) Religious Societies Section 116. Religious societies. - Any religious society or religious order, or any diocese, synod, or district organization of any religious denomination, sect or church, unless forbidden by the constitution, rules, regulations, or discipline of the religious denomination, sect or church of which it is a part, or by competent authority, may, upon written consent and/or by an affirmative vote at a meeting called for the purpose of at least two-thirds (2/3) of its membership, incorporate for the administration of its temporalities or for the management of its affairs, properties and estate by filing with the Securities and Exchange Commission, articles of

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incorporation verified by the affidavit of the presiding elder, secretary, or clerk or other member of such religious society or religious order, or diocese, synod, or district organization of the religious denomination, sect or church, setting forth the following: 1. That the religious society or religious order, or diocese, synod, or district organization is a religious organization of a religious denomination, sect or church; 2. That at least two-thirds (2/3) of its membership have given their written consent or have voted to incorporate, at a duly convened meeting of the body; 3. That the incorporation of the religious society or religious order, or diocese, synod, or district organization desiring to incorporate is not forbidden by competent authority or by the constitution, rules, regulations or discipline of the religious denomination, sect, or church of which it forms a part; 4. That the religious society or religious order, or diocese, synod, or district organization desires to incorporate for the administration of its affairs, properties and estate; 5. The place where the principal office of the corporation is to be established and located, which place must be within the Philippines; and 6. The names, nationalities, and residences of the trustees elected by the religious society or religious order, or the diocese, synod, or district organization to serve for the first year or such other period as may be prescribed by the laws of the religious society or religious order, or of the diocese, synod, or district organization, the board of trustees to be not less than five (5) nor more than fifteen (15). (160a) Under common law, a religious society is a body of persons associated together for the purpose of maintaining religious worship.

The religious society and the church are distinct bodies, independent of each other, though they may exist with the other. A religious society is not mandated by law to register as a corporation but it may do so to acquire juridical personality and for the purpose of administration and temporalities and properties and even to acquire properties of its own. It has been held that an unincorporated religious association cannot acquire private agricultural lands in the Philippines. Like the corporation sole, the articles of incorporation of a religious society need not contain a term of its existence as it is supposed to exist in perpetuity.

16) Dissolution and Winding Up

Extinguishment of the corporate franchise and the termination of corporation. A corporation ceases to be a juridical entity and can no longer pursue the business for which it is incorporated BUT may continue as a body corporate for another 3 years from the time it was dissolved for the purpose of winding up its affairs and liquidation of assets.

3 Ways of Dissolution (According to LADIA, there are 3 ways to dissolve a corporation however the Code (Sec. 117) only provides for 2 because the expiration of term can rightfully be considered voluntary dissolution- the intention of the stockholders is only for the corporation to exist for such period. 1. Expiration of Term A corporation ceases to exist and deemed automatically dissolved upon the expiration of the term indicated in the articles of incorporation without the need for any formal proceedings.

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However, the original term of existence indicated in the articles of incorporation is subject to extension (Sec. 11 and 37). Extension of the corporate term must be made before the expiration of the original term otherwise the corporation is dissolved, ipso facto. Extension should not be made earlier than 5 years prior to the original expiration unless for justifiable reasons determined by the SEC (Sec. 11).

Case: PNB v. CFI (1992) Private Respondents entered into a contract of lease with Philippine Blooming Mills (PBM) for 20 years and extendible for another 20 years at the option of lessee should their corporate term of existence be extended in accordance to law. PBM executed in favour of PNB a Deed of Assignment transferring all rights under the contract of lease (this was annotated on the title). Private Respondents filed motion to cancel the annotations on the certificate of title regarding assignment of leasehold rights, improvements and real estate mortgages. They were claiming that the lease had already expired for PBMs failure to renew a second 20 year lease and the failure to extend its corporate existence. Issue: WON Cancellation of entries on the certificate of title is valid? YES Ratio: The lease contract provides that only if there is extension of corporate term can the lease be extended. PBMs failure to extend terminated their rights over the land. The parties have stipulated in the contract their own terms and conditions concerning the improvements before the termination of the lease. PNB as assignee of PBM succeeded to the obligation of the latter under the contract of lease. It could not possess rights more than what PBM had as lessee under the contract. Hence, PNB was duly bound to remove the improvements before the expiration of the period of lease. Its failure to do so when the lease terminated was tantamount to a waiver of its rights and interest over the improvements on the leased premises. 2. Voluntary Dissolution/Surrender of Franchise

3 modes of voluntary dissolution: 1.Voluntary Dissolution where no creditors are affected; 2. Voluntary Dissolution where creditors are affected; 3. Shortening of Corporate term. a. Voluntary Dissolution where no creditors are affected (Sec. 118) Formal and Procedural Requirements (Mandatory; failure to comply will have no effect on the legal existence of the corporation) 1. Majority vote of board of directors of trustees 2. Notice to each stockholder/member by registered mail OR personal delivery 30 days prior to the meeting (scheduled by board; for dissolution) 3. Publication of notice of time, place and subject of the meeting for 3 consecutive weeks in a newspaper published in the place where the principal office of corp is located or in a newspaper of general circulation in the Philippines. 4. Resolution adopted by the affirmative vote of the stockholders owning at least 2/3 of the outstanding capital stock or 2/3 of the members at the meeting duly called for the purpose. 5. Copy of resolution authorizing the dissolutioncertified by majority of board of directors or trustees and countersigned by corporate secretary. 6. Issuance of certificate of dissolution by SEC. b. Voluntary Dissolution where creditors are affected (Sec. 119) Requirements are mandatory except for the appointment of a receiver which is only permissive since the law intended to let the shareholders have the control of the assets of the corporation upon dissolution in winding up its affairs. 1. Affirmative vote of stockholders representing at least 2/3 of majority of outstanding capital stock or at least 2/3 of members at a meeting duly called for that purpose

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2.

c.

Petition for dissolution shall be filed with SEC signed by majority of its board directors or trustees or other officers having the management of its affairs, verified by the president or secretary or one of its board of directors or trustees setting forth all claims and demands against it. 3. Issuance of an order of SEC- must state the purpose of petition and fixing the date on or before which objections thereto may be filed by any person, which date shall be 30-60 days after entry of order. 4. Before such date, copy of the order must be published once a week for 3 consecutive weeks in a newspaper of general circulation published in the city/municipality where the principal office is situated or in a newspaper of general circulation in thePhilippines. 5. Posting of the same order for 3 consecutive weeks in 3 public places in such a city/municipality. 6. Upon 5 days notice, given after the date on which the right to file objections has expired, the SEC shall hear the petition and try any issue made by the objections filed. 7. Judgment dissolving the corporation and directing disposition of its assets as justice requires and the appointment of a receiver (if necessary in its discretion) to collect such assets and pay the debts of the corporation. Shortening of Corporate Term (Sec. 120) -Through amendment of articles of incorporation although sec. 16 does not apply in terms of written assent and automatic dissolution. Sec. 37 mandates that the votes must be cast at a duly constituted meeting. Sec. 120 is also very clear that it is only upon the approval of the SEC that the corporation is deemed dissolved.

complaint and after proper notice and hearing on the grounds provided by existing laws, ruled and regulations. Grounds (Sec. 6, PD 902-A): 1. 2. Fraud in procuring its certificate of registration Serious misrepresentations as to what the corporation can do or is doing to the great prejudice of or damage to the general public Refusal to comply or defiance of any lawful order of the Commission restraining commission of acts which would amount to a grave violation of its franchise Continuous inoperation for a period of at least 5 years Failure to file by-laws within the required period Failure to file required reports in appropriate forms as determined by the Commission within the prescribed period

3.

4. 5. 6.

Grounds (Corpo Code) 1. 2. 3. Violation of Sec. 144 Deadlock in a close corporation (Sec. 105) In a close corporation, any acts of directors, officers or those in control of the corporation which is illegal or fraudulent or dishonest or oppressive or unfairly prejudicial to the corporation or any stockholder or whenever corporate assets are being misapplied or wasted (Sec. 105) Other grounds can be found in other special laws like SRC and the General Banking Act. The relief of dissolution will be awarded only where no other adequate remedy is available and it will not be allowed where the rights of the stockholders can be, or are, protected in some other way.

3.

Involuntary Dissolution (Sec. 121) Cases: May be dissolved by SEC (concurrent jurisdiction with Special Commercial Courts) upon filing of a verified

Government v. Philippine Sugar Estate Co.(PSEC)

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Facts: QUO Warranto was brought by Republic against PSEC. For a period of 18months it had continuously offended against laws and misused its corporate authority, franchise and privileges and had assumed privileges and franchises not granted. It entered into a contract with Tayabas Land to purchase lands along the right of way of the Manila Railroad Company through the Province of Tayabas with a view of selling the same to the Manila Railroad Company for profit. Held: DISSOLVED! Ratio: The scope of the remedy furnished by quo warranto is to forfeit the franchise of a corporation for mis-user or non-user. It is necessary in order to secure a judicial forfeiture of charter to show a mis-user of its franchise justifying such a forfeiture. The mis-user must be such as to work or threaten a substantial injury to the public, or such as to work or threaten a substantial injury to the public, or such as to amount to a violation of the fundamental condition of the contract by which the franchise was granted and thus defeat the purpose of the grant and ordinarily the wrong or evil must be one remediable in no other form of judicial proceeding. The purpose of intervention of the defendant in this case was to enrich itself at the expense of the taxpayers of Phil, who had, by a franchise granted, permitted the defendant to exist and to business as a corporation. The conduct of defendant in the premise merits the severest condemnation of the law.

laws in conflict with Corpo Code, provision will only be declared a nullity and shall not be enforced even if directors were to attempt to do so. Republic v. Security Credit and Acceptance Corp Facts: Quo Warranto to dissolve corp for engaging in banking operations without authority required by General Banking Act. Also, the corporation ignored the Monetary Board resolution declaring its illegal transaction and continued its operationmanaged to induce public to open 59,643 savings deposit accounts. HELD: DISSOLVED. Defendant corp has violated the law by engaging in banking without securing the administrative authority required in RA 337. The illegal transactions undertaken by corp warrant dissolution is apparent from fact that the foregoing misuser of the corporate funds and franchise affects the essence of its business, that it is wilful and has been repeated 59,643 times and that its continuance inflicts injury upon public, owing to the number of persons affected thereby. Republic v. Bisaya Land Transporation Co, Inc. Facts: 9 causes of action for dissolution: 1. Falsely reconstituted articles of incorporation by adding new purposes not originally included- lumber concession, cattle ranch, agri, gen merch, 2. Adopted resolution authorizing acquisition of public land and timber concessions- violation of Act 143, 3. Resolution authorizing corp to lease pasture land of cattle ranch on a public land, 4. Operated a gen merch store (not necessary, incidental to accomplishment of principal business), 5. Corp allowed non stockholders to be officers, 6. Engaged in mining, 7. Imported and rd sold black market prices to 3 persons, 8. Paid laborers below minimum wage, manipulated books to make it appear that laborers were paid in accordance to min wage, 9. Failed to maintain accurate and faithful stock and transfer books. HELD: NOT DISSOLVED. The court found that the several acts of mis-use of and misapplication of the funds and/or assets of the corp were committed more particularly by the president and

Government v. El Hogar Filipino Facts: Petition to dissolve El Hogar for violation of Sec 75 Act of Congress and Sec 13.5 Corp Code- must dispose of real estate obtained within 5 years after receipt of title and also certain parts of by-laws are in conflict with Corpo Code. HELD: NOT DISSOLVED. Although there was violation of the law, its conduct not characterized by obduracy and pertinacity in contempt of law. A fair interpretation of act of congress sec 75 would indicate that the date of receiving the title was the date when the respondent received the owners certificate. The failure of respondent to receive the certificate sooner was not due to its fault but to unexplained delay on the part of the register of deeds. For this delay the respondent cannot be held accountable. For by-

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another officer for the commission of which they may be held personally liable. The court also found a quo that the controversy between the parties was more personal than anything else and did not at all affect public interest. Other parties who might feel aggrieved, would not be without their remedies since they can still maintain whatever claims they may have against each other. A relief by dissolution will be awarded only where no other adequate remedy is available and is not available where the rights of the stockholders can be, or are, protected in some other way. Financing Corp of the Phil v. Teodoro Facts: Dissolution was filed by stockholders against corp and general manager/president for alleged gross mismanagement and fraudulent conduct of the corporate affairs. The corp questioned the appointment of a receiver and the capacity of the stockholders to file for dissolution. HELD: General Rule: Minority stockholders of a corp cannot use and demand its dissolution. Exception: when such minority members, is unable to obtain redress and protection of their rights within the corporation, must not and should not be left without redress and remedy. It was held in Hall v. Piccio that even the existence if a de jure corporation may be terminated in a private suit for its dissolution by the stockholders without the intervention of the State. Effects of Dissolution 1. Terminates all franchises- whether primary or secondary 2. Cannot apply for a new certificate or a secondary franchise for it is incapable of receiving a grant 3. Cannot enforce a contract executed prior its dissolution for the purpose of continuing the business of its organization. 4. Debts are not extinguished. It may be brought within the 3 year period of liquidation. 5. Rights and liabilities are not extinguished by its dissolution. For example in lease, a lease to a corp may, by its terms, terminate where the corporation ceases to exist but unless the lease so provides, the rights and obligations thereunder are not

extinguished by the corps dissolution. Leases affects property rights and survive the death of the parties. Upon expiration of the 3 year period to wind up affairs, the juridical personality of the corporation ceases for all intents and purposes, and as a general rule, it can no longer sue and be sued. Cases: Buenaflor v. Cam Sur Industry Corp Facts: Cam Sur Industry filed opposition to Buenaflors proposed ice plant and filed application to construct and manage its own ice plant. Buenaflor challenged the personality of the corporation alleging that its corporate life had expired. Instead of filing its answer, Cam Sur filed for extension of time to answer. The corporators registered new articles of incorporation and filed for cert of public convenience. In its answer, it alleged its recent incorporation plus acquisition of new assets and cpcs. HELD: When Cam Corp docketed its application, it had no longer judicial personality since it had ceased to exist as a corporation and could not sue nor apply for certificate, for it was incapable of receiving grant. The new corp is merely a transferee of the properties of old plus the cpc to operate ice plant. It has not filed any application for cpc and has not published such application. Cebu Port Labor Union v. State Marine Co. Et al. Facts: The Cebu Port Labor Union filed for petition for recognition of stevedoring service and injunction against States Marine Corp. The union was awarded a contract for the exclusive right of loading and unloading of cargoes of vessel formerly owned by Elizalde and Co which ownership was transferred to State Marine. Corp filed Motion to Dismiss alleging that it having been dissolved, had no longer personality to enter or refuse to enter into any contract. HELD: The 3 year period allowed by law is only for the purpose of winding up its affairs. Union prayed that it be declared to have the right to stevedoring work thereby respecting the contract entered into by them and Elizalde and subsequently enforced and

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continued by State Marine. It appearing that state marine was already dissolved at the time petition was filed and the vessels subject of the agreement having changed hands, it cannot be compelled now to respect such agreement specially considering the fact that it cannot be made a party to this suit. Gonzales v. Sugar Regulatory Administration Facts: Sps. Gonzales filed for cancellation of mortgage of recovery of money against Republic Planters, Philsucom and SRA. EO 28 abolished Philsucom. Sps assailed its constitutionality because in effect, it destroyed their right to recover. Sps. Assert that they had been deprived of property without due process of law and that the abolition of PhilSuCom and the transfer of assets to SRA are unconsti and ineffective. Is SRA liable to claim of spouses? HELD: The termination of the life of a juridical entity does not by itself imply the diminution or extinction of rights demandable against such juridical entity. Philsucoms contractual obligations carry with it substantive rights which cannot be destroyed by the EO. Should the assets of Philsucom remaining in Philsucom at the time of its abolition not be adequate to pay for all lawful claims against Philsucom, SRA must be held liable for such claims to the extent of the fair market value of assets actually taken over by SRA. Liquidation and Winding Up Collection of all assets, payments of all its debts and settlement of its obligations and the ultimate distribution of the corporate assets, if any of it remains, to all stockholders in accordance with their proportionate stockholdings in the corporation or in accordance with their respective contracts of subscription.

2.

3.

when the 3 year period expires are abated since after that period, the corporation ceases for all intents and purposes and is no longer capable of suing or being sued. By a Trustee appointed by the corporation- 3 year period will not apply provided designation be made within that period. In effect, corp, as represented by trustee, can sue and be sued beyond 3 year period. Trustee may include counsel to whom case is entrusted. By appointment of a receiver- through a petition or motu proprio upon dissolution of corp. 3 year expiration will not apply because the corp is substituted by receiver.

Cases: National Abaca Other Fibers Co. V. Pore Facts: National Abaca filed against Pore for recovery of money. Pore moved to dismiss on the ground that corp has no capacity to sue. It was abolished by EO 372. HELD: Pending actions by or against a corporation are abated upon expiration of the period allowed by law for the liquidation of its affairs. It is generally held that where a statute continues the existence of a corporation for a certain period after its dissolution for the purpose of prosecuting and defending suits, the corporation becomes defunct upon the expiration of such period, at least in the absence of provision to the contrary, so that no action can afterwards be brought by or against the it, and must be dismissed. Actions pending by or against the corporation when the period allowed by the statute expires, ordinarily abate. Sumera v. Valencia

3 ways (Liquidation) 1. By the corporation itself through Board of Directors- the board will have 3 years to finish its task of liquidation. Claims for or against the corp not filed within the period will become unenforceable as there exist no corporate entity against which they can be enforced. Actions pending for or against the corp

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Facts: Petition was filed for voluntary dissolution of corp. Damaso Nicolas was appointed assignee and was later on replaced by Tiburcio Sumera. He filed a motion asking Eugenio to deliver P400 belonging to the funds of corporation. Valencia alleged prescription since action the action was commenced on June 5, 1936 while the dissolution of corporation was on Feb 14, 1928. HELD: if a receiver/assignee is appointed with or without transfer of its properties within 3 years, the legal interest passes to the assignee- where he is allowed to bring an action outside of the 3 year period. Board of Liquidators v. Kalaw Facts: Nacoco seeks to recover sum of money from the general manager and board chairman Maximo Kalaw and other directors. It charges them negligence, bad faith and/or breach of trust for having approved contracts for delivery of copra. Defendants questioned legal personality of Board of Liquidators. HELD: No time limit has been tasked to the Board of Liquidators and its function of closing the affairs of the various government owned corporation- Nacoco. And nowhere in the executive order was there any mention of the life-span of the Board of Liquidators. The complete loss of NACOCOs corporate existence after the expiration of the period of 3 years for settlement of its affairs is what impelled the President to create a Board of Liquidators, to continue the management of such matters as may be pending. Nacoco has personality to proceed. Gelano v. CA Although there was no trustee appointed, the counsel who prosecuted and defended the suits by or against the corp- appeared in behalf of the corp may be considered a trustee of a corp with respect to litigation. There was substantial compliance with Sec. 78, as such private respondent may prosecute present case even beyond 3 year period. Republic v. Marsman

Facts: BIR is demanding tax deficiencies from Marsman Dev Co. However, defendant contends that action is already barred by Sec 77 of Corp Codethey were saying that filing of complaint was beyond the 3 year period. HELD: The assessments of BIR were made before the corps dissolution and within the 3 year period. The government, therefore, became the creditor of the corporation before the completion of its dissolution by liquidation of its assets. Also, there was a liquidator appointed which in effect became the trustee of all assets for the benefits of all persons in Sec. 78 including creditors. Chung Ka Bio v. IAC Facts: Phil Blooming Mills executed a deed of assignment of all its account receivables, obligations and liabilities to Chung Siong Pek (in his capacity as the treasurer of the new PBM). Chung Ka Bio and other stockholders of the old PBM, filed with SEC petition for liquidation of both old and new PBM. They contend that board of directors of an already dissolved corp does not have the inherent power, without the express consent of stockholders, to convey all assets to a new corporation. HELD: it is not unlawful for the old board of directors to negotiate and transfer the assets of the dissolved corporation to the new corporation intended to be created as long as the stockholders have given their consent. Also, the petitioners are barred by laches since it was only after 4 years of DOA execution when they questioned the transfer and filed for liquidation of assts. Clemente v. CA Facts: both plaintiffs and defendants were claiming ownership over certain parcel of land. Only plaintiffs presented evidence. TC found that Sociedad Popular Calambena organization was the owner of parcel of land acquired from the Friar Lands Estate of Calamba Laguna. HELD: all that appear to be certain are that the Sociedad Popular Calambena, engaged in the management and operation of a cockpit, has existed sometime in the past, it has acquired the parcel of land in question and that plaintiffs predecessors were original stockholders of the sociedad.

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However, petitioners were not able to come up with any evidence to substantiate their claim of ownership of corporate asset. If the sociedad have long been defunct, petitioners should have taken appropriate measures before a proper forum for a peremptory settlement of its affairs.

17) Foreign Corporations

Any corporation which owes its existence to the laws of another state, government or country. one formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state. (Sec. 123) Incorporation test- to determine whether domestic/foreign. If it is incorporated in another state, it is a foreign corp, if registered under Phil laws, deemed a domestic corp irrespective of nationality of stockholders. A foreign corp, in order to do business in the Phil, must first obtain a license to transact business in Phil and a certificate from the appropriate government agency. If without license, it cannot be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the Phil but it may be sued on any valid cause of action recognized under Phil laws.

3.

How to obtain a license (Sec. 125) 1. Submit to SEC copy of its articles of incorporation and by-laws, certified in accordance with law and translation to an official language of the Phil, if necessary. Application must be under oath shall set forth:

4.

Date and term of incorporation Address (Including street number) of principal office of corp in the country or state of incorporation c. Name and address of its resident agent authorized to accept summons and processes in all legal proceedings and, pending the establishment of a local office, all notices affecting the corporation d. Place in the Phil where corp intends to operate e. Specific purpose/s of the corp which it intends to pursue in the transaction of its business in the Phil: provided that said purpose/s are those specifically stated in the certificate of authority issued by the government agency f. Names and addresses of the present directors and officers of the corporation g. Statement of its authorized capital stock and the aggregate number of shares which the corporation has authority to issue, itemized by classes, par value of shares, shares without par value, and series, if any h. Statement of its outstanding capital stock and the aggregate number of shares which the corp has issued, itemized by classes, par value of shares, shares without par value, and series, if any. i. Statement of account actually paid in j. Additional info necessary or appropriate to enable SEC to determine whether such corp is entitled to a license to transact business in Phil There must also be a duly executed certificate under oath by authorized official/s of the jurisdiction of its incorporation, attesting to the fact that the laws of the country or state of the applicant allow Filipino citizens and corporations to do business therein, and that the applicant is an existing corporation in good standing. Statement under oath of President showing that applicant is solvent and in sound financial condition and set forth assets and liabilities of corp not exceeding 1 year prior to filing of application.

a. b.

2.

Within 60 days after issuance of license, foreign corp, except those engaged in foreign banking or insurance, shall deposit with SEC, for benefit

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of creditors, securities consisting of bonds or other evidence of indebtedness of Phil gov or political subdivision, shares of stock in registered enterprises, domestic insurance companies and banks or any combination with an actual fair market value of P100k. Necessity of obtaining a license to do business: The reason for the license is to subject the foreign corporation doing business in the Philippines to the jurisdiction of the courts, otherwise a foreign corporation illegally doing business here may successfully though unfairly plead such neglect or illegal act so as to avoid service and thereby impugn the jurisdiction of the local courts. Appointment of resident agent A resident agent may be either an (Sec. 127): o Individual residing in the Philippines of good moral character and of sound financial standing o Domestic corporation lawfully transacting business in the Philippines: The SEC shall require as a condition precedent to the issuance of the license to transact business in the Philippines by any foreign corporation that such corporation file with the SEC a written power of attorney: o Designating some person who must be a resident of the Philippines, on whom any summons and other legal processes may be served in all actions or other legal proceedings against such corporation, and o Consenting that service upon such resident agent shall be admitted and held as valid as if served upon the duly authorized officers of the foreign corporation at its home office. Any such foreign corporation shall likewise execute and file with the SEC an agreement or stipulation, executed by the proper authorities of said corporation, in form and substance as follows: o "The (name of foreign corporation) does hereby stipulate and agree, in consideration of its being granted by the

Securities and Exchange Commission a license to transact business in the Philippines, that if at any time said corporation shall cease to transact business in the Philippines, or shall be without any resident agent in the Philippines on whom any summons or other legal processes may be served, then in any action or proceeding arising out of any business or transaction which occurred in the Philippines, service of any summons or other legal process may be made upon the SEC and that such service shall have the same force and effect as if made upon the duly-authorized officers of the corporation at its home office." Whenever such service of summons or other process shall be made upon the SEC, the Commission shall, within ten (10) days thereafter, transmit by mail a copy of such summons or other legal process to the corporation at its home or principal office. The sending of such copy by the Commission shall be necessary part of and shall complete such service. All expenses incurred by the Commission for such service shall be paid in advance by the party at whose instance the service is made.

In case of a change of address of the resident agent, it shall be his or its duty to immediately notify in writing the SEC of the new address. What are the consequence of doing business in the Philippines without a license? (Sec. 133) No foreign corporation transacting business in the Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the Philippines; Such corporation may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws.

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In addition, Sec. 134 makes it a ground for revocation of license when a foreign corporation transacts business in the Philippines as agent of or acting for and in behalf of any foreign corporation or entity not duly licensed to do business in the Philippines.

extended or improperly applied. it was not the purpose of legislature to exclude foreign corps from seeking redress on Phil courts and thus permit persons to avoid their contracts made with these foreign corps. Bulakhidas v. Navarro Facts: Petitioner (FC) filed for recovery of damages for failure of Diamond Shipping Corp (DC) to deliver the goods shipped to it to their proper destination. It is alleged in complaint that FC is suind under an isolated transaction. DC moved to dismiss complaint on the ground that FC has no capacity to sue. HELD: it is settled that if a foreign corporation is not engaged in business in the Phil, it may not be denied the right to file an action in Phil courts for isolated transaction. The object of Sec. 68 and 69 was not to prevent the foreign corp from performing single acts but to prevent it from acquiring domicile for the purpose of business without taking the steps necessary to render it amendable to suit in the local courts. It was not the purpose of the legislature to exclude foreign corp which happens to obtain an isolated order for business from the Phil, from seeking redress in the Phil courts. Swedish East Asia Co, LTD v. Manila Port Service Facts: Petitioner (FC) filed complaint for recovery of money (value of missing goods which were not delivered in Hongkong but instead was included in cargo delivered in Manila) against Manila Port Service. HELD: Sec. 69 is not applicable to foreign corp performing single acts or isolated transactions. There is nothing in the record to show that FC has been in the Phil engaged in continuing business or enterprise for which it was organized. The value of which is sought to be recovered, were landed not as a result of business transaction, isolated or otherwise, but due to a mistaken belief that they were part of the shipment to the Phil, there is no justification therefore, for invoking Sec 69. ANTAM Consolidated v. CA Facts: Stokely Van Camp (FC) filed against several domestic corps complaint for collection of money. It purchased crude coconut oil from DC

Cases: Mentholatum v. Mangaliman Facts: Mentholatum filed case against Mangaliman for infringement of trademark and unfair competition. It prayed for restraining Mangaliman from using Mentholiman which according to petitioner was registered in 1919 in its corporation. Mentholatum was a foreign corp no licensed to do business in Phil. HELD: No general rule or governing principle can be laid down as to what constitutes doing or engaging in or transacting business. Indeed, each case must be judged in the light of its peculiar environmental circumstances. The true test, however, seems to be whether the foreign corporation is continuing the body or substance of the business or enterprise for which it was organized, or whether it has substantially retired from it and turned it over to another. The term implies a continuity of commercial dealings and arrangements, and contemplates to that extent the performance of acts or works or the exercise of the functions normally incident to and in the progressive prosecution of the purpose and object of its organization. Marshall-Wells Co. v. Henry W. Elser & Co. Facts: Marshall-Wells(FC)sued Henry W. Elser & Co. (DC) for the unpaid balance of a bill of goods. Defendant demurred to the complaint on the statutory ground that FC has no legal capacity to sue- complaint did not show that FC has complied with the laws of Phil nor it was authorized to do business in the Phil. HELD: the law simply means that no foreign corp shall be permitted to transact business in the Phil, unless it shall have the license required by law, and until it complies with the law, shall not be permitted to maintain any suit in the local courts. A contrary holding would bring the law to the verge of unconstitutionality. the effect of statute must not be unduly

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under 3 transactions. DCs filed motion to dismiss on the ground that being a corp not licensed to do business in Phil, it has no personality to maintain the suit. HELD: The transaction entered into by the respondent with the petitioners area not a series of commercial dealings which signify an intent on the part of FC to do business in the Phil but constitute an isolated one which does not fall under the category of doing business. The only reason why FC nd rd entered into the 2 and 3 transactions was because it wanted to recover the loss it sustained from the failure of the petitioners to deliver the crude coconut oil under the first transaction and in order to give the latter a chance to make good on their obligation. In reality there was only one agreement between FC and DCs. Facilities Management Corp v. De la Osa Facts: De La Osa sought his reinstatement with full backwages and recovery of overtime compensation, swing shift and graveyard shift differentials as painter, houseboy and cashier of FC. FC denied allegations saying that it was beyond the territorial jurisdiction of the Phil government. HELD: FC is doing business in the Phil within the scope of Sec 14 Rule 14 of ROC. FC had to appoint Jaime Catuira as its agent with authority to execute employment contracts and receive on behalf of that corporation legal service from and be bound by processes of the Phil court of justice for as long as it remains an employee of FC. Summons was also served on him. In effect, Mr. Catuira was a liaison officer representing FC in the Phil. According to Foreign Investment Act, doing business in the phil means either: Soliciting orders Service contracts Appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totaling 180 days or more Opening offices, whether called liason offices or branches Any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent, performance normally incident to , and in progressive prosecution

of, commercial gain or of the purpose and object of the business organization If a foreign corp not engaged in business in Phil is not banned from seeking redress from Phil courts, a fortiori, that same corp cannot claim exemption from being sued in phil courts for acts done against a person/s in the Phil. Far East Intl Import v. Nankai Kogyo Co. Ltd Facts: Far East filed for specific performance, damages and a writ of preliminary injunction directed against Nankai to issue and deliver to plaintiff complete set of negotiable Bill of Lading for 1,058 metric tons scrap of metal. Nankai filed motion to dismiss the complaint and dissolve the preliminary injunction for lack of jurisdiction over the person of defendant. HELD: 3 modes of effecting service of summons upon private foreing corp: 1. Upon agent designated in accordance with law to accept service of summons, 2. If no residing agent, service on the government officials designated by law to that effect, 3. By serving on any officer or agent of rd corp within Phil. The plaintiff complied with 3 , it was shown that summons was served to officers of company. In the testimony of officers, they were sent to the Phil to look into the operation of mines, thereby revealing FCs desire to continue engaging in business here, after receiving the scrap metal , making the Phil a base thereof. Communication Materials and Design Inc. v. CA Facts: ITEC entered into a representative agreement with ASPAC where it engaged ASPAC as its exclusive representative in the Phil. ASPAC was able to incorporate and use ITEC in its own name. ASPAC sold electronic products exported by ITEC to its sole customer, PLDT. ITEC decided to terminate contract with PLDT because ASPAC allegedly violated its contractual commitment. ITEC charged ASPAC with using knowledge of information of ITECs products specifications to develop their own line of equipment and product support, which are similar, if not identical to ITECs own and offering them to ITECs former customers. ASPAC filed motion to dismiss on the ground that ITEC has no capacity to sue as a foreign corp doing business in the Phil without license.

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HELD: ITEC is considered to be doing business in the Phil- it entered into several contracts and agreements with various business contacts- ASPAC, TESSI etc). Its arrangements with these entities indicate convincingly ITECs purpose to bring about the situation among its customers and the general public that they are dealing directly with ITEC and that it is actively engaging in business in the country. However, ASPAC is stopped from raising issue on jurisdiction against ITEC. A party is stopped to challenge the personality of a corporation after having acknowledged the same by entering into a contract with it. Western Equipment and Supply Co. v. Reyes Facts: Western Equipment through agent Felix applied for issuance of license to do business in the Phil- granted a provisional license which eventually became permanent. Telephone equipment in Manila was manufactured by Western Electric (bearing its trademark, Western Electric)- not licensed to do business in Phil. Western Equipment registered Western Electric as its trademark through Act of Congress in Washington. Henry Herman as president and general manager of Electric Supply (phil corp) filed for articles of incorporation for purpose of organizing a domestic corporation of Western Electric Company. Western Electric filed for temporary injunction against Henry Herman restraining them from organizing corporation. HELD: trade name is a property right, a right in rem, which may assert and protect against all the world, in any of the courts of the world- even in jurisdictions where it does not transact business- just the same as it may protect its tangible property, real or personal, against trespass or conversion. It is very apparent that the purpose and intent of Herman and his associates in seeking to incorporate under the name Western Electric Company was to unfairly and unjustly compete in the Phil with the Western Electric Company. General Garments Corporation v. Director of Patents Facts: Puritan Sportwear Corp filed petition for cancellation of trademark Puritan registered in the name of General Garments alleging ownership

and prior use of in the Phil. WON Puritan Sportswear, a foreign corp, has legal capacity to sue in phil courts. HELD: Yes. The requirement for a license in order to maintain a suit in Phil does not make a corporation any less a juridical person. An exception to the license requirement is where a foreign corp sues on an isolated transaction. RA 638 Sec 21-A allows a foreign corp/juristic person to bring an action in Phil courts for infringement, unfair competition or false designation of origin and false description- include those previously used trademark in the Phil by another and not abandoned. Puma v. IAC Facts: PUMA filed petition for infringement of patent or trademark against MIL-ORO. Defendant filed motion to dismiss on the ground that PUMA had no legal capacity to sue. Petitioner alleged that it substantially complied with requirements of Sec 21 RA 166- specifically alleged that it is not doing business in the Phil and it is suing under the said RA. It also contended that the fact of reciprocity arrangement under the Paris convention need not be averred since as a signatory, the treaty automatically becomes a law in the Phil, and that courts are bound to take judicial notice thereof. HELD: a foreign corp not doing business in the Phil needs no license to sue before Phil courts for infringement of trademark and unfair competition. This is provided for in the Paris Convention, of which the Phil is a signatory, saying: the Phil is obliged to assure to nationals of countries of Union an effective protection against unfair competition on the same way that they are obligated to similarly protect Filipino citizen and firms. Le Chemise Lacoste v. Fernandez Facts: Le Chemise Lacoste filed with NBI complaint on acts of unfair competition being committed by Hemandas. NBI, after conducting investigation filed with court for issuance of search warrants on premises used and occupied by Hemandas- granted. NBI found and seized various goods and articles described in the warrant. Hemandas filed Motion to Quash alleging that trademark used by him was different- granted, search

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warrants were recalled. Hemandas alleged that petitioner was not doing business in the Phil and not licensed to business here. HELD: The petitioner is a foreign corp not doing business in the Phil. The marketing of its products is done through an exclusive distributor, Rustans. The latter is an independent entity which buys and then markets not only products of the petitioner but also many other products bearing equally well-known established trademark and tradenames. Rustan s is actually a middlemen acting and transacting business in its own name and or its own account and not in the name of the petitioner. But petitioner may still sue for infringement of trademark and unfair competition. The nature of the case is criminal and eventually, the information shall be in the name of the people of the Phil and no longer the petitioner which only becomes an aggrieved party since a criminal offense is an act against the state. Petitioners capacity to use would become not much of sig nificance in the main case. Also there is recognition of duties and the rights of states under the Paris convention for protection of industrial property. A treaty or obligation is not a mere moral obligation to be enforced or not at the whims of an incumbent head. It creates a legally binding obligation on the parties founded on the generally accepted principle of international law of pacta sunt servanda which been adopted as part of the law of the land. Atlantic Mutual Insurance Co. v. Cebu Stevedoring Co, Inc. Facts: Atlantic and Continental sued Cebu Stevedoring for recovery of a sum of money for damaged copra. Motion to dismiss on the ground of lack of legal personality and no capacity to sue-> based upon the failure of the complaint to allege compliance with Section 69. RTC ordered Atlantic to amend complaint within 10 days. FC did not comply. HELD: There should be compliance with the rule on averment of reason for exception. It is enough that foreign corps are allowed by law to seek redress in phil courts under certain conditions: the interpretation of law should not go so far as to include, in effect, an inference that those conditions have been met from the mere fact that the party suing is a foreign corporation. Olympia Business Machines v. E. Razon

Facts: Olympia shipped 300 typewriters to its sister company in Manila (this was issued against all risk by California Insurance Co.). When it was transferred to E. Razon, part of the shipment was stolen. California and Olympia sued E. Razon, E.Razon was declared in default. In its Motion for reconsideration, E. Razon questioned the legal personality of FC, but he failed to appear at the pre-trial again. WON failure of California to aver its capacity to sue is fatal? HELD: not in this case. Defense of lack of capacity was not raised until after st the 1 declaration of default of defendant. There is also a pronouncement of CA that the defendant had no meritorious defences save that of lack of capacity to sue on the part of plaintiff. Moreover, in case of dismissal of case, would not bar California from instituting similar action this time alleging that it was suing on a single, isolated transaction. But this would become an idle, circuitous ceremony in the light of the unchallenged declaration of CA of the absence of any meritorious substantial defense on the part of Razon. Time, Inc. v. Reyes Facts: Villegas and Enrile sought to recover damages upon an alleged libel arising from a publication of Time. Subsequently there was an issuance of a writ of attachment on the real and personal property of time. MTD by TIME on the ground of lack of jurisidiction and improper venue. HELD: Foreign Corporation is not maintainin any suit but is merely defending one against itself, it did not file any complaint but only a corollary defensive petition to prohibit the lower court from further proceeding with a suit that it had no jurisdiction to entertain. Intra-corporate or internal matters not affecting creditors or the public in general are governed not by Philippine laws but the law under the foreign corp was formed or organized. M.E. Grey v. Insular Lumber Company

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Facts: M.E. Grey- owner and possessor of 57 shares of capital stocks was not allowed to examine the books of records of transactions when he requested to do so. According to the law of New York, only stockholders owning 3% of shares may make a written request for inspection. However, Grey contends that under Phil Corp Law, since a corp was registered to do business in the Phil, each is entitled to inspect records. HELD: the right under common law can only be granted at the discretion of the court. The stockholder must show that: 1.he seeks information for an honest purpose or to protect his interest as a stockholder, 2. The right to examine must be exercised in good faith, for a specific and honest purpose and not to gratify curiosity or for speculative or vexatious purposes. The petitioner made no effort to prove any of the aforementioned. Merger or consolidation involving a foreign corporation licensed in the Philippines (Sec. 132) One or more foreign corporations authorized to transact business in the Philippines may merge or consolidate with any domestic corporation or corporations if : o Such is permitted under Philippine laws and by the law of its incorporation o The requirements on merger or consolidation as provided in this Code are followed Whenever a foreign corporation authorized to transact business in the Philippines shall be a party to a merger or consolidation in its home country or state as permitted by the law of its incorporation, such foreign corporation shall, within sixty (60) days after such merger or consolidation becomes effective, file with the SEC, and in government agency, a copy of the articles of merger or consolidation duly authenticated by the proper official or officials of the country or state under the laws of which merger or consolidation was effected Provided, however, that if the absorbed corporation is the foreign corporation doing business in the Philippines, the latter shall at the same time file a petition for withdrawal of its license.

Revocation of license (Sec. 134)

prejudice to other grounds provided by special laws, the license of a foreign corporation to transact business in the Philippines may be revoked or suspended by the SEC upon any of the following grounds: o Failure to file its annual report or pay any fees as required by this Code; o Failure to appoint and maintain a resident agent in the Philippines as required by this Title; o Failure, after change of its resident agent or of his address, to submit to the Securities and Exchange Commission a statement of such change as required by this Title; o Failure to submit to the Securities and Exchange Commission an authenticated copy of any amendment to its articles of incorporation or by-laws or of any articles of merger or consolidation within the time prescribed by this Title; o A misrepresentation of any material matter in any application, report, affidavit or other document submitted by such corporation pursuant to this Title; o Failure to pay any and all taxes, imposts, assessments or penalties, if any, lawfully due to the Philippine Government or any of its agencies or political subdivisions; o Transacting business in the Philippines outside of the purpose or purposes for which such corporation is authorized under its license; o Transacting business in the Philippines as agent of or acting for and in behalf of any foreign corporation or entity not duly licensed to do business in the Philippines; or o Any other ground as would render it unfit to transact business in the Philippines. (n) Issuance of certificate of revocation (Sec. 135) Upon the revocation of any such license to transact business in the Philippines, the Securities and Exchange Commission shall issue a corresponding certificate of revocation, furnishing a copy thereof to the appropriate government agency in the proper cases. The Securities and Exchange Commission shall also mail to the corporation at its registered office in the Philippines a notice of such revocation accompanied by a copy of the certificate of revocation.

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Withdrawal by a foreign corporation (Sec. 136) If a foreign corporation duly licensed to do business desires to withdraw, it must file a petition for withdrawal, and must meet the following requirements: o All claims accrued in the Philippines must be settled o All taxes must be paid o Petition must be published once a week for three (3) consecutive weeks.

18) Miscellaneous Provisions 19) PD 902-A

20) Securities Regulation Code RA 8799

PRESIDENTIAL DECREE 902-A, AS AMENDED BY PD NOS. 1653, 1758 AND 1799 Section 1 transferred the administrative supervision of the SEC from the Department of Trade to the Office of the President. It is now under the supervision of the Department of Fiannce by virtue of EO 788 of July 27, 1981. Section 3 provides that the SEC shall have absolute jurisdiction, supervision, and control over: 1. all corporations, partnerships, and associations, who are: a. grantees of primary franchise and/or b. grantees of a license or permit issued by the government to operate in the Philippines;

Sections 2 (Composition, Terms, and Qualifications), 4 (Reorganization and restructuring of the staff and personnel) and 8 (SEC Departments) had been repealed by the Securities Regulation Code. Section 5 enumerates cases over which the SEC has quasi-judicial jurisdiction. These were transferred and are now under the original and exclusive jurisdiction of the designated Special Commercial Courts by virtue of A.M. No. 00-11-03. Section 6 enumerates the powers necessary for the SEC to effectively exercise its powers under Section 5, PD 902-A. Despite the transfer of its quasi-judicial powers, since only Sections 2, 4 and 8 of P.D. 902-A had been repealed, the powers and functions under Section 6 PD 902A are retained inasmuch as they are consistent with the powers and functions of the SEC under Section 5 of the SRC . The SEC and the Special Commercial Courts have concurrent jurisdiction to: 1. compel the officers of corporations to call meetings of stockholders or members, and 2. suspend and revoke, after due notice and hearing, the franchise or certificate of registration of corporations.

CASES UNDER SPECIAL COMMERCIAL COURTS JURISDICTION (formerly with SEC): DEVICES OR SCHEMES AMOUNTING TO FRAUD Section 5. *SEC+ shall have original and exclusive jurisdiction to hear and decide cases involving: (a) Devices or schemes employed by or any acts, of the board of directors, business associates, its officers or partnership, amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or of the stockholder, partners, members of associations or organizations registered with the Commission. - Now within the original and exclusive jurisdiction of the Special Commercial Courts

Under the same section, SEC also has the power to enlist the aid and support of: 1. any and all enforcement agencies of the government, civil or military 2. any private institution, corporation, firm, association, or person.

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Elements of 5(a): 1. 2. 3. 4. Devices and schemes Amounting to fraud and misrepresentation By the Board of Directors, Associates, Officers, its Partnership Detrimental to interest of the public, stockholder, partners, members or organizations registered with the SEC

1. 2. 3. 4.

Stockholders, Members, Associates Stockholders, Members, Associates and their Corp/Part/Assn Corp/Part/Assn and the State Corp/Part/Assn and the Public (Union Glass vs. CA)

The old rule in Union Glass is that any controvery where there is an intracorporate relationship between parties is an intracorporate dispute cognizable by the SEC. Intracorporate Controversies, under the new rule laid down in PSBA vs Leano, now have 2 elements: 1. 2. An intra-corporate relationship The controversy arose out of the said relationship.

Even if the action is for recovery of sums of money paid, if such sums are given to the corporation through devices or schemes amounting to fraud or misrepresentation detrimental to the investing public, the same must be filed, heard, and tried by the Special Commercial Courts. (Orosa vs. CA) When the complaint alleges that one of the officers of the corporation employed fraud, an otherwise ordinary action for recovery of property and sum of money with damages is transposed into an intracorporate controversy under the jurisdiction of SEC. (Alleje vs. CA) The allegation of fraud under Section 5(a) of PD 902-A must be stated with particularity to place the case within SEC jurisdiction because Section 5 Rule 8 of the Rules of Court provides that averments of fraud or mistake must be stated with particularity. (Abad vs. CFI Pangasinan)

Similarly, Speed Distributng Corpo vs. CA held that the following 2 elements must be present: 1. 2. The controversy must arise out of the intracorporate relationship The dispute among the parties must be intrinsically connected with the regulation of the corporation

CONTROVERSIES IN THE APPOINTMENT, ELECTION, AND REMOVAL OF DIRECTORS AND OFFICERS (c) Controversies in the election or appointments of directors, trustees, officers or managers of such corporations, partnerships or associations. - Now within the original and exclusive jurisdiction of the Special Commercial Courts The ff. are within the SEC jurisdiction under Section 5(c): - The case of a board of directors member who was not reelected and who alleged that his ouster was a scheme to deprive him of his just and fair return on investment (PSBA vs Leano).

INTRA-CORPORATE CONTROVERSIES (b) Controversies arising out of intra-corporate or partnership relations, between and among stockholders, members, or associates; between any or all of them and the corporation, partnership or association of which they are stockholders, members or associates, respectively; and between such corporation, partnership or association and the state insofar as it concerns their individual franchise or right to exist as such entity. - Now within the original and exclusive jurisdiction of the Special Commercial Courts Intracorporate Relationship exists between/among:

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- Determination of rights arising from an alleged illegal convening of a meeting of the Board of Directors leading to ouster from office (Andaya vs. Abadia) -The question of remuneration being asserted by an officer of the corporation (Lozon vs NLRC and PAL) Test: WON the corporate officer aserts his rights as such officer or questions his removal or ouster. If YES, within SEC jurisdiction However if the main cause of action is for recovery of unpaid wages and separation pay, the case falls within the labor courts.

banks and insurance companies, upon request of the government agency concerned: Provided, finally, That upon appointment of a management committee, rehabilitation receiver, board or body, pursuant to this Decree, all actions for claims against corporations, partnerships or associations under management or receivership pending before any court, tribunal, board or body shall be suspended accordingly.. (d) To create and appoint a management committee, board, or body upon petition or motu propriety to undertake the management of corporations, partnerships or other associations not supervised or regulated by other government agencies in appropriate cases when there is imminent danger of dissipation, loss, wastage or destruction of assets or other properties of paralization of business operations of such corporations or entities which may be prejudicial to the interest of minority stockholders, parties-litigants or the general public: Provided, further, That the Commission may create or appoint a management committee, board or body to undertake the management of corporations, partnerships or other associations supervised or regulated by other government agencies, such as banks and insurance companies, upon request of the government agency concerned.. The management committee or rehabilitation receiver, board or body shall have the power to take custody of, and control over, all the existing assets and property of such entities under management; to evaluate the existing assets and liabilities, earnings and operations of such corporations, partnerships or other associations; to determine the best way to salvage and protect the interest of the investors and creditors; to study, review and evaluate the feasibility of continuing operations and restructure and rehabilitate such entities if determined to be feasible by the Commission. It shall report and be responsible to the Commission until dissolved by order of the Commission: Provided, however, That the Commission may, on the basis of the findings and recommendation of the management committee, or rehabilitation receiver, board or body, or on its own findings, determine that the continuance in business of such corporation or entity would not be feasible or profitable nor work to the best interest of the stockholders, parties-litigants, creditors, or the general public, order the dissolution of such corporation entity and its remaining assets liquidated accordingly. The management committee or rehabilitation receiver, board or body may overrule or revoke the actions of the previous management and board of directors of the entity or entities under management notwithstanding any provision of law, articles of incorporation or bylaws to the contrary..chan robles virtual law library The management committee, or rehabilitation receiver, board or body shall not be subject to any action, claim or demand for, or in connection with, any act done or

RECEIVERSHIP AND SUSPENSION OF PAYMENTS d) Petitions of corporations, partnerships or associations to be declared in the state of suspension of payments in cases where the corporation, partnership or association possesses sufficient property to cover all its debts but foresees the impossibility of meeting them when they respectively fall due or in cases where the corporation, partnership or association has no sufficient assets to cover its liabilities, but is under the management of a Rehabilitation Receiver or Management Committee created pursuant to this Decree. - This Section as well as Section 6(c) and (d) of PD 902-A pertaining to suspension of payments and appointment of receiver and management committee is now within the jurisdiction of Special Commercial Courts.
1

PD 902-A, Section 6 (c) To appoint one or more receivers of the property, real and personal, which is the subject of the action pending before the Commission in accordance with the pertinent provisions of the Rules of Court in such other cases whenever necessary in order to preserve the rights of the parties-litigants and/or protect the interest of the investing public and creditors: Provided, however, That the Commission may, in appropriate cases, appoint a rehabilitation receiver of corporations, partnerships or other associations not supervised or regulated by other government agencies who shall have, in addition to the powers of a regular receiver under the provisions of the Rules of Court, such functions and powers as are provided for in the succeeding paragraph d) hereof: Provided, further, That the Commission may appoint a rehabilitation receiver of corporations, partnerships or other associations supervised or regulated by other government agencies, such as

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Three Remedies for a Cash-Strapped Corporation seeking Suspension of Payment: 1. Simple Suspension corporation has sufficient assets but foresees impossibility of meeting due to temporary liquidity problems. 2. Suspension with proposal for rehabilitation suspension with a plan for rehab and repayment scheme for all debts 3. Suspension where the corpo is under a Management Committee or Rehabilitation Receiver may be availed of by a: a. corporation which has no sufficient assets to cover liabilities b. corporation having mere liquidity problems provided it prays for the appointment or is under a management comm or rehab receiver Two kinds of entities may be appointed for a corporation under suspension of payment: 1. Rehabilitation Receiver a. For Corp/Part/Assn NOT SUPERVISED by government agencies Appointed in appropriate cases b. For Corp/Part/Assn SUPERVISED Appointed upon Request of the government agency concerned Ex.: Banks,Insurance Companies 2. Management Committee a. For Corp/Part/Assn NOT SUPERVISED by government agencies Appointed upon petition or motu proprio ii. Requisites: 1. when there is imminent danger of dissipation, loss, wastage or destruction of assets or other properties 2. Paralysis of business operations of such corporations or entities which may be prejudicial to the interest of minority
omitted to be done by it in good faith in the exercise of its functions, or in connection with the exercise of its power herein conferred.

b.

stockholders, parties-litigants or the general public: For Corp/Part/Assn SUPERVISED by government agencies Appointed upon REQUEST by the government agency concerned

Powers and Functions of the RR and the MC [Sections 6(c) and (d)] Rehabilitation Receiver a. A regular receiver under the ROC b. Management Committees under Section 6(d) Management Committee a. Take custody and control over all existing assets of entities managed b. Evaluate existing assets and liabilities c. Determinate the best way to salvage and protect the interest of the investors and creditors d. Study, review, and evaluate the feasibility of continuing operations and restructure and rehabilitate such entitties if determined to be feasible by the Commission e. Report to the Commission until dissolved. The Commission determines the feasibility of continuance on the basis of the MCs recommendation f. Overrule or revoke the actions of the previous management/Board of Directors g. Immune from any action, claim, or demand in connection with any act done by it in good faith and in the exercise of its powers and functions EFFECT OF SUSPENSION OF PAYMENTS

Section 6(c): Upon APPOINTMENT of a MC, RR, board, or body, all actions for claims against corporations, partnerships or associations under management or receivership pending before any court, tribunal, board or body shall be suspended accordingly.

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CLAIMS debts or demands of pecuniary nature. Hence an action for nullification of corporate documents is not suspended by appointment of a receiver (Finasia Investment and Finance vs CA). The claim must be against the corporation and not its surety. Creditors may proceed against the properties of an individual stockholder, director or officer which stood as surey to the corporation (Chung Ka Bio vs IAC). The reason for suspending claims is to enable the MC or RR to effectively exercise its powers without any judicial or extrajudicial interference that might prevent the rescue of the company (PAL vs Sadic and Kurangking). If the creditors action already became final but pending execution at the time the suspension order was issued, execution of the final judgment is also suspended (Bagong Bayan vs Exec Judge) Suspension of payment includes: 1. Extrajudicial foreclosure of mortgage 2. Final judgment pending execution 3. All claims of pecuniary nature (Jimenez vs BF Homes) When a corporation is taken over by a receiver, all creditors, secured or not, stand on equal footing. Foreclosure is not allowed and the preference of credits is not applicable (Alemars Sibal and Sons vs Elibenas) Rules of Thumb: 1. All claims pending before any court whether filed by a creditor secured or unsecured, shall be suspended upon appointment of a MC, RR, board or body. 2. Secured creditors retain their preference over unsecured ones but they cannot enforce this preference once suspension is effected. However in the event that rehabilitation has become no longer feasible (liquidation), they may enforce their preference of credit. (RCBC vs IAC) APPOINTMENT OF MANAGEMENT COMMITTEE BOARD OR BODY

SY CHIM VS SY SIY HO & SONS Sy Chim, minority stockholder of respondent corporation, filed Motion for the Appointment of a Management Committee alleging massive dissipation and loss of corporate assets and funds and imminent danger of further dissipation. General Manager Sy Tiong opposed, contending that Sy Chim failed to allege and establish two requisites for the creation of a management committee. SC held that Section 1 Rule 9 of the Interim Rules provide for 2 requisites for the creation of a MC: 1. Dissipation, loss, wastage, destruction of assets or other properties AND 2. Paralyzation (sic) of its business operations which may be prejudicial to the interest of the minority stockholders, partieslitigants, or the general public. The word AND must not be taken to mean OR hence the two must concur. Since transference of the corporations management will certainly have a negative, if not crippling effect, on the operations/affairs of the corporation, the creation and appointment of a management committee and a receiver is an extraordinary and drastic remedy to be exercised with care and caution; What is "imminent danger"? PD 902A, the SRC not the Interim Rules do not define. "Danger" refers to exposure or liability to injury. "Imminent" refers to something which is threatening to happen at once, close although not yet happening, and on the verge of happening. In the present case, petitioners failed to make a strong showing that there was an imminent danger of dissipation, loss, wastage or destruction of assets or other properties of respondent corporation and paralysis of its business operations which may be prejudicial to the interest of the partieslitigants, petitioners, or the general public. JACINTO vs FWCC

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Shig Katayama, director and minority stockholder of FWCC, filed a derivative suit praying for the appointment of an Interim Management Committee to avoid dissipation of funds since Ramon Jacinto was allegedly diverting FWCC funds to the RJ Group of Companies. SC held that mere disagreement among stockholders as to the affairs of the corporation is not sufficient ground to appoint an MC. However, in the CAB, the findings of the external auditor of FWCC show imminent danger of dissipation, loss, wastage and destruction of corpo assets due to the continuance of the petitioners management. The court added that the MC is not an agent of the stockholder upon whose instance the committee was appointed; the appointment of MC is for the benefit of all interested parties. Also, that Katayama knew of the illegal diversion of funds does not justify the impropriety of the dealings.

(b) Investment contracts, certificates of interest or participation in a profit sharing agreement, certificates of deposit for a future subscription; (c) Fractional undivided interests in oil, gas or other mineral rights; (d) Derivatives like option and warrants; (e) Certificates of assignments, certificates of participation, trust certificates, voting trust certificates or similar instruments; (f) Proprietary or non proprietary membership certificates incorporations; and (g) Other instruments as may in the future be determined by the Commission. REGULATION OF SECURITIES 1. SEC AS AN ADMINISTRATIVE AGENCY (Section 4) a. Composition: i. Collegial body of 5 members. 1 Chairperson, 4 Commissioners 1. Term: Appointed by the President for a term of 7 years 2. Qualifications: a. Natural Born Filipino b. At least 40 yo for Chairperson, at least 35 for Commissioners c. Of good moral character or of unquestionable integrity d. Of known probity and patriotism e. with recognized competence in social and econ disciplies f. Majority of the 5 members must be LAWYERS

SECURITIES REGULATIONS CODE or RA 87899 SRC or RA 8799 became effective August 8, 2000 replacing BP 178 or the Revised Securities Act. It aimed to establish a free securities market that regulates itself, protect investors, and minimize fraudulent market manipulations which distort free market. SRC took away from SEC its quasi-judicial functions and transferred it to the courts through Section 5.2, pursuant to which AM No. 00-11-03-SC was promulgated on November 21, 2000. Fraudulent and manipulative devices in securities transactions are more spelled out in the SRC esp. in Chapter VII. SECURITIES DEFINED Section 3.1. Securities are shares, participation or interests in a corporation or in a commercial enterprise or profit-making venture and evidenced by a certificate, contract, instrument, whether written or electronic in character. It includes: (a) Shares of stock, bonds, debentures, notes, evidences of indebtedness, asset-backed securities;

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b.

c.

ii. 2 Attached Offices 1. Office of the General Counsel 2. Office of the General Accountant iii. 8 Departments: 1. Economic Research and Information Department 2. Market Regulation Department 3. Corporation Finance Department 4. Non-traditional Securities and Instruments Department 5. Company Registration and Monitoring Department 6. Compliance and Enforcement Department 7. Human Resource and Administrative Department 8. Financial Management Department Meetings: i. At least once a week or as often as necessary ii. Upon the 1. Call of the Chairperson 2. Request of the three (3) Commissioners Functions of the Chairperson: i. Chief Exec Officer of the Commission ii. Execute and Administer policies, orders, resolutions of the Commission iii. General Executive Direction and Supervision of all the bodies, offices, personnel and administrative business of the Commission

(b) Formulate policies and recommendations on issues concerning the securities market, advise Congress and other government agencies on all aspects of the securities market and propose legislation and amendments thereto; (c) Approve, reject, suspend, revoke or require amendments to registration statements, and registration and licensing applications; (d) Regulate, investigate or supervise the activities of persons to ensure compliance; (e) Supervise, monitor, suspend or take over the activities of exchanges, clearing agencies and other SROs; (f) Impose sanctions for the violation of laws and the rules, regulations and orders issued pursuant thereto; (g) Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and provide guidance on and supervise compliance with such rules, regulations and orders; (h) Enlist the aid and support of and/or deputize any and all enforcement agencies of the Government, civil or military as well as any private institution, corporation, firm, association or person in the implementation of its powers and functions under this Code; (i) Issue cease and desist orders to prevent fraud or injury to the investing public; (j) Punish for contempt of the Commission, both direct and indirect, in accordance with the pertinent provisions of and penalties prescribed by the Rules of Court;

2.

POWERS AND FUNCTIONS OF THE COMMISSION (Section 5) (a) Have jurisdiction and supervision over all corporations, partnerships or associations who are the grantees of primary franchises and/or a license or permit issued by the Government;

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(k) Compel the officers of any registered corporation or association to call meetings of stockholders or members thereof under its supervision; (l) Issue subpoena duces tecum and summon witnesses to appear in any proceedings of the Commission and in appropriate cases, order the examination, search and seizure of all documents, papers, files and records, tax returns, and books of accounts of any entity or person under investigation as may be necessary for the proper disposition of the cases before it, subject to the provisions of existing laws; (m) Suspend, or revoke, after proper notice and hearing the franchise or certificate of registration of corporations, partnerships or associations, upon any of the grounds provided by law; and (n) Exercise such other powers as may be provided by law as well as those which may be implied from, or which are necessary or incidental to the carrying out of, the express powers granted the Commission to achieve the objectives and purposes of these laws. REGISTRATION OF BROKERS, DEALERS, SALESMEN Registration of Brokers, Dealers, Salesmen and Associated Persons . SEC. 28.1-.2. Persons who engage in the business of buying or selling securities in the Philippines as a broker or dealer, or act as a salesman, or an associated person of any broker or dealer need to register with the Commission. Also No registered broker or dealer or issuer shall employ any salesman or any associated person who is not registered. 28.3. The Commission may conditionally or unconditionally exempt from

registration any broker, dealer, salesman, associated person of any broker or dealer, or any class, consistent with the public interest and the protection of investors. 28.4. Minimun conditions for registration: (a) If a natural person, the applicant satisfactorily pass a written examination as to his proficiency and knowledge in the area of activity for which registration is sought; (b) In the case of a broker or dealer, the applicant satisfy a minimum net capital as prescribed by the Commission, and provide a bond or other security as the Commission may prescribe to secure compliance with the provisions of this Code; and (c) If located outside of the Philippines, the applicant files a written consent to service of process upon the Commission pursuant to Section 65 hereof. How to register: 28.5. A broker or dealer must file with the Commission a written application the form and contents of which the Commission by rule shall prescribe. 28.6. A salesman or of an associated person of a registered broker or dealer must file a written application, separately signed and certified by the registered broker or dealer to which such salesman or associated person is to become affiliated, or by the issuer in the case of a salesman employed, appointed or authorized solely by such issuer. Any employee of an issuer whose compensation is not determined directly or indirectly on sales of securities of the issuer is not a salesman under this provision. 28.7. Applicant must pay a registration fee prescribed by the Commission. 28.9. The names and addresses of all persons approved for registration shall be recorded in a Register of Securities Market Professionals (open to public inspection.) 28.10. Every person registered shall file information necessary to keep the

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application for registration current and accurate (ex. changes in salesmen, associated persons and owners) 28.11. Every person registered shall pay to the Commission an annual fee as the Commission shall prescribe. Nonpayment suspends registration. 28.12. The registration of a salesman or associated person automatically terminated upon the cessation of his affiliation with said registered broker or dealer, or with an issuer. The latter must file notice of separation with the Commission. Grounds for Revocation, Refusal or Suspension of Registration of Brokers, Dealers, Salesmen and Associated Persons. 29.1. Registration under Section 28 of this Code may be refused, or any registration granted thereunder may be revoked, suspended, or limitations placed thereon, by the Commission if, after due notice and hearing, the Commission determines the applicant or registrant: (a) Has willfully violated any provision of this Code, any rule, regulation or order made hereunder, or any other law administered by the Commission, or in the case of a registered broker, dealer or associated person has failed to supervise, with a view to preventing such violation, another person who commits such violation; (b) Has willfully made or caused to be made a materially false or misleading statement in any application for registration or report filed with the Commission or a self-regulatory organization, or has willfully omitted to state any material fact that is required to be stated therein; (c) Has failed to satisfy the qualifications or requirements for registration prescribed under Section 28 and the rules and regulations of the Commission promulgated thereunder; (d) Has been convicted, by a competent judicial or administrative body of an offense involving moral turpitude, fraud, embezzlement, counterfeiting, theft, estafa, misappropriation, forgery, bribery, false oath, or perjury, or of a violation of securities, commodities, banking, real estate or insurance laws;

(e) Is enjoined or restrained by a competent judicial or administrative body from engaging in securities, commodities, banking, real estate or insurance activities or from willfully violating laws governing such activities; (f) Is subject to an order of a competent judicial or administrative body refusing, revoking or suspending any registration, license or other permit under this Code, the rules and regulations promulgated thereunder, any other law administered by the Commission; (g) Is subject to an order of a self-regulatory organization suspending or expelling him from membership or participation therein or from association with a member or participant thereof; (h) Has been found by a competent judicial or administrative body to have willfully violated any provisions of securities, commodities, banking, real estate or insurance laws, or has willfully aided, abetted, counseled, commanded, induced or procured such violation; or (i) Has been judicially declared insolvent. Competent judicial or administrative body -- includes a foreign court of competent jurisdiction and a foreign financial regulator. 29.3. The suspension or revocation of the registration of a dealer or broker shall also automatically suspend the registration of all salesmen and associated persons affiliated with such broker or dealer. 30.1. Brokers and dealers are prohibited from dealing in securities listed and issued by any corporation where any stockholder, director, associated person or salesman, or authorized clerk of said broker or dealer and all the relatives of the said individuals within the fourth civil degree of consanguinity or affinity, is at the time holding office in said issuer corporation as a director, president, vice-president, manager, treasurer, comptroller, secretary or any office of trust and responsibility, or is a controlling person of the issuer. 30.2. Brokers and Dealers must deal with securities in compliance with such rules and regulations as the Commission shall prescribe to ensure fair and honest dealings.

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Cases: JUSTEE TERM ENTERPRISE VS SEC The Certificate of Level of Attainment which expresses the terms: You have just received your certificate in claiming a great sum of money Share your certificate and recover right away your investment of P1.5K well falls within the definition of securities under Section 2 of the Revised Securities Act. Justee Term is therefore illegally selling securities having not previously registered with the SEC. CHINA BANKING VS CA Calapatia, stockholder of (Valley Golf) VGCCI, pledged his stock with ChinaBankingCorp (CBC). VGCCI duly recorded the pledge in its book of records. CBC foreclosed and bought the stock in the auction. VGCCI however, put the stocks of Calapatia on a delinquency sale due to nonpayment of his overdue account with VGCCI. CBC filed complaint with SEC seeking nullification of the delinquency auction sale and the issuance of the stock inits name. Is it an intracorporate controversy within SEC jurisdiction? YES. The prior purchase of CBC of the shares in the public auction transferred ownership to the same and entitled CBC to have the share registered in its name as a new VGCCI member. Hence CBC is a stockholder and the conflict is intracorporate in nature. PEOPLE VS PETRALBA The foreign exchange trading transaction that transpired between complainant and Lansdale appears to be an investment contract or participation in a profit sharing agreement that falls within the definition of the law [on securities]. When the investor is relatively uninformed and turns over his money to others, essentially depending upon their representations and their honesty and skill in managing it, the transaction generally is considered to be an investment contract. However, the accused account executive Petralba was acquitted because while it is established by the prosecution that Lansdale was not duly registered and appellant was not licensed as a broker, the manner by which appellant connived with her co-accused and induced her to invest are devoid of any certainty as to the actual participation of appellant in the commission of the offenses charged against her. TENDER OFFER RULE SEC. 19.1. (a) Any person or group of persons acting in concert who intends to acquire at least fifteen per cent (15%) of any class of any equity security of a listed corporation or of any class of any equity security of a corporation with assets of at least Fifty Million Pesos (P50,000,000.00) and having two hundred (200) or more stockholders with at least one hundred (100) shares each or who intends to acquire at least thirty per cent (30%) of such equity over a period of twelve (12) months shall make a tender offer to stockholders by filing with the Commission a declaration to that effect; and furnish the issuer, a statement containing such of the information required in Section 17 of this Code as the Commission may prescribe. Such person or group of persons shall publish all requests or invitations for tender, or materials making a tender offer or requesting or inviting letters of such a security. INDEPENDENT DIRECTOR RULE SEC. 38. Independent Directors. - Any corporation with a class of equity securities listed for trading on an Exchange or with assets in excess of Fifty million pesos (P50,000,000.00) and having two hundred (200) or more holders, at least of two hundred (200) of which are holding at least one hundred (100) shares of a class of its equity securities or which has sold a class of equity securities to the public pursuant to an effective registration statement in compliance with Section 12 hereof shall have at least two (2) independent directors or such independent directors shall constitute at least twenty percent (20%) of the members of such board, whichever is the lesser. For this purpose, an independent director shall mean a person other than an officer or employee of the corporation, its parent or subsidiaries, or any other individual having a relationship with the corporation, which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. OTHER FORMS MANIPULATION OF FRAUDULENT TRANSACTIONS AND MARKET

WASH SALE [Section 24.1(a)(I)] Any transaction in a security which involves no change in the beneficial ownership thereof. A series of by and sell transaction may be

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placed by one and the same beneficial owner in the Exchange which would not affect change in ownership of the shares exchanged. MATCHED ORDER [24.1 (a)(II)] Order/orders for the purchase or sale of security with the knowledge that a simultaneous order or orders of substantially the same size, time and price for the sale or purchase of such security has, or will be entered by or for the same or different parties. Wash Sale and Matched Order are not per se illegal. Only if they are used as ameans to create a false or misleading appearance of active trading do they become illegal. MARKING THE CLOSE The placing of purchase or sale order at or near the close of the trading period so that the price of the security on the ff trading day is the same price as the one marked or taped on the close of the previous trading day. PAINTING THE TAPE Same as Marking the Close only that it is made during normal trading hours, causing fictitious reports to appear on the ticker tape. SQUEEZING THE FLOAT Although part of the issue is outstanding, the dealers hold them intentionally with a view of reselling them for profit. The result is a short supply vis--vis the demand hence raising the price. HYPE AND DUMP The group buys the outstanding capital stock of a dormant company. They merge it to their own private company and they gain control of the majority of the stocks of the merged company. The number of shares is reduced and stock certificates are reissued to nominal stockholders (relatives and other persons in the scheme). They get a broker-dealer who would willingly make a market for the stocks of the newly merged company. They hire a promoter to hype the virtues of the

company. The broker advances a high bid price. The stockholders would then dump their shareholdings (sell it for a low price) and bail out. BOILER ROOM OPERATIONS Intensive selling campaign inducing investors to purchase based on unfounded predictions and misleading market letters. Marking the close/Painting the Tape, Squeezing the Float, Hype and Dump and Boiler Room are all under Section 24(b). They become unlawful if effected to either: 1. Raise the price or induce the purchase of security or of a commonly controlled company 2. Depress the price to induce the sale of security 3. Create active trading to induce purchase or sale of security The following are illegal per se: CIRCULATION OR DISSEMINATION INFORMATION [Section 24(c)] Spreading info that the price of any security listed is likely to fall because of manipulative market operations for the purpose of raising or depressing the price and inducing the purchase or sale of the security. MAKING FALSE OR MISLEADING STATEMENTS [24(d)] Stating any material fact, which he knew or had reasonable grounds to believe to be false and misleading for the purpose of inducing purchase or sale of the security. PEGGING OR FIXING OR STABILIZING THE PRICE [24(e)] Pegging the price of security through any series of transactions for the purchase and sale thereof. INSIDER TRADING An act of a person who buys and sells security while in possession of material information with respect thereto that is not generally available to the public. INSIDER under Section 3.8: (a) the issuer;

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(b) a director or officer (or person performing similar functions) of, or a person controlling the issuer; (c) a person whose relationship or former relationship to the issuer gives or gave him access to material information about the issuer or the security that is not generally available to the public; (d) a government employee, or director, or officer of an exchange, clearing agency and/or self-regulatory organization who has access to material information about an issuer or a security that is not generally available to the public; or (e) a person who learns such information by a communication from any of the foregoing insiders. OTHER FRAUDULENT TRANSACTIONS SEC. 26. It shall be unlawful for any person, directly or indirectly, in connection with the purchase or sale of any securities to: 26.1. Employ any device, scheme, or artifice to defraud; 26.2. Obtain money or property by means of any untrue statement of a material fact of any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or 26.3. Engage in any act, transaction, practice or course of business which operates or would operate as a fraud or deceit upon any person. SANCTIONS ADMINISTRATIVE SEC. 54.1. (i) Suspension, or revocation of any registration for the offering of securities; (ii) A fine of no less than Ten thousand pesos (P10,000.00) nor more than One million pesos (P1,000,000.00) plus not more than Two thousand pesos (P2,000.00) for each day of continuing violation;

(iii) In the case of a violation of Sections 19.2, 20, 24, 26 and 27, disqualification from being an officer, member of the Board of Directors, or person performing similar functions, of an issuer required to file reports under Section 17 of this Code or any other act, rule or regulation administered by the Commission; (iv) In the case of a violation of Section 34, a fine of no more than three (3) times the profit gained or loss avoided as a result of the purchase, sale or communication proscribed by such Section; and (v) Other penalties within the power of the Commission to impose. This shall be without prejudice to the filing of criminal charges against the individuals responsible for the violation. CIVIL SEC. 56. Civil Liabilities on Account of False Registration Statement. - 56.1. Any person acquiring a security, the registration statement of which or any part thereof contains on its effectivity an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make such statements not misleading, and who suffers damage, may sue and recover damages from the following enumerated persons, unless it is proved that at the time of such acquisition he knew of such untrue statement or omission:chan robles virtual law library (a) The issuer and every person who signed the registration statement; (b) Every person who was a director of, or any other person performing similar functions, or a partner in, the issuer at the time of the filing of the registration statement or any part, supplement or amendment thereof with respect to which his liability is asserted; (c) Every person who is named in the registration statement as being or about to become a director of, or a person performing similar functions, or a partner in, the issuer and whose written consent thereto is filed with the registration statement;

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(d) Every auditor or auditing firm named as having certified any financial statements used in connection with the registration statement or prospectus. (e) Every person who, with his written consent, which shall be filed with the registration statement, has been named as having prepared or certified any part of the registration statement, or as having prepared or certified any report or valuation which is used in connection with the registration statement, with respect to the statement, report, or valuation, which purports to have been prepared or certified by him. (f) Every selling shareholder who contributed to and certified as to the accuracy of a portion of the registration statement, with respect to that portion of the registration statement which purports to have been contributed by him. (g) Every underwriter with respect to such security. 56.2. If the person who acquired the security did so after the issuer has made generally available to its security holders an income statement covering a period of at least twelve months beginning from the effective date of the registration statement, then the right of recovery under this subsection shall be conditioned on proof that such person acquired the security relying upon such untrue statement in the registration statement or relying upon the registration statement and not knowing of such income statement, but such reliance may be established without proof of the reading of the registration statement by such person. SEC. 57. Civil Liabilities Arising in Connection With Prospectus, Communications and Reports. - 57.1. Any person who: (a) Offers to sell or sells a security in violation of Chapter III; or (b) Offers to sell or sells a security, whether or not exempted by the provisions of this Code, by the use of any means or instruments of transportation or communication, by means of a prospectus or other written or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make

the statements, in the light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission), and who shall fail in the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission, shall be liable to the person purchasing such security from him, who may sue to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or for damages if he no longer owns the security. 57.2. Any person who shall make or cause to be made any statement in any report, or document filed pursuant to this Code or any rule or regulation thereunder, which statement was at the time and in the light of the circumstances under which it was made false or misleading with respect to any material fact, shall be liable to any person who, not knowing that such statement was false or misleading, and relying upon such statements shall have purchased or sold a security at a price which was affected by such statement, for damages caused by such reliance, unless the person sued shall prove that he acted in good faith and had no knowledge that such statement was false or misleading.chan robles virtual law library SEC. 58. Civil Liability For Fraud in Connection With Securities Transactions . - Any person who engages in any act or transaction in violation of Sections 19.2, 20 or 26, or any rule or regulation of the Commission thereunder, shall be liable to any other person who purchases or sells any security, grants or refuses to grant any proxy, consent or authorization, or accepts or declines an invitation for tender of a security, as the case may be, for the damages sustained by such other person as a result of such act or transaction. SEC. 59. Civil Liability For Manipulation of Security Prices . - Any person who willfully participates in any act or transaction in violation of Section 24 shall be liable to any person who shall purchase or sell any security at a price which was affected by such act or transaction, and the person so injured may sue to recover the damages sustained as a result of such act or transaction.

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PENAL SEC. 60. Civil Liability With Respect to Commodity Futures Contracts and Pre-need Plans. - 60.1. Any person who engages in any act or transaction in willful violation of any rule or regulation promulgated by the Commission under Section 11 or 16, which the Commission denominates at the time of issuance as intended to prohibit fraud in the offer and sale of pre-need plans or to prohibit fraud, manipulation, fictitious transactions, undue speculation, or other unfair or abusive practices with respect to commodity future contracts, shall be liable to any other person sustaining damage as a result of such act or transaction. 60.2. As to each such rule or regulation so denominated, the Commission by rule shall prescribe the elements of proof required for recovery and any limitations on the amount of damages that may be imposed. SEC. 61. Civil Liability on Account of Insider Trading. - 61.1. Any insider who violates Subsection 27.1 and any person in the case of a tender offer who violates Subsection 27.4 (a)(i), or any rule or regulation thereunder, by purchasing or selling a security while in possession of material information not generally available to the public, shall be liable in a suit brought by any investor who, contemporaneously with the purchase or sale of securities that is the subject of the violation, purchased or sold securities of the same class unless such insider, or such person in the case of a tender offer, proves that such investor knew the information or would have purchased or sold at the same price regardless of disclosure of the information to him. Section 73. Any person who: 1. violates any of the provisions of this Code, or the rules and regulations promulgated by the Commission under authority thereof, 2. in a registration statement filed under this Code, makes any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, Shall suffer the penalty of: 1. a fine of not less than Fifty thousand pesos (P50,000.00) nor more than Five million pesos (P5,000,000.00) or 2. imprisonment of not less than seven (7) years nor more than twenty- one (21) years, or 3. both, in the discretion of the court. If the offender is a juridical entity, the penalty be imposed upon 1. such juridical entity and 2. upon the officer or officers of the corporation, partnership, association or entity responsible 3. if such officer is an alien, he shall suffer the above penalties and be deported without further proceedings after service of sentence.

61.2. An insider who violates Subsection 27.3 or any person in the case of a tender offer who violates Subsection 27.4 (a), or any rule or regulation thereunder, by communicating material non-public information, shall be jointly and severally liable under Subsection 61.1 with, and to the same extent as, the insider, or person in the case of a tender offer, to whom the communication was directed and who is liable under Subsection 61.1 by reason of his purchase or sale of a security.

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