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Corporation Code
Maria Zarah Villanueva - Castro
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Corporation Code
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and to that branch of the purchasing public, As a rule, no extension can be made earlier
the word or phrase has come to mean that than 5 years prior to the expiration of the
the article was his product. term.
Requisites: *No limitations regarding number of
1. Period of use; extension can apply.
2. The use must be exclusive. Reason: To compel the stockholders to
Case: Lyceum of the Philippines meet the corporation’s term.
*The exclusivity requirement was not Exception: If for compelling reasons, earlier
satisfied by Lyceum of the Philippines. extension will be allowed.
*In case of change of name, the corporation *During the three year winding up period,
is not dissolve nor create a new the corporation still has personality but
corporation; it also does not extinguish the activities are limited to the liquidation of
corporate liability. the corporation affairs and not to transact
*Change of name can be done by amending further business.
the Articles of Incorporation. As a rule, after the term has expired, no
Procedure: more extensions be allowed or entertained
1. Obtain approval of majority of the Board by the SEC.
and 2/3 stockholders; Reason: No more period to extend.
2. Submission to the SEC for approval. Exception: Doctrine of Relation – The filing
Purpose Clause and recording of a certificate of extension
*Only one primary purpose. Primary after the term cannot relate back to the
purpose defines the business activities of date of the passage of the resolution of the
the corporation. It is the ordinary course of stockholders to extend the life of the
business of the corporation. corporation. However, the doctrine of
*Secondary Purpose is for future expansion. relations applies if the failure to file the
There is no limit on the secondary purpose. application for existence within the term of
*In case the primary purpose is not viable the corporation is due to neglect of the
then secondary purpose may be used. officer with whom the certificate is required
Principal Office to be filed or to wrongful refusal on is part
*The principal place of business may to receive it.
determine the venue of court cases *The delay in submitting the application for
involving corporations. It may also extension is justifiable.
determine if service of summons and Keywords:
notices was properly made. It is also 1. Excusable delay;
important for tax purposes (local taxation). 2. Beyond the control of the corporation
*The SEC requires the exact address to be (insuperable intervening causes)
indicated in the Articles of Incorporation. Incorporators
*It is the residence of the corporation. It is *Once an incorporator always an
where the corporation maintains its books incorporator. (Fait accompli – an
and records and where normally the bulk of accomplished fact which cannot be altered)
its business is being conducted or *They are the signatories to the Articles of
undertaken. Incorporation.
*For personal action, venue is the *They are originally forming the corporation
residence. Q: What is the reason behind the phrase
Term of Existence that an incorporator is not always a
*A corporation has a maximum term of 50 corporator?
years. It may be extended for a period not A: To be an incorporator it is not necessary
exceeding 50 years in any single instance. to own a share unlike as a corporator.
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*If the Treasurer’s affidavit is false such act Sec. 19 of the Corporation Code states that “ A
is tantamount to fraud. (PD 902-A) private corporation formed or organized under
*Fraud on the part of the corporation is a this Code commences to have corporate
ground for revocation or suspension of existence and juridical personality and is
license depending upon the extent of the deemed incorporated from the date the SEC
violation committed. issues a certificate of incorporation under its
*If there’s no Treasurer’s Affidavit, the first official seal; and thereupon the incorporators,
ground shall apply, i. e., noncompliance stockholders/members and their successors
with the minimum requirement. shall constitute a body politic and corporate
General Rule: 25% must be subscribed and under the name stated in the articles of
25% must be paid. incorporation for the period of time mentioned
Exception: If the law provides otherwise, therein, unless said period is extended or the
i.e., special laws. corporation is sooner dissolved in accordance
with law.”
C. Grounds for rejection of the Articles of *For purposes of determining whether a
Incorporation corporation enjoys the status of a de facto
1. The articles of incorporation or any corporation, it must have been at least issued a
amendment thereto is not substantially in certificate of registration.
accordance with the form prescribed
herein; E. Amendment of the Articles of Incorporation
2. The purpose or purposes of the corporation Sec. 16 of the Corporation Code states that:
are patently unconstitutional, illegal, “Unless otherwise prescribed by this Code or by
immoral, or contrary to government rules special law, and for legitimate purposes, any
and regulations; provision or matter stated in the articles of
3. The Treasurer’s Affidavit concerning the incorporation may be amended by a majority
amount of capital stock subscribed and/or vote of the board of directors or trustees and
paid is false; the vote or written assent of the stockholders
4. The percentage of ownership of the capital representing at least 2/3 of the outstanding
stock to be owned by citizens of the capital stock, without prejudice to the appraisal
Philippines has not been complied with as right of dissenting stockholders in accordance
required by existing laws or the with the provisions of this Code, or the vote or
Constitution. written assent of at least 2/3 of the members if
it be a non-stock corporation.”
Dual Franchise Requirement: No articles of *It is effective upon the approval of the SEC.
incorporation or amendment to articles of *There may be an amendment by inaction.
incorporation of banks, banking and quasi- Amendment by Inaction – Upon filing with the
banking institutions, building and loan SEC of the amendment and the Commission
associations, trust companies and other failed to act on it within 6 months from the date
financial intermediaries, insurance companies, of filing for a cause not attributable to the
public utilities, educational institutions, and corporation.
other corporations governed by special laws
shall be accepted or approved by the F. Effects of Non-Use of Corporate Charter
Commission unless accompanied by a Sec. 22 of the Corporation Code states that: “If
favourable recommendation of the appropriate a corporation does not formally organize and
government agency to the effect that such commence the transaction of its business or the
articles or amendment is in accordance with construction of its work within 2 years from the
law. date of its incorporation, its corporate powers
D. Commencement of Corporate Existence cease and the corporation shall be deemed
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is a director shall thereby cease to be a shares for as many persons as there are
director. Trustees of non-stock corporations directors to be elected or he may cumulate
must be members thereof. A majority of the said shares and give one candidate as many
directors or trustees of all corporations votes as the number of directors to be
organized under this Code must be elected multiplied by the number of his
residents of the Philippines.” shares shall equal, or he may distribute
*In order to be eligible as director, what is them on the same principle among as many
material is the legal title to and not candidates as he shall see fit: Provided, that
beneficial title or ownership of the stocks the total number of votes cast by him shall
appearing on the books of the corporation. not exceed the number of shares owned by
*The directors/trustees must be natural him as shown in the books of the
persons. corporation multiplied by the whole
*They must also be of legal age. number of directors to be elected:
*He must possess other qualifications as Provided, however, that no delinquent
may be prescribed in the by-laws of the stock shall be voted. Unless otherwise
corporation. provided in the articles of incorporation or
*Under Sec. 27 of the Corporation Code: in the by-laws, members of the
“No person convicted by final judgment of corporations which have no capital stock
an offense punishable by imprisonment for may cast as many votes as there are
a period exceeding 6 years, or a violation of trustees to be elected but may not cast
this Code committed within 5 years prior to more than one vote for one candidate.
the date of his election or appointment, Candidates receiving the highest number of
shall qualify as a director, trustee or officer votes shall be declared elected. Any
of any corporation.” meeting of the stockholders or members
Reason: The position is based on trust and called for an election may adjourn from day
confidence. to day or from time to time but not sine die
*No citizenship requirement. or indefinitely if, for any reason, no election
*The By-Laws may provide additional is held, or if there not present or
qualifications/disqualifications. represented by proxy, at the meeting, the
Election of the Board Members owners of a majority of the outstanding
Sec. 24 of the Corporation Code provides capital stock, or if there be no capital stock,
that: “At all elections of directors or a majority of the member entitled to vote.”
trustees, there must be present, either in *It is the stockholders or corporators who
person or by representative authorized to elect members of the Board of Directors.
act by written proxy, the owners of a *The only procedure required by the Code
majority of the outstanding capital stock, or is through Election. There can be no other
if there be no capital stock, a majority of modes.
the members entitled to vote. The election *The election must be by ballot if requested
must be by ballot if requested by any voting by any voting member or stockholder.
stockholder or member. In stock *A stockholder cannot be deprived in the
corporations, every stockholder entitled to articles of incorporation or in the by-laws of
vote shall have the right to vote in person his statutory right to use any of the
or by proxy the number of shares of stock methods of voting in the election of
standing, at the time fixed in the by-laws, in directors.
his own name on the stock books of the *No delinquent stock shall be voted.
corporation, or where the by-laws are silent *It is not required that the candidate
at the time of the election; and said received the majority vote, what the law
stockholder may vote such number of provides is only plurality of votes.
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*Majority number is required only for the officers elected. Should a director, trustee
existence of a quorum. or officer die, resign or in any manner cease
Not included in outstanding capital stocks: to hold office, his heirs in case of his death,
1. Unissued stocks; the secretary, or any other officer of the
2. Non-voting stocks; corporation, or the director, trustee or
3. Treasury Shares. officer himself, shall immediately report
Methods of Voting: such fact to the SEC.”
1. Straight Voting – every stockholder may Term of Office
vote such number of shares for as many *The directors or trustees shall hold office
persons as there are directors to be elected. for one (1) year subject to the “hold over”
2. Cumulative Voting for One Candidate – a principle, i.e., they continue in office until
stockholder is allowed to concentrate his their successors are elected and qualified.
votes and give one candidate as many votes *The one year period does not apply to
as the number of directors to be elected directors initially elected for purposes of
multiplied by the number of his shares shall incorporation.
equal. Quorum Requirement in Board Meetings
*Example: X has 10 shares in his name; Sec. 25 of the Corporation Code states that:
there are 5 numbers of directors to be “Unless the articles of incorporation or the
elected. X has 50 votes (10x5) available to by-laws provide for a greater majority, a
him. X may opt to concentrate all his 50 majority of the number of directors or
votes to a particular candidate. trustees as fixed in the articles of
3. Cumulative Voting by Distribution – a incorporation shall constitute a quorum for
stockholder may cumulate his shares by the transaction of corporate business, and
multiplying also the number of his shares by every decision of at least a majority of the
the number of directors to be elected and directors or trustees present at a meeting at
distribute the same among as many which there is a quorum shall be valid as a
candidates as he shall see fit. corporate act, except for the election of
*Example: X has 10 shares in his name; officers which shall require the vote of a
there are 5 numbers of directors to be majority of all the members of the board.”
elected. X has 50 votes available to him. X Q: Is the director allowed to let a proxy
may opt to distribute the votes to as many attend a board meeting in behalf for
candidates as there are provided that the himself?
total number of votes does not exceed 50. A: NO. Proxy prohibition.
Purpose of cumulative voting: To protect Reason: Because of their personal
the minority stockholders. qualifications.
*The elected officer must act as a body. *Quorum requirement should always be
*In a stock corporation, cumulative voting is computed based on the number specified in
a statutory right whereas in a non-stock the Articles of Incorporation regardless of
corporation, cumulative voting is applicable ensuing vacancies.
if it is provided in the Article of *The basis is always the number specified in
Incorporation. the Articles of Incorporation.
Sec. 26 of the Corporation Code provides *The corporation can modify the number by
that: Within 30 days after the election of providing a different provision in the
the directors, trustees and officers of the articles of incorporation, however, the law
corporation, the secretary, or any other provides that the modification must be for a
officer of the corporation, shall submit to number greater than that provided in the
the SEC, the names, nationalities and law. It cannot provide for a number less
residences of the directors, trustees and than the general requirement of the code.
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*For voting purposes, majority of the 1. It must take place either at a regular
member present constituting a quorum. meeting or special meeting of the
Except: election of directors. stockholders or members called for the
Removal of Board Members purpose;
Sec. 28 of the Corporation Code states that: 2. There must be previous notice to the
“Any director or trustee of a corporation stockholders or member of the intention to
may be removed from office by a vote of remove;
the stockholders holding or representing at 3. The removal must be by a vote of the
least 2/3 of the outstanding capital stock, or stockholders representing 2/3 outstanding
if the corporation be a non-stock capital stock or 2/3 of members;
corporation, by a vote of at least 2/3 of the 4. The director may be removed with or
members entitled to vote: Provided, that without cause unless he was elected by the
such removal shall take place either at a minority, in which case, it is required that
regular meeting of the corporation or at a there is cause for removal.
special meeting called for the purpose, and Reason: The functions of directors are
in either case, after previous notice to fiduciary in nature.
stockholders or members of the Requisites for the removal of minority
corporation of the intention to propose directors are:
such removal at the meeting. A special 1. Justifiable cause;
meeting of the stockholders or members of 2. Satisfaction of the voting requirements,
a corporation for the purpose of removal of i.e., 2/3 of OCS or members.
directors or trustees, or any of them, must *It is the secretary of the corporation upon
be called by the secretary on order of the order of the president or in case there is no
president or on the written demand of the secretary, stockholder representing
stockholders representing or holding at majority of the outstanding capital stocks or
least a majority of the outstanding capital member signing the demand who may call a
stock, or, if it be a non-stock corporation, meeting for the purpose of removal.
on the written demand of a majority of the Vacancies in the Board
members entitled to vote. Should the Sec. 29 of the Corporation Code provides
secretary fail or refuse to call the special that: “Any vacancy occurring in the board of
meeting upon such demand or fail or refuse directors or trustees other than by removal
to give the notice, or if there is no secretary, by the stockholders or members or by
the call for the meeting may be addressed expiration of term, may be filled by the vote
directly to the stockholders or members by of at least a majority of the remaining
any stockholder or member of the directors or trustees, if still constituting a
corporation signing the demand. Notice of quorum; otherwise, said vacancies must be
the time and place of such meeting, as well filled by the stockholders in a regular or
as of the intention to propose such special meeting called for that purpose. A
removal, must be given by publication or by director or trustee so elected to fill a
written notice prescribed in this Code. vacancy shall be elected only or the
Removal may be with or without cause: unexpired term of his predecessor in office.
Provided, that removal without cause may A directorship or trusteeship to be filled by
not be used to deprive minority reason of an increase in the number of
stockholders or members of the right of directors or trustees shall be filled only by
representation to which they may be an election at a regular or at a special
entitled under Sec. 24 of this Code.” meeting of stockholders or members duly
Requisites: called for the purpose, or in the same
meeting authorizing the increase of
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Exception: If the requisites provided in Sec. subject to the provisions of the preceding
32 are present. section insofar as the latter corporation or
Exception to the Exception: If requirement corporations are concerned. Stockholdings
number 1 or 2 is absent, in the case of a exceeding 20% of the outstanding capital
contract with a director or trustee, such stock shall be considered substantial for
contract may be considered valid by the purposes of interlocking directors.”
ratification of at least 2/3 of the Example:
outstanding capital stock or 2/3 of the A is a director of two corporation, ABC
members. Corporation and XYZ Corporation. XYZ
Requisites: Corporation and ABC Corporation entered
1. The presence of such director or trustee into a lease contract where ABC
in the board meeting in which the contract Corporation is the lessor and XYZ
was approved was not necessary to Corporation is the lessee.
constitute a quorum for such meeting; Q: Can this contract be invalidated on the
2. The vote of such director or trustee was ground that there is an interlocking
not necessary for the approval of the director?
contract; A: NO.
3. The contract is fair and reasonable under Q: What is the status of the contract?
the circumstances; A: General Rule: Contracts between two or
4. In case of an officer, the contract has more corporations having interlocking
been previously authorized by the board of directors are valid.
directors. Exceptions:
Reason: A’s presence in the board meeting 1. Contracts are void if contracts are
might affect the status of the contract. fraudulent or if contracts are unfair
and unreasonable.
Self-Dealing Directors/Officers – 2. If the By-Laws prohibits interlocking
directors/officers who transact business director.
with their own corporation. Case: Gokongwei, Jr. v SEC
- This is not prohibited by law. *The interest is nominal if his interest is
Interlocking Directors – those who have 20% or less of the outstanding capital stock.
been elected as directors in 2 or more The interest is substantial if his interest is
different corporations. more than 20% of the outstanding capital
- May be prohibited by the By-Laws stock.
(Gokongwei case). *If the interlocking director has a
-Not prohibited by law however there are substantial interest in one corporation and
consequences. has a nominal interest in the other
Contracts involving Inter-locking Directors corporation, the director must comply with
Sec. 33 of the Corporation Code provides the requisites provided in Sec. 32 on self-
that: “Except in cases of fraud, and dealing directors.
provided the contract is fair and reasonable Reason: The case is analogous to that of
under the circumstances, a contract transactions involving self-dealing directors
between two or more corporations having because such director holds substantial
interlocking directors shall not be interest with the other company.
invalidated on that ground alone: Provided, Doctrine of Corporate Opportunity
That if the interest of the interlocking Sec. 34 of the Corporation Code states that:
director in one corporation is substantial “Where a director, by virtue of his office,
and his interest in the other corporation or acquires for himself a business opportunity
corporations is merely nominal, he shall be which should belong to the corporation,
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thereby obtaining profits to the prejudice of *It must be stated in the By-Laws.
such corporation, he must account to the *Board Resolution is not sufficient if there is no
latter for all such profits by refunding the provision in the By-Laws.
same, unless his act has been ratified by a *The decision of the executive committee is
vote of the stockholders owning or considered a Board Resolution.
representing at least 2/3 of the outstanding *The decision of the executive committee is not
capital stock. This provision shall be subject to appeal to the board. However, if the
applicable notwithstanding the fact that the resolution of the Executive Committee is invalid
director risked his own funds in the it may be ratified by the Board.
venture.” *The decision of the executive committee needs
General Rule: A director shall refund to the no confirmation from the Board.
corporation all the profits he realizes on a Case: Filipinas Port, Inc.
business opportunity which: 1. the *The corporation may create other committees.
corporation is financially able to undertake; Distinction: In executive committee, there is a
2. from its nature, is in line with statutory restriction on members whereas in
corporations business and is of practical other committee there is no such restriction.
advantage to it; and 3. the corporation has General Rule: The executive committee may act
an interest or a reasonable expectancy. on specific matters within the competence of
Exception: His act has been ratified by a the board as may be delegated to it in the by-
vote of the stockholders owning or laws or on a majority vote of the board.
representing at least 2/3 of the outstanding Exceptions:
capital stock. 1. Approval of any action for which
*A business opportunity ceases to be shareholders’ approval is also required;
corporate opportunity and transforms to 2. The filing of vacancies in the board;
personal opportunity where the 3. The amendment or repeal of by-laws or the
corporation refuses or is definitely no adoption of new by-laws;
longer able to avail itself of the opportunity. 4. The amendment or repeal of any resolution
of the board which by its express terms is
E. Executive Committee not so amendable or repealable;
Sec. 35 of the Corporation Code states that: 5. A distribution of cash dividends to the
“The by-laws of a corporation may create an shareholders.
executive committee composed of not less than
3 members of the board to be appointed by the CORPORATE POWERS:
board. Said committee may act, by majority A. Doctrine of Limited Capacity; Concept of Ultra
vote of all its members, on such specific matters Vires Act
within the competence of the board, as may be Sec. 45 of the Corporation Code states that:
delegated to it in the by-laws or on a majority “No corporation under this Code shall possess
vote of the board, except with respect to: (1) or exercise any corporate powers except those
approval of any action for which shareholders’ conferred by this Code or by its articles of
approval is also required; (2) the filing of incorporation and except such as are necessary
vacancies in the board; (3) the amendment or or incidental to the exercise of powers so
repeal of by-laws or the adoption of new by- conferred.”
laws; (4) the amendment or repeal of any Ultra Vires Acts – an act committed outside the
resolution of the board which by its express object for which a corporation is created as
terms is not so amendable or repealable; and defined by the law of its organization and
(5) a distribution of cash dividends to the therefore beyond the power conferred upon it
shareholders.” by law.
Keyword: BY-LAWS Effects of Ultra Vires Acts:
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1. Executed Contract – courts will not set transaction of the lawful business of the
aside or interfere with such contracts. corporation may reasonably and necessarily
2. Executory Contract – no enforcement even require, subject to the limitations prescribed by
at the suit of either party. law and the Constitution; 8. To enter into
3. Partly executed and Partly executory merger or consolidation with other
contract – principle against unjust corporations as provided in this Code; 9. To
enrichment shall apply. make reasonable donations, including those for
the public welfare or for hospital, charitable,
B. Classes of Corporate Powers cultural, scientific, civic, or similar purposes:
1. Express Provided, That no corporation, domestic or
2. Implied foreign, shall give donations in aid of any
3. Incidental political party or candidate or for purposes of
Express – those expressly authorized by the partisan political activity; 10. To establish
Corporation Code and other laws, and its pension, retirement, and other plans for the
Articles of Incorporation or Charter. benefit of its directors, trustees, officers and
Implied – those that can be inferred from or employees; and 11. To exercise such other
necessary for the exercise of the express powers as may be essential or necessary to
powers. carry out its purpose or purposes as stated in
Incidental – those that are incidental to the the articles of incorporation.”
existence of the corporation. Amendment of Articles of Incorporation
Sec. 16 of the Corporation Code states that:
Doctrine of Necessary Implication – those which can be “Unless otherwise prescribed by this Code
reasonably inferred from the express powers given or by special law, and for legitimate
since they are necessary for the corporation to perform purposes, any provision or matter stated in
a particular act are deemed part of such powers. the articles of incorporation may be
C. Statutory Powers of a Corporation and the amended by a majority vote of the board of
Limitations on their Exercise directors or trustees and the vote or written
Sec. 36 of the Corporation Code states that: assent of the stockholders representing at
“Every corporation incorporated under this least 2/3 of the outstanding capital stock,
Code has the power and capacity: 1. To sue and without prejudice to the appraisal right of
be sued in its corporate name; 2. Of succession dissenting stockholders in accordance with
by its corporate name for the period of time the provisions of this Code, or the vote or
stated in the articles of incorporation and the written assent of at least 2/3 of the
certificate of incorporation; 3. To adopt and use members if it be a non-stock corporation.”
a corporate seal; 4. To amend its articles of *The following are excluded in counting the
incorporation in accordance with the provisions outstanding capital stock: 1. Treasury stock;
of this Code; 5. To adopt by-laws, not contrary 2. Unissued shares.
to law, morals, or public policy, and to amend *Aside from the votes of majority of the
or repeal the same in accordance with this board and assent of the 2/3 of the OCS, the
Code; 6. In case of stock corporations, to issue approval of the SEC is necessary for the
or sell stocks to subscribers and to sell treasury amendment of the AOI.
stocks in accordance with the provisions of this *There is an implied approval of the SEC,
Code; and to admit members to the corporation i.e., failure to act on the application filed by
if it be a non-stock corporation; 7. To purchase, the corporation within 6 mos.
receive, take or grant, hold, convey, sell, lease, Q: How to get the approval of the
pledge, mortgage and otherwise deal with such stockholders?
real and personal property, including securities A: 1. Call for a meeting; 2. Obtain the
and bonds of other corporations, as the written assent of the stockholders.
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*In Tan v Sycip, the Supreme Court held diminution of the capital stock, or the
that in case of a non-stock corporation, incurring, creating or increasing of any
membership is personal and non- bonded indebtedness. Written notice of the
transferrable unless the by-laws provides proposed increase or diminution of the
otherwise. The deceased member is not capital stock or of the incurring, creating, or
entitled to vote. increasing of any bonded indebtedness and
of the time and place of the stockholders’
Four changes in Articles of Incorporation that require meeting at which the proposed increase or
the approval of the stockholders. diminution of the capital stock or the
1. Extension of corporate term; incurring or increasing of any bonded
2. Shortening of corporate term; indebtedness is to be considered , must be
3. Increase or Decrease of Capital Stock; addressed to each stockholder at his place
4. Increase or Decrease of Bonded indebtedness. of residence as shown on the books of the
*Approval of Stockholders is necessary in these changes corporation and deposited to the addressee
because they are necessary for the corporation’s in the post office with postage prepaid, or
existence. served personally. xxx.”
Extension/Shortening of Corporate Term Q: When the corporation increases its
Sec. 37 of the Corporation Code states that: capital stock, is the 25% requirement
“A private corporation may extend or necessary? How can it be computed?
shorten its term as stated in the articles of A: YES. The SEC ruled that the 25% applies
incorporation when approved by a majority to the increase amount.
vote of the board of directors or trustees *The corporation is required to maintain a
and ratified at a meeting by the sinking fund.
stockholders representing at least 2/3 of Q: What does bonded indebtedness mean?
the outstanding capital stock or by at least A: Requires longer time of payment; special
2/3 of the members in case of non-stock burden on the corporation; involves the
corporation. Written notice of the proposed important assets of the corporation.
action and of the time and place of the Denial of Pre-emptive Right
meeting shall be addressed to each Sec. 39 of the Corporation Code states that:
stockholder or member at his place of “All stockholders of a stock corporation
residence as shown on the books of the shall enjoy pre-emptive right to subscribe to
corporation and deposited to the addressee all issues or disposition of shares of any
in the post office with postage prepaid, or class, in proportion to their respective
served personally: Provided, That in case of shareholdings, unless such right is denied
extension of corporate term, any dissenting by the articles of incorporation or an
stockholder may exercise his appraisal right amendment thereto: Provided, That such
under the conditions provided in this code.” pre-emptive right shall not extend to shares
Increase or Decrease of Capital Stock/ to be issued in compliance with laws
Incurrence, Creation or Increase of Bonded requiring stock offerings or minimum stock
Indebtedness ownership by the public; or to shares to be
Sec. 38 of the Corporation Code states that: issued in good faith with the approval of the
“No corporation shall increase or decrease stockholders representing 2/3 of the
its capital stock or incur, create or increase outstanding capital stock, in exchange for
any bonded indebtedness unless approved property needed for corporate purposes or
by a majority vote of the board of directors in payment of a previously contracted
and, at a stockholders’ meeting duly called debt.”
for the purpose, 2/3 of the outstanding *Coming from the increased authorized
capital stock shall favor the increase or capital stock.
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Q: Are the stock dividends considered as a meeting duly called for the purpose:
watered stocks because the stockholder Provided, That 1. Where a stockholder or
concerned does not pay anything therefor? stockholders representing the same interest
A: NO. The unrestricted retained earnings of both the managing and the managed
are considered to be a consideration thus corporations own or control more than 1/3
dividends received through stocks are not of the total outstanding capital stock
watered stocks. entitled to vote of the managing
*The source of payment is the unrestricted corporation; or 2. Where a majority of the
retained earnings. members of the board of directors of the
Q: Are delinquent stockholders entitled to managing corporation also constitute a
receive dividends? majority of the members of the board of
A: YES. But only in terms of cash dividends. directors of the managed corporation, then
Q: Who are entitled to receive dividends? the management contract must be
A: Stockholders approved by the stockholders of the
*In Nielson case, the SC held that dividends managed corporation owning at least 2/3 of
cannot be given to non-stockholders. the total outstanding capital stock entitled
*If there is date of record – Dividends may to vote, or by at least 2/3 of the members in
be received by those persons who are the case of a non-stock corporation. No
holders of stocks as of date of record. management contract shall be entered into
*If there is no date of record – dividends for a period longer than 5 years for any one
may be received by those persons who are term. The provisions of the next preceding
holders of stocks as of the declaration. paragraph shall apply to any contract
Q: When the corporation declares stock whereby a corporation undertakes to
dividends, would it likewise create a manage or operate all or substantially all of
creditor-debtor relationship between the the business of another corporation,
corporation and the stockholder? whether such contracts are called service
A: NO. Stock dividends will not bring about contracts, operating agreements or
a creditor-debtor relationship. When it otherwise: Provided, however, That such
comes to shareholdings, the one holding service contracts or operating agreements
the shares are considered investors; risk- which relate to the exploration,
takers. development, exploitation or utilization of
Q: Will legal compensation possible to natural resources may be entered into for
occur? such periods as may be provided by the
A: NO. The parties are not mutually pertinent laws or regulations.”
creditor-debtor of each other. The Requisite:
requisites under the Civil Code on legal General Rule: Majority vote of the OCS
compensation are not present. Exception: 2/3 of the OCS
Management Contract *SEC’s approval is not necessary
Sec. 44 of the Corporation Code states that: *When the corporation enters into a
“No corporation shall conclude a management contract, appraisal right is
management contract with another NOT AVAILABLE to any dissenting
corporation unless such contract shall have stockholder.
been approved by the board of directors Reason: Sound business policy dictates that
and by stockholders owning at least the it would be better for the corporation, at
majority of the outstanding capital stock, or the inception of its operation, to be
by at least a majority of the members in the managed by a company who has been
case of a non-stock corporation, of both the experienced in a particular kind of business
managing and the managed corporation, at if the managed corporation needs the
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*In China Banking Corporation v CA, the SC corporation by giving proper notice required by
held that in the absence of evidence that China this Code or by the by-laws. The petitioning
Bank is aware of the provisions of the By-Laws, stockholder or member shall preside thereat
China Bank is not bound to observe the until at least a majority of the stockholders or
provisions of the By-Laws. Hence, China Bank members present have been chosen one of
must be allowed to register the shares in its their number as presiding officer.”
name. *Regular meeting of stockholders/members
General Rule: Third parties are not affected by shall be held annually on a date fixed in the by-
the By-Laws. laws or if not so fixed, on any date in April of
Exception: If the third party has actual every year. Written notice of regular meetings
knowledge of the provisions of the By-Laws. shall be sent 2 weeks prior to the meeting
unless a different period is required by the by-
CORPORATE MEETINGS: laws.
A. Kinds of Corporate Meetings ** Special meeting of stockholders/members
Sec. 49 of the Corporation Code provides that: shall be held at any time deemed necessary or
“Meetings of directors, trustees, stockholders, as provided in the by-laws. Written notice shall
or members may be regular or special.” be sent to all stockholders or members at least
Kinds: one week or unless otherwise provided in the
a. Stockholders/Members: by-laws.
1. Regular meeting Sec. 53 of the Corporation Code provides that:
2. Special meeting “Regular meetings of the board of directors or
b. Directors/Trustees: trustees of every corporation shall be held
1. Regular meeting monthly, unless the by-laws provide otherwise.
2. Special meeting Special meetings of the board of directors or
Sec. 50 of the Corporation Code provides that: trustees may be held at any time upon the call
“Regular meetings of stockholders or members of the president or as provided in the by-laws.
shall be held annually on a date fixed in the by- Meetings of directors or trustees of
laws, or if not so fixed, on any date in April of corporations may be held anywhere in or
every year as determined by the board of outside of the Philippines, unless the by-laws
directors or trustees: Provided, That written provide otherwise. Notice of regular or special
notice of regular meetings shall be sent to all meetings stating the date, time and place of the
stockholders or members of record at least 2 meeting must be sent to every director or
weeks prior to the meeting, unless a different trustee at least 1 day prior to the scheduled
period is required by the by-laws. Special meeting, unless otherwise provided by the by-
meetings of stockholders or members shall be laws. A director or trustee may waive this
held at any time deemed necessary or as requirement, either expressly or impliedly.”
provided in the by-laws: Provided, however, *Regular meetings of directors/trustees shall be
That at least 1 week written notice shall be sent held monthly unless the by-laws provide
to all stockholders or members, unless otherwise.
otherwise provided in the by-laws. Notice of *Special meetings of directors/trustees may be
any meeting may be waived, expressly or held at any time upon the call of the president
impliedly, by any stockholder or member. or as provided in the by-laws.
Whenever, for any cause, there is no person *Meetings of directors or trustees may be held
authorized to call a meeting, the SEC, upon anywhere in or outside of the Philippines unless
petition of a stockholder or member on a the by-laws provide otherwise.
showing of good cause therefor, may issue an *Notice of regular or special meetings stating
order to the petitioning stockholder or member the date, time and place of the meeting must be
directing him to call a meeting of the sent to every director or trustee at least 1 day
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prior to the scheduled meeting unless within the Philippines and notice has been
otherwise provided by the by-laws. given. As an exception, if the by-laws is silent of
the place of the meeting, section 51 applies.
B. Requirements of a Meeting Sec. 52 of the Corporation Code provides that:
1. It must be held at the proper place. “Unless otherwise provided for in this Code or
2. It must be held at the stated date and at the in the by-laws, a quorum shall consist of the
appointed time or at a reasonable time stockholders representing a majority of the
thereafter. outstanding capital stock or a majority of the
3. It must be called by the proper person. members in the case of non-stock
4. There must be a previous notice. corporations.”
5. There must be a quorum. General Rule: Majority of the OCS or Majority
Sec. 51 of the Corporation Code provides that: of the members
“Stockholders’ or members’ meetings, whether Exception: Unless otherwise provided by the
regular or special, shall be held in the city or Code or by the By-Laws.
municipality where the principal office of the *In Tan v Sycip, deceased member is not
corporation is located, and if practicable in the entitled to vote
principal office of the corporation: Provided, Sec. 54 of the Corporation Code provides that:
That Metro Manila shall, for purposes of this “The president shall preside at all meetings of
section, be considered a city or municipality. the directors or trustees as well as of the
Notice of meetings shall be in writing, and the stockholders or members, unless the by-laws
time and place thereof stated therein. All provide otherwise.”
proceedings had and any business transacted at
any meeting of the stockholders or members, if C. Right to Vote of Stockholders
within the powers or authority of the Instances when voting right not available
corporation, shall be valid even if the meeting Sec. 6 of the Corporation Code provides
be improperly held or called, provided all the that: “Except as provided in the
stockholders or members of the corporation are immediately preceding paragraph, the vote
present or duly represented at the meeting.” necessary to approve a particular corporate
*Applies to both stock and non-stock act as provided in this Code shall be
corporations. deemed to refer only to stocks with voting
General Rule: The meeting must be held in the rights.”
city or municipality where the principal office is Instances when voting right is not
located. available:
Exception: Sec. 93 on non-stock corporations, 1. Delinquent shares
the By-Laws may provide different venue for 2. Treasury shares
their meeting. 3. Fractional shares
*A casual reading of section 51 would say that a 4. Escrow shares
corporation cannot provide any other place for Rules on:
the meeting of stockholders. But in case of a 1. Delinquent Shares
non-stock corporation, Section 93 of the Sec. 71 of the Corporation Code
Corporation provides that the by-laws could provides that: “No delinquent stock
provide any place for the meeting of its shall be voted for or be entitled to vote
members provided that it is within the or to representation at any
Philippines and proper notice has been given. stockholders’ meeting, nor shall the
Q: Is there a conflict between Section 51 and holder thereof be entitled to any of the
Section 93? rights of a stockholder except the right
A: YES. There is conflict but this conflict may be to dividends in accordance with the
reconciled. As a rule, the by-laws may provide a provisions of this Code, until and unless
different place of meeting provided that it is he pays the amount due on his
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agreement is ineffective and unenforceable. performing the duties of a director because the
The certificate or certificates of stock covered law requires each and every director to have
by the voting trust agreement shall be cancelled legal, not beneficial title to at least one share.
and new ones shall be issued in the name of the
trustee or trustees stating that they are issued E. Derivative Suit; Concept and Requisites
Derivative Suit is a suit brought by any
pursuant to said agreement. In the books of the
corporation, it shall be noted that the transfer stockholder, usually a minority shareholder, to
redress a wrong committed against the
in the name of the trustee or trustees is made
pursuant to said voting trust agreement. The corporation whenever the responsible officers
refuse to take any action thereon or are the
trustee or trustees shall execute and deliver to
the transferors voting trust certificates, which very person to be sued.
*This prerogative is developed through
shall be transferable in the same manner and
with the same effect as certificates of stock. The jurisprudence.
*This is expressly mandated by Sec. 31 of the
voting trust agreement filed with the
corporation shall be subject to examination by Corporation Code.
Q: Why derivative?
any stockholder of the corporation in the same
manner as any other corporate book or record: A: From the word derive. The one bringing the
suit derives the cause of action from the
Provided, That both the transferor and the
trustee or trustees may exercise the right of corporation.
Q: Who brings the suit?
inspection of all corporate books and records in
accordance with the provisions of this Code. A: Any stockholder/member usually minority
stockholder.
Any other stockholder may transfer his shares
to the same trustee or trustees upon the terms Q: Whose cause of action?
A: It is the corporation’s cause of action.
and conditions stated in the voting trust
agreement, and thereupon shall be bound by all Q: Are we in violation of the Code?
A: No. Because the power to sue lies on the
the provisions of said agreement. No voting
trust agreement shall be entered into for the board thus when the board refuses to take
action in order to protect the corporation
purpose of circumventing the law against
monopolies and illegal combinations in restraint derivative suit may be allowed.
Compelling Reason: Inaction of the officers.
of trade or used for purposes of fraud. Unless
expressly renewed, all rights granted in a voting Failure to discharge their responsibilities.
Requisites:
trust agreement shall automatically expire at
the end of the agreed period, and the voting 1. The stockholder bringing the suit must be
one of record as of the time the cause of
trust certificates as well as the certificates of
stock in the name of the trustee or trustees action accrues as well as of the time the
action is brought unless the cause of action
shall thereby be deemed cancelled and new
certificates of stock shall be reissued in the is a continuing offer.
*The stockholder must implead the real
name of the transferors. The voting trustee or
trustees may vote by proxy unless the party in interest, i.e. the corporation.
*In Chua v CA, the SC held that the
agreement provides otherwise.”
Consequence: The stockholder entering into a corporation must be impleaded since it is
the real party in interest.
voting trust agreement ceases to be a
stockholder of record. 2. The action must be named under the
corporation’s name
*In case of Lee v CA, the SC held that the
stockholder concerned loses his legal title to the 3. General Rule: The stockholder bringing the
suit must have exhausted intra-corporate
shares so that if the stockholder is, at the same
time, a director of the corporation, remedies within the corporation.
Exception: If the very person to be sued is
automatically he is disqualified to continue
the responsible officers themselves.
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exchange for promissory notes or future capital stock and may collect the same or
service. The same considerations provided for such percentage thereof, in either case with
in this section, insofar as they may be accrued interest, if any, as it may deem
applicable, may be used for the issuance of necessary. Payment of any unpaid
bonds by the corporation. The issued price of subscription or any percentage thereof,
no-par value shares may be fixed in the articles together with the interest accrued, if any,
of incorporation or by the board of directors shall be made on the date specified in the
pursuant to authority conferred upon it by the contract of subscription or on the date
articles of incorporation or the by-laws, or in stated in the call made by the board. Failure
the absence thereof, by the stockholders to pay on such date shall render the entire
representing at least a majority of the balance due and payable and shall make the
outstanding capital stock at a meeting duly stockholder liable for interest at the legal
called for the purpose.” rate on such balance, unless a different rate
Valid considerations for the subscription of interest is provided in the by-laws,
agreements: computed from such date until full
1. Cash payment. If within 30 days from the said
2. Property date no payment is made, all stocks covered
3. Labor or services actually rendered to the by said subscription shall thereupon
corporation become delinquent and shall be subject to
4. Prior corporate obligations sale as hereinafter provided, unless the
5. Amounts transferred from unrestricted board of directors orders otherwise.”
retained earnings to stated capital *If there was no date as to payment of
6. Outstanding shares in exchange for stocks subscription stated in the subscription
in the event of reclassification or agreement, the board may call on all the
conversion. unpaid subscribers to pay the remaining
balance of their subscription. Failure to pay
E. Payment of Subscription within 30 days from the said date, all stocks
Q : When payment of the subscription is covered by said subscription shall
made? thereupon become delinquent and shall be
A: Look into the subscription agreement. If subject to sale unless the board of directors
subscription agreement is silent as to when the orders otherwise.
amount of subscription to be paid, the board of
directors may call on all the unpaid subscribers F. Certificate of Stock
to pay the remaining balance of their Certificate of Stock is a written evidence of the
subscription. shares of stock but it is not the share itself.
Remedies to enforce payment of *Does not represent credit.
subscription Q: How important is a stock certificate?
1. By Extra-judicial sale at public auction. A: It is an evidence of ownership of stocks.
2. By judicial action. Q: Who issue stock certificate?
3. Collection from cash dividends and A: Stock certificates must be signed by the
withholding of stock dividends. president or vice-president, countersigned by
When shares are considered delinquent the secretary or assistant secretary.
Sec. 67 of the Corporation Code provides Q: When certificate of stock may be issued?
that: “Subject to the provisions of the A: Sec. 64 of the Corporation Code states that:
contract of subscription, the board of “No certificate of stock shall be issued to a
directors of any stock corporation may at subscriber until the full amount of his
any time declare due and payable to the subscription together with interest and
corporation unpaid subscriptions to the
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expenses (in case of delinquent shares), if any is 3. To be valid to third parties, the transfer must
due, has been paid.” be recorded in the books of the corporation.
Doctrine of Indivisibility of Subscription *If not represented by the certificate, the
Contract shares may be transferred by means of a deed
Doctrine of Indivisibility of Subscription of assignment and such is duly recorded in the
Contract: Failure to pay any of the books of the corporation.
installments due would necessarily affect all *To make the transfer binding to the
the other installments because the corporation and third person, the transfer must
subscription is to be treated as one, whole, be recorded in the stock and transfer book of
entire, indivisible contract. Upon default of the corporation.
payment on any of the installment results Q: Who is the owner of the share?
to entire subscription due and demandable. A: The stockholder of record.
*The Certificate of Stock cannot be divided
into portions. H. Lost and Destroyed Certificate of Stock
*No certificate of stock shall be issued until Sec. 73 of the Corporation Code provides that:
the full payment of the subscription. “The following procedure shall be followed for
*The corporation has an automatic lien over the issuance by a corporation of new
the shares. certificates of stock in lieu of those which have
Q: What will happen to the payment been lost, stolen or destroyed: 1. The registered
already made by the subscriber? owner of a certificate of stock in a corporation
A: The payment partially made shall be or his legal representative shall file with the
applied proportionately to all the shares corporation an affidavit in triplicate setting
covered by the subscription. forth, if possible, the circumstances as to how
Example: the certificate was lost, stolen or destroyed, the
P10 per share; payment made is P6000 number of shares represented by such
covering 1000 shares. The P6000 shall be certificate, the serial number of the certificate
allocated equally to all shares. P6 per share and the name of the corporation which issued
has been paid. P4 per share is the liability. the same. He shall also submit such other
Certificate of Stock, quasi-negotiable information and evidence which he may deem
Q: can the stock certificate be treated as necessary; 2. After verifying the affidavit and
negotiable instrument under NIL? other information and evidence with the books
A: No. The requisites are not complied of the corporation, said corporation shall
with. There is no engagement to pay in sum publish a notice in a newspaper of general
certain in money. circulation published in the place where the
*Negotiable instrument represents credit. corporation has its principal office, once a week
Creditor-debtor relationship arises. for 3 consecutive weeks at the expense of the
Q: Are certificates of stock negotiable? registered owner of the certificate of stock
A: They are negotiable in certain extent. which has been lost, stolen or destroyed. The
That is why they are quasi-negotiable. notice shall state the name of said corporation,
*The title over the share can be assigned, the name of the registered owner and the serial
transferred by indorsement and delivery. number of said certificate, and the number of
*Due course holding is not applicable. shares represented by such certificate, and that
after the expiration of 1 year from the date of
G. Transfer of Shares the last publication, if no contest has been
If represented by a certificate, the following presented to said corporation regarding said
must be strictly complied with: certificate of stock, the right to make such
1. Delivery of the certificate; contest shall be barred and said corporation
2. Indorsement by the owner or his agent; shall cancel in its books the certificate of stock
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which has been lost, stolen or destroyed and proposed action must be recorded in full on his
issue in lieu thereof new certificate of stock, demand. The records of all business
unless the registered owner files a bond or transactions of the corporation and the minutes
other security in lieu thereof as may be of any meetings shall be open to inspection by
required, effective for a period of 1 year, for any director, trustee, stockholder or member of
such amount and in such form and with such the corporation at reasonable hours on
sureties as may be satisfactory to the board of business days and he may demand, writing, for
directors, in which case a new certificate may a copy of excerpts from said records or minutes,
be issued even before the expiration of the 1 at his expense. Any officer or agent of the
year period provided herein: Provided, That if a corporation who shall refuse to allow any
contest has been presented to said corporation director, trustee, stockholder or member of the
or if an action is pending in court regarding the corporation to examine and copy excerpts from
ownership of said certificate of stock which has its records or minutes, in accordance with the
been lost, stolen or destroyed, the issuance of provisions of this Code, shall be liable to such
the new certificate of stock in lieu thereof shall director, trustee, stockholder or member for
be suspended until the final decision by the damages, and in addition, shall be guilty of an
court regarding the ownership of said certificate offense which shall be punishable under Section
of stock which has been lost, stolen or 144 of this Code: Provided, That if such refusal
destroyed. Except in case of fraud, bad faith, or is made pursuant to a resolution or order of the
negligence on the part of the corporation and board of directors or trustees, the liability under
its officers, no action may be brought against this section for such action shall be imposed
any corporation which shall have issued upon the directors or trustees who voted for
certificate of stock in lieu of those lost, stolen or such refusal: and Provided, further, That it shall
destroyed pursuant to the procedure above- be a defense to any action under this section
described.” that the person demanding to examine and
copy excerpts from the corporation’s records
CORPORATE BOOKS AND RECORDS: and minutes has improperly used any
A. Books required to be kept by a Corporation information secured through any prior
Sec. 74 of the Corporation Code provides that: examination of the records or minutes of such
“Every corporation shall keep and carefully corporation or of any other corporation, or was
preserve at its principal office a record of all not acting in good faith or for a legitimate
business transactions and minutes of all purpose in making his demand. Stock
meetings of stockholders or members, or of the corporations must also keep a book to be
board of directors or trustees, in which shall be known as the “stock and transfer book,” in
set forth in detail the time and place of holding which must be kept a record of all stocks in the
the meeting, how authorized, the notice given, names of the stockholders alphabetically
whether the meeting was regular or special, if arranged; the installments paid and unpaid on
special its object, those present and absent, and all stock for which subscription has been made,
every act done or ordered done at the meeting. and the date of payment of any installment; a
Upon the demand of any director, trustee, statement of every alienation, sale or transfer
stockholder or member, the time when any of stock made, the date thereof, and by and to
director, trustee, stockholder or member whom made; and such other entries as the by-
entered or left the meeting must be noted in laws may prescribe. The stock and transfer book
the minutes; and on a similar demand, the yeas shall be kept in the principal office of the
and nays must be taken on any motion or corporation or in the office of its stock transfer
proposition, and a record thereof carefully agent and shall be open for inspection by any
made. The protest of any director, trustee, director or stockholder of the corporation at
stockholder or member on any action or reasonable hours on business days. No stock
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transfer agent or one engaged principally in the *Can also claim damages.
business of registering transfers of stocks in
behalf of a stock corporation shall be allowed to MERGER AND CONSOLIDATION:
operate in the Philippines unless he secures a A. Concept of Merger and Consolidation
license from the SEC and pays a fee as may be Merger is one where a corporation absorbs the
fixed by the Commission, which shall be other and remains in existence while the others
renewable annually: Provided, That a stock are dissolved.
corporation is not precluded from performing *There is a continuous flow of juridical
or making transfer of its own stocks, in which personality.
case all the rules and regulations imposed on Examples:
stock transfer agents, except the payment of a A+B=B
license fee herein provided, shall be A+B+C=C
applicable.” A+B+C=A
*Keeping of books and records are mandatory. A+B+C=B
Books required to be kept: Consolidation is one where a new corporation
1. Book of minutes – reflects the decisions and is created, and consolidating corporations are
actions of the Board of extinguished.
Directors/Stockholders. Examples:
2. Record of all business transactions A+B=C
3. Stock and Transfer Book/Membership Book A+B+C=D
4. Books of Proceedings A + B + C = ABC
A + B + C = XYZ
B. Right to Inspect Corporate Books
Basis and Extent of the Right of Inspection B. Requisites of and Procedure for Merger and
Q: Is the keeping of these books Consolidation
mandatory? 1. Approval by majority vote of the Board of
A: YES. Section 144 of the Corporation Code Directors of each corporation.
provides penalty for any violation of the 2. Approval of the stockholders of each
provision of the Code. corporation representing 2/3 of the
Rationale: Right of inspection would be outstanding capital stock.
futile. Right of inspection would not be 3. Approval of SEC
exercised. Cases: Associated Bank v CA; Polyan v CA
Limitations on the Right of Inspection Procedure:
1. The books and records shall be open to 1. The Board of each corporation shall draw
inspection at reasonable hours on up a plan of merger/consolidation.
business days. 2. The plan of merger or consolidation shall be
2. The books and records shall not be approved by majority vote of each board of
improperly used any information the concerned corporations at separate
secured through any prior examination meetings.
of the books or records. 3. The plan of merger/consolidation shall be
3. The stockholder’s demand must be in approved by the majority vote of the 2/3 of
good faith or for a legitimate purpose. the shareholders of the outstanding capital
*Inspection can be done personally or stock or members in case of a non-stock
through agent. corporation.
Remedies to Enforce Right of Inspection 4. Articles of Merger/Consolidation shall be
*In case of refusal to exercise the right of executed by each of the constituent
inspection, the stockholder concerned may corporators, signed by the President or
file an action for mandamus before the RTC.
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Vice-President and certified by the *Stockholders cannot exercise this right at his
secretary or assistant secretary. pleasure.
5. Four copies of the Articles of Merger or Requisites:
Consolidation together with favorable 1. The Stockholder has dissented
recommendation of a pertinent 2. Corporate change must have been
government agency in certain cases shall be approved by the SEC.
submitted to the SEC for approval. *Any changes that affect the stockholders’
6. The SEC shall issue a certificate or merger if right.
it is satisfied that the merger or *Any changes that concern the
consolidation of the corporations corporation’s existence.
concerned is not inconsistent with the *Corporate changes that appraisal right can
provisions of this Code and existing laws. be availed of.
3. There must have an unrestricted retained
C. Effects of Merger or Consolidation earnings,
1. All property, real or personal, and all *It is not a matter of right.
receivables due to, and all other interest of Reason: If it is a matter of right it shall lead to
each constituent corporation, shall be the diminution or depletion of corporate assets
deemed transferred to and vested in such which is violative of the Trust Fund Doctrine.
surviving or consolidated corporation
without further act or deed. B. Instances of Appraisal Right
2. The surviving or consolidated corporation Sec. 81 of the Corporation Code provides that:
shall be responsible for all the liabilities and “Any stockholder of a corporation shall have the
obligations of each of the constituent right to dissent and demand payment of the fair
corporations. value of his shares in the following instances: 1.
3. Any claim, action or proceeding pending by In case any amendment to the articles of
or against any of the constituent incorporation has the effect of changing or
corporations may be prosecuted by or restricting the rights of any stockholder or class
against the surviving or consolidated of shares, or of authorizing preferences in any
corporations. respect superior to those of outstanding shares
4. The rights of the creditors or lien upon the of any class, or of extending or shortening the
property of any of each constituent term of corporate existence; 2. In case of sale,
corporation shall not be impaired by such lease, exchange, transfer, mortgage, pledge or
merger or consolidation. other disposition of all or substantially all of the
5. Dissolution of other corporation leaving the corporate property and assets as provided in
surviving or consolidated corporation exists. the Code; and 3. In case of merger or
Remedy of the dissenting stockholder: The consolidation.”
dissenting stockholder may exercise his
appraisal right. C. Requirements for a Valid Exercise of Appraisal
Right
RIGHT OF APPRAISAL: Sec. 82 of the Corporation Code provides that:
A. Concept of Appraisal Right “The appraisal right may be exercised by any
Appraisal Right is the right to withdraw from stockholder who shall have voted against the
the corporation and demand payment of the proposed corporate action, by making a written
fair value of his shares after dissenting from demand on the corporation within 30 days after
certain corporate acts involving fundamental the date on which the vote was taken for
changes in corporate structure. payment of the fair value of his shares:
*Demanding for the reasonable return of Provided, That failure to make the demand
investment. within such period shall be deemed a waiver of
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the appraisal right. If the proposed corporate 7. Stockholder must transfer his shares to the
action is implemented or affected, the corporation upon payment by the
corporation shall pay to such stockholder, upon corporation.
surrender of the certificate or certificates of
stock representing his shares, the fair value D. Effects of Exercising Appraisal Right
thereof as of the day prior to the date on which Sec. 83 of the Corporation Code provides that:
the vote was taken, excluding any appreciation “From the time of demand for payment of the
or depreciation in anticipation of such fair value of a stockholder’s shares until either
corporate action. If within a period of 60 days the abandonment of the corporate action
from the date the corporate action was involved or the purchase of the said shares by
approved by the stockholders, the withdrawing the corporation, all rights accruing to such
stockholder and the corporation cannot agree shares, including voting and dividend rights,
on the fair value of the shares, it shall be shall be suspended in accordance with the
determined and appraised by 3 disinterested provisions of this Code, except the right of such
persons, one of whom shall be named by the stockholder to receive payment of the fair value
stockholder, another by the corporation, and thereof: Provided, That if the dissenting
the third by the two thus chosen. The findings stockholder is not paid the value of his shares
of the majority of the appraisers shall be final, within 30 days after the award, his voting and
and their award shall be paid by the corporation dividend rights shall immediately be restored.”
within 30 days after such award is made: Effects:
Provided, That no payment shall be made to 1. All rights accruing to such shares shall be
any dissenting stockholder unless the suspended from the time of demand for
corporation has unrestricted retained earnings payment of the fair value of the shares until
in its books to cover such payment: and either the abandonment of the corporate
Provided, further, That upon payment by the action.
corporation of the agreed or awarded price, the 2. The dissenting stockholder shall be entitled
stockholder shall forthwith transfer his shares to receive payment of the fair value of his
to the corporation.” shares as agreed upon between him and
Requisites: the corporation or as determined by the
1. Any of the instances set forth by law must appraisers chosen by them.
be present. *Sec. 86. The dissenting stock can be sold
2. Dissenting stockholder must have voted during the pendency of its payment.
against the proposed action. Remedy in case appraisal right cannot be
*Abstaining stockholder cannot claim or exercised: Dispose the shareholdings.
exercise his appraisal right.
NON-STOCK CORPORATIONS:
3. Demand for payment must be made within
30 days from the date vote is taken A. Definition and Purposes of a Non-Stock
thereon. Failure to make demand shall be Corporation
deemed a waiver. Sec. 87 of the Corporation Code states that:
4. Price must be based on fair value as of day “For the purposes of this Code, a non-stock is
prior to date on which vote was taken one where no part of its income is distributable
5. Submission by withdrawing stockholder of as dividends to its members, trustees, or
his shares to the corporation for notation of officers, subject to the provisions of this Code
being a dissenting stockholder within 10 on dissolution: Provided, That any profit which
days from written demand. a non-stock corporation may obtain as an
6. Payment must be made only when the incident to its operations shall, whenever
corporation has unrestricted retained necessary or proper, be used for the
earnings in its books. furtherance of the purpose or purposes for
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Sec. 96 of the Corporation Code states that: “A 7. Corporations declared to be vested with
corporation, within the meaning of this Code, is public interest
one whose articles of incorporation provide
Distinctions from Open Corporations:
that: (1) All the corporation’s issued stock of all
classes, exclusive of treasury shares, shall be Open Corporation Close Corporation
held of record by not more than a specified Its articles of Its articles must
number of persons, not exceeding 20; (2) all the incorporation need contain the special
issued stock of all classes shall be subject to one only contain the matters prescribed by
or more specified restrictions on transfer general matters Section 97 aside from
permitted by this Title; and (3) The corporation enumerated in Section the general matters in
14 of the Corporation Section 14. Failure to
shall not list in any stock exchange or make any
Code do so precludes a de
public offering of any of its stock of any class. jure close corporation
Notwithstanding the foregoing, a corporation status
shall not be deemed a close corporation when Its status as an 2/3 of its voting stock
at least 2/3 of its voting stock or voting rights is ordinary stock or voting rights must
owned or controlled by another corporation corporation is not not be owned or
which is not a close corporation within the affected by the controlled by another
ownership of its voting corporation which is
meaning of this Code. Any corporation may be
stock or voting rights not a close
incorporated as a close corporation, except corporation
mining or oil companies, stock exchanges, Its articles cannot Its articles may classify
banks, insurance companies, public utilities, classify its directors its directors
educational institutions and corporations Business of the Business of the
declared to be vested with public interest in corporation is corporation may be
accordance with the provisions of this Code. managed by the board managed by the
of directors stockholders if the
The provisions of this Title shall primarily
articles so provide, but
govern close corporations: Provided, That the they are liable as
provisions of other Titles of this Code shall directors
apply suppletorily except insofar as this Title The corporate officers Its articles may
otherwise provides.” and employees are provide that any or all
*Whether open or close corporation depends elected by a majority of the corporate
on its charter. vote of all the officers or employees
members of the board may be elected or
Case: San Juan Structural
of directors appointed by the
The following must be stated in the Articles of stockholders
Incorporation: The pre-emptive right The pre-emptive right
1. Membership is limited to 20 is subject to the is subject to no
2. Transfer or disposition of shares is subject exceptions found in exceptions unless
to specified restrictions Section 39 of the denied in the articles
3. Prohibition against offering to the public of Corporation Code
The appraisal right The appraisal right
the shares or listing in the stock exchange.
may be exercised by a may be exercised and
General Rule: Any corporation may be
stockholder only in the compelled against the
incorporated as close corporation. cases provided in corporation by a
Exceptions: Sections 81 and 42 of stockholder for any
1. Mining or oil companies the Corporation Code reason
2. Stock exchanges Except as regards In case of an
3. Banks redeemable shares, arbitration of an
the purchase by the intracorporate
4. Insurance companies
corporation of its own deadlock by the SEC,
5. Public utilities
stock must always be the corporation may
6. Educational institutions made from the be ordered to
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unrestricted retained purchase its own stockholders of the corporation shall be subject
earnings shares from the to all liabilities of directors. The articles of
stockholders incorporation may likewise provide that all
regardless of the officers or employees or that specified officers
availability of
or employees shall be elected or appointed by
unrestricted retained
earnings the stockholders, instead of by the board of
Arbitration of Arbitration of directors.”
intracorporate intracorporate
deadlock by the SEC is deadlock by the SEC is C. Restrictions on Transfer of Shares
not a remedy in case an available remedy in Sec. 98 of the Corporation Code provides that:
the directors or case the directors or “Restrictions on the right to transfer shares
stockholders are so stockholders are so
must appear in the articles of incorporation and
divided respecting the divided respecting the
management of the management of the in the by-laws as well as in the certificate of
corporation. corporation. stock; otherwise, the same shall not be binding
on any purchaser thereof in good faith. Said
restrictions shall not be more onerous than
*In San Juan Structural Steel Fabricators v CA, granting the existing stockholders or the
the SC held that the circumstance that around corporation the option to purchase the shares
99.86% of the total share holding of petitioner of the transferring stockholder with such
belongs to respondent would not justify reasonable terms, conditions or period stated
classification of the corporation as close. therein. If upon the expiration of said period,
B. Permissive Provisions in the Articles of the existing stockholders or the corporation
Incorporation fails to exercise the option to purchase, the
Sec. 97 of the Corporation Code provides that: transferring stockholder may sell his shares to
“The articles of incorporation of a close any third person.”
corporation may provide: 1. For a classification Option Restriction – this restriction provides
of shares or rights and the qualifications for that no disposition of shares will be made
owning or holding the same and restrictions on unless the shares are offered first to the
their transfers as may be stated therein, subject corporation or the stockholders.
to the provisions of the following section; 2. For *Pre-emptive right is exercisable or available.
a classification of directors into one or more *This restriction is valid and allowed.
classes, each of whom may be voted for and Reason: it is the one contemplated by law.
elected solely by a particular class of stock; and *Restriction derogates private rights.
3. For a greater quorum or voting requirements Consent Restriction – this restriction provides
in meetings of stockholders or directors than that no disposition of shares will be made
those provided in this Code. The articles of without the consent of directors.
incorporation of a close corporation may *This restriction is not valid.
provide that the business of the corporation Reason: It is more onerous and burdensome.
may provide that the business of the CORPORATE DISSOLUTION/LIQUIDATION:
corporation shall be managed by the
stockholders of the corporation rather than by a A. Methods of Voluntary Corporate Dissolution
board of directors. So long as this provision and the Requirements therefor
continues in effect: 1. No meeting of Dissolution refers to the extinguishment of
stockholders need be called to elect directors; franchise or termination of corporate existence.
2. Unless the context clearly requires otherwise, Modes of Dissolution:
the stockholders of the corporation shall be 1. Voluntary dissolution
deemed to be directors for the purpose of 2. Involuntary dissolution
applying the provisions of this Code; and 3. The Methods of Voluntary Dissolution:
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posted for three (3) consecutive weeks in term pursuant to the provisions of this
three (3) public places in such municipality Code. A copy of the amended articles of
or city. Upon five (5) day's notice, given incorporation shall be submitted to the
after the date on which the right to file
Securities and Exchange Commission in
objections as fixed in the order has expired,
accordance with this Code. Upon approval
the Commission shall proceed to hear the
petition and try any issue made by the of the amended articles of incorporation of
objections filed; and if no such objection is the expiration of the shortened term, as the
sufficient, and the material allegations of case may be, the corporation shall be
the petition are true, it shall render deemed dissolved without any further
judgment dissolving the corporation and proceedings, subject to the provisions of
directing such disposition of its assets as
this Code on liquidation.”
justice requires, and may appoint a receiver
to collect such assets and pay the debts of
the corporation.” B. Concept of Involuntary Dissolution and the
Requisites: Grounds therefor
1. Approval of the stockholders Sec. 121 of the Corporation Code provides that:
representing at least 2/3 of the “A corporation may be dissolved by the
outstanding capital stock or 2/3 of Securities and Exchange Commission upon filing
members in a meeting called for that
of a verified complaint and after proper notice
purpose;
2. Filing of a Petition with the SEC signed and hearing on the grounds provided by existing
by majority of directors or trustees or laws, rules and regulations.”
other officers having the management *This must be done with substantive and
of its affairs verified by President or procedural due process.
Secretary or Director. Claims and Grounds:
demands must be stated in the petition;
1. Failure to submit by-laws within the
3. If petition is sufficient in form and
prescribed period
substance, the SEC shall issue an Order
fixing a hearing date for objections; 2. Fraud in the procurement of Certificate of
4. A copy of the Order shall be published Registration
at least once a week for 3 consecutive 3. Misrepresentation as to the activities that
weeks in a newspaper of general the corporation will undertake
circulation or if there is no newspaper 4. Treasurer’s affidavit is false
in the municipality or city of the
5. Continued inoperation for 5 years
principal office, posting for 3
consecutive weeks in 3 public places is 6. Failure to commence business transactions
sufficient; within 2 years from issuance of certificate
5. Objections must be filed no less than 30 of registration
days nor more than 60 days after the 7. To some cases, performance of ultra vires
entry of the order; act since it is a violation to the franchise but
6. After the expiration of the time to file depending on the seriousness or gravity of
objections, a hearing shall be conducted
the offense
upon prior 5 day notice to hear the
objections; 8. Issuance of watered stocks
7. Judgment shall be rendered dissolving 9. De facto status
the corporation and directing the 10. Failure to keep corporate books and records
disposition of assets; the judgment may depending on the gravity or seriousness of
include appointment of a receiver. the offense
11. Violation of its charter
Shortening of term of existence
Sec. 120 of the Corporation Code provides
C. Corporate Liquidation
that: “A voluntary dissolution may be
Liquidation is a process by which all the assets
effected by amending the articles of
of the corporation are converted into liquid
incorporation to shorten the corporate
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assets in order to facilitate the payment of Q: Can the 3 year period be extended?
obligations to creditors, and the remaining A: NO.
balance if any is to be distributed to the
Reason: Beyond the 3 year period, there is no
stockholders.
*Liquidation takes place after dissolution. corporate existence for all purposes subject to
doctrine of relation.
Sec. 122 of the Corporation Code provides that:
“Every corporation whose charter expires by its Remedy: Before the expiration of the 3 year
period, appoint a trustee/receiver.
own limitation or is annulled by forfeiture or
otherwise, or whose corporate existence for Q: During the 3 year period, does the
corporation enjoy corporate existence?
other purposes is terminated in any other
manner, shall nevertheless be continued as a A: YES. But for limited purpose only, i.e., for
liquidation purposes only. (Limited existence)
body corporate for three (3) years after the
time when it would have been so dissolved, for Q: May such corporation sue during the 3 year
period?
the purpose of prosecuting and defending suits
by or against it and enabling it to settle and A: YES. But only when the subject matter is
related to liquidation and winding up of its
close its affairs, to dispose of and convey its
property and to distribute its assets, but not for remaining affairs.
*In case trustee/receiver is appointed, he is not
the purpose of continuing the business for
which it was established. At any time during bound by the 3 year period.
*In Gelano v CA, the SC held that the lawyer of
said three (3) years, the corporation is
authorized and empowered to convey all of its the corporation can be considered as trustee.
The term trustee must be considered in its
property to trustees for the benefit of
stockholders, members, creditors, and other generic sense. Anyone who has been
designated by the corporation to act on its
persons in interest. From and after any such
conveyance by the corporation of its property in behalf could be considered as trustee for
purposes of pursuing a claim for and on behalf
trust for the benefit of its stockholders,
members, creditors and others in interest, all of the corporation. A lawyer falls within the
ambit of the word “trustee.”
interest which the corporation had in the
property terminates, the legal interest vests in *Appointment of trustee can be inferred from
the conduct of the corporation. This is by
the trustees, and the beneficial interest in the
stockholders, members, creditors or other Implication.
*If the corporation is the creditor appoint a
persons in interest. Upon the winding up of the
corporate affairs, any asset distributable to any trustee. If the corporation is the debtor appoint
a receiver.
creditor or stockholder or member who is
unknown or cannot be found shall be escheated Q: What if the corporate properties have
already been distributed among the
to the city or municipality where such assets are
located. Except by decrease of capital stock and shareholders without trustee/receiver?
A: Remedy: Run after the erring directors and
as otherwise allowed by this Code, no
corporation shall distribute any of its assets or officers.
property except upon lawful dissolution and E. Concept of Rehabilitation; Effects of
after payment of all its debts and liabilities.” Appointment of Management Committee or
Receiver
D. Methods of Liquidation or Winding Up Rehabilitation connotes a reopening or
1. By Board of Directors reorganization. Contemplates a continuance of
2. Through a trustee to whom the properties corporate existence in an effort to restore the
are conveyed corporation to its former successful operation.
3. By management committee or *This is a remedy expressly allowed under
rehabilitation receiver Section 6 of PD 902-A.
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Purpose: To make the corporation financially transact business in the Philippines after it shall
viable again. have obtained a license to transact business in
Substantive Grounds: this country in accordance with this Code and a
1. When there is imminent danger of certificate of authority from the appropriate
dissipation or wastage of corporate assets government agency.”
2. Serious paralyzation of business which Reciprocity Clause provides that the foreign
would work to the prejudice of the laws allow Filipino citizens and corporations to
stockholders and creditors of the do business in its own country or state.
corporation
*Mere misconduct of an officer is not a ground B. Tests to Determine Nationality of a Corporation
for corporate rehabilitation. 1. Incorporation Test – when the corporation
*A corporation cannot ask for corporate is incorporated, organized under the law of
rehabilitation and at the same time dissolution. other country.
*With the passage of RA8799, the remedy could 2. Control Test – for purposes of investment;
now be instituted with the proper RTC. the citizenship of a particular corporation is
Effect: Stay Order - stops or suspends the to be determined by the citizenship of the
enforcement of all claims for money or controlling stockholders.
otherwise whether enforcement is by court or
not, until rehabilitation proceedings are C. Concept of “Doing Business” and the License
terminated. Requirement therefor
Cases: PAL v Garcia; Sobrejuanite; Lingkod Substance Test provides that: a foreign
Manggagawa ng Rubberworld v Rubberworld corporation is doing business in the country if it
Philippines; RCBC v IAC is continuing the body or substance of the
*In PAL v Garcia, the SC held that stay order enterprise of business for which it was
suspends all enforcement in all stages of the organized.
proceedings. Continuity Test provides that: doing business
*In Lingkod Manggagawa sa Rubberworld v implies a continuity of commercial dealings and
Rubberworld Philippines, the SC held that labor arrangements, and contemplates to some
claims are likewise affected by the Stop order. extent the performance of acts or works or the
*In RCBC v IAC, the SC held that whether exercise of some functions normally incident to
creditors are secured or not, stay order will still and in progressive prosecution of, the purpose
affect them. The preference still remains it is and object of its organization.
just the enforcement that is suspended. *Foreign Corporation is required to obtain
license from the SEC to enable them to do
FOREIGN CORPORATIONS: business in the Philippines.
A. Concept of Foreign Corporation *The foreign corporation must appoint a
Foreign Corporation is a corporation formed, resident agent so that court may acquire
organized or existing under any law other than jurisdiction over the foreign corporation
those of the Philippines, and whose laws allow *License is essential if there is an intention to
Filipino citizens and corporations to do business maintain main or substance of the business in
in its own country or state. the Philippines or to continue the same.
Sec. 123 of the Corporation Code provides that: *Lack of license does not affect the validity of
“For the purposes of this Code, a foreign the transaction.
corporation is one formed, organized or existing *License is for regulatory purposes.
under any laws other than those of the *License requirement does not prevent
Philippines and whose laws allow Filipino performance of acts that are isolated from the
citizens and corporations to do business in its main business of the corporation and there is
own country or state. It shall have the right to
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no intent to continue the same in the 1. Failure to file its annual report or pay any
Philippines. fees as required by the Corporation Code
*If the foreign corporation is not licensed to do 2. Failure to appoint and maintain a resident
business in the Philippines, General Rule: they agent in the Philippines as required by the
have no access in Philippine Courts Corporation Code
Exceptions: 3. Failure, after change of its resident agent or
1. Isolated transactions his address, to submit to the SEC a
2. Infringement of trademark statement of such change as required by
*International offense can be sued the Corporation Code
anywhere. 4. Failure to submit to the SEC an
Cases: Expert Travel Tours v CA; Home authenticated copy of any amendment to
Insurance v Eastern Shipping Lines its articles of incorporation or by-laws or of
*In Expert Travel Tours v CA, the SC held that any articles of merger or consolidation
resident agent is not with authority to execute a within the time prescribed by the
certification of Forum shopping following Sec. Corporation Code
23 of the Corporation Code. 5. A misrepresentation of any material matter
*In Home Insurance v Eastern Shipping Lines, in any application, report affidavit or other
the SC held that if at the time the suit was document submitted by such corporation
brought, the suing foreign entity already have pursuant to the provisions of the
license to do business in the Philippines, the suit Corporation Code
will be allowed although at the time the 6. Failure to pay any and all taxes, imposts,
transaction was made it does not have the assessments or penalties, if any, lawfully
requisite of a license to do so, the remedial due to the Philippine Government or any of
defect is cured. its agencies or political subdivision
Cases: Japan Airlines v CA 7. Transacting business in the Philippines
*In Japan Airlines v CA, the SC held that the outside of the purpose or purposes for
selling of tickets though there is no aircraft which such corporation is authorized under
landing in the Philippines constitute doing its license
business in the Philippines. 8. Transacting business in the Philippines as
*In Ericks v CA, the SC held that license is agent of or acting for and in behalf of any
necessary in order the foreign corporation may foreign corporation or entity not duly
sue. In this case, the court considered the licensed to do business in the Philippines
continuity test, they found out that the foreign 9. Any other ground as would render it unfit to
corporation has the intent to continue business transact business in the Philippines.
in the Philippines.
*Credit is obtained to maintain longer
transactions.
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