Вы находитесь на странице: 1из 197

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

E. Conflict of interest: Self-dealing director Sec 32, Campos, p687


Section 32. Dealings of directors, trustees or officers with the corporation. A contract of the corporation with
one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all the
following conditions are present:
1. That the presence of such director or trustee in the board meeting in which the contract was approved was
not necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was not necessary for the approval of the contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in case of an officer, the contract has been previously authorized by the board of directors.
Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract
with a director or trustee, such contract may be ratified by the vote of the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members in a meeting
called for the purpose: Provided, That full disclosure of the adverse interest of the directors or trustees
involved is made at such meeting: Provided, however, That the contract is fair and reasonable under the
circumstances. (n)
Self-dealing directors, trustees, or officers are those who personally contract with the corporation in which
they are directors, trustees or officers. It is discouraged because the directors, trustees and officers have
fiduciary relationship with the corporation and there can be no real bargaining where the same is acting on
both sides of the trade.
The contract between the corporation and the self-dealing director, trustee or officer is voidable. However, the
contract is valid if the following requirements for its validity are present
1. Presence of director/trustee in the board meeting approving the contract was not necessary for
constituting a quorum for such meeting
2. Vote of such director/trustee in the board meeting approving the contract was not necessary for the
approval of the contract
3. The contract is fair and reasonable under the circumstances; and
4. In the case of an officer, there was previous authorization by the board of directors or trustees.
However, even if not all the requirements are met the contract may still be ratified representing at least 2/3 of
the outstanding capital stock or by 2/3 of the members in a meeting called for that purpose.
Related party transactions
PALTING v SAN JOSE PETROLEUM
FACTS:
1. SJP filed with SEC for registration and licensing for sale in Philippine Voting Trust Certificates
representing 2, 000, 000 shares of its capital stock at a par value of $0.35 per share, at P1
per share.
2. The proceeds of the sale is devoted to finance operations of San Jose Oil Camp (SJOC), a
domestic mining oil company, with the express condition that every purchaser shall not
receive as stock certificate, but a registered /bearer-voting-trust certificate from voting
trustees
3. While application was pending, SJP filed amended statement:
a. Registration of sale in Philippine shares of capital stock
b. 2M shares increased to 5M, reduced offering from P1 per share to P0.70 per share

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

c.

Par value reduced from $0.35 to $.01 per share

4. Palting, prospective investor of SJP, filed an opposition to registration on grounds that:


a. Tie up between SJP (Panamanian Corp) & SJOC violates the Constitution,
Corporation Law and Petroleum Act of 1949
b. Issuer hadnt been licensed to transact in the Philippines
c. Sale of shares of the issuer is fraudulent
d. Issuer, as an enterprise, based on unsound business principles
ISSUE: WON the sale of SJPs securities is fraudulent, or would work or tend to work fraud to
purchasers of such securities in the Philippines
RULING: YES. SJP- incorporated under the laws of Panama, and by virtue of a 3-party agreement,
SJP was suppose to receive 8M shares of capital stock for which it issued 16M shares of its capital
stock, with a value of $160, 000. The capitalization increased to 17.5M shares without any additional
consideration to the previously issued oil investments. These figures are highly questionable.
Moreover, some provisions of its Articles of Incorporation are noteworthy as it is a direct
opposition to the Corporation Law:
a. Directors need not be shareholders
b. In meetings, any director may be represented and may vote through a proxy, who doesnt
need to be a director or stockholder
c. No contract or transaction between corporations and any other associations will be
affected, except in fraud, by the fact that any director or officer of such other association
has interest or is a director or officer of such other association
The impact of the provisions upon traditional judiciary relationships is too obvious, the directors and
officers can do anything, short of actual fraud, with the affairs of the corporation. It even stated that
agreements bind all parties, successors and all holders of voting trust certificates.
Voting Trust Certificates are offered to investors as authorized by SEC. It canno be doubted that
SJPs securities would work or tend to work fraud to Philippine investors.
DISPOSITIVE: Palting won. Case was remanded to SEC for appropriate action. SJPs Motion to
dismiss was denied.
PRIME WHITE CEMENT v IAC
FACTS:
Prime White Cement , thru its President, Mr. Zosimo Falcon and Justo C. Trazo, as Chairman of the
Board entered into a dealership agreement with Alejandro Te (Private Resp.). That Te was obligated
to act as exclusive dealer/ distributor of cement products in Mindanao for 5yrs, and every month
starting Sept 1970, Prime White will sell and supply plaintiff with 20000 bags of white cement, while
Te will pay P9.70 per bag and that everytime Prime White is ready to deliver the good evidenced by
the cert. of bill of lading, Te shall open with any bank a confirmed, unconditional and irrevocable letter
of credit in favor of Prime White.
Te placed an advertisement in Manila Chronicle newspaper the fact that he was the exclusive dealer
of PW in Mindanao area and his businessmen friends asked if they cqn be his sub-dealer. Te also
entered into written agreements with several hardware stores in Davao and CDO to enable him to sell
his allocation of 20000 bags regular supply. He also informed PW through a letter that he is making
preparation for the opening of the letter of credit. But in reply, PW thru corp sec. said that BOD
decided to impose ff conditions
-Delivery to commence Nov 1970 instead of Sept
-only 8000 bags per month for 3 months will be delivered
-price of cement- P13.30 per bag and payment be made in advance
-that price is subject to readjustment unilaterally on part of PW
-place of delivery- Austurias

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

-and letter of credit may be opened only with Prudential Bank, Makati Branch
Due to said demands plaintiff was forced to cancel his agreement with 3rd parties. Despite the
dealership agreement being still in force and subsisting, PW in violation and with evident intention not
to be bound by the terms and conditions, entered into an exclusive dealership agreement with
Napoleon Co for Marketing of cement in Mindanao.
TC- held PW liable to Alejandro Te
IAC- affirmed
Hence this Pet for Review filed by PW
ISSUE: Won there is conflict of interest on the part of Alejandro Te
RULING: YES. Te was not an ordinary stockholder, he wasb a member of BOD and Auditor of the
corp, he was a self-dealing director. - he owes duty of loyalty to his corporation, he cannot sacrifice
the interest of the corp to his own advantage and benefit.
The dealership agreement would be valid and enforceable if entered into with a person other than a
director or officer of a corporation, but Te being a Director and Auditor of PW changes the situation.
The contract was neither fair nor reasonable due to the fixed price of P9.70 for 5yrs since the price of
commodities were not stable and expected to rise. But no provision in the dealership agreement to
allow for an increase in price
DOCTRINE: Conflict of Interest- Self dealing directors
A director of a corporation holds a positionof trust and owes duty of loyalty to his corporation. In case
his interest conflict with those of the corporation, he cannot sacrifice the latter to his own advantage
and benefit. As corporate managers, directors are committed to seek the maximum amountof profits
for the corporation. This trust relationship is not a matter of statutory or technical lae. It springs from
the fact that directors have the control and guidance of corporate affairs and property and hence
property interests of the stockholders.
DISPOSITIVE: The contract was not valid. IAC decision - set aside and Te orderes to pay PW
P20000 for atty's fees
MEAD v McCULLOUGH
FACTS:
Plaintiff Mead
4 Defendants McCullough, Hartigan, Green, Hilbert
1. Plaintiff Mead and 4 defendants organized Philippine Engineering Construction Company
(hereinafter referred to as the company), the 5 of them being the incorporators and directors at
the same time. Plaintiff Mead was elected to be the general manager but he resigned to accept
the position of engineer in Canton and Shanghai Railway Company.
2. The contracts and work undertaken by the company are:
a. Wrecking contract with Navy Dept. For raising of the Spanish ships sunk
b. Construction contract of certain warehouses
c. Wharf construction
3. Since the corporation had been going from bad to worse, 4 defendants (while plaintiff was in
China) decided to sell/ transfer the corporate property to McCullough.
4. Petitioner Mead filed this action against 4 defendants for 3 causes of action:
1. For salary
2. For profit
3. For the VALUE of PERSONAL EFFECTS allegedly to have been left by mead and SOLD by
the defendants.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

ISSUE: Did a majority of the stockholders, who were at the same time a majority of the directors of
this corporation, have the power under the law and its articles of agreement, to sell or transfer to one
of its directors/members the assets of said corporation?
Ruling: YES.
Ratio and Relevant Doctrine:
While a corporation remains solvent, we can see no reason why a director or officer, by the
authority of a majority of the stockholder or board of managers, may not deal with the corporation,
loan it money or buy property from it, in like manner as a stranger. So long as a purely private
corporation remains solvent, its directors are agents or trustees for the stockholders. They owe no
duties or obligations to others. But the moment such a corporation becomes insolvent, its
directors are trustees of all the creditors, whether they are members of the corporation or not,
and must manage its property and assets with strict regard to their interest; and if they are
themselves creditors while the insolvent corporation is under their management, they will
NOT be permitted to secure to themselves by purchasing the corporate property or otherwise
any personal advantage over the other creditors.
Nevertheless, a director or officer may
(1) in good faith and
(2) for an adequate consideration
purchase from a majority of the directors or stockholders the property even of an insolvent
corporation, and a sale thus made to him is VALID and binding upon the minority.
In the case at bar, FACTS would show that McCullough acted in good faith in purchasing
the old corporations assets and that he certainly paid for the same a valuable consideration. To
wit:
1. The corporation had been going from bad to worse.
2. The work of trying to raise the sunken Spanish fleet had been for several months
abandoned. To continue its operation meant more losses.
3. Success was impossible.
4. The majority of the stockholders/directors sold the assets thereby relieving themselves
including the plaintiff of all responsibility. This was the only wise and sensible thing for
them to do.
5. They acted in perfectly good faith and for the best interests of all the stockholders.
6. In addition, the naval authorities with whom the corporation contracted agreed that if the
defendant McCullough would organize a new association, they would give the new
concern an extension of time and would reconsider the question of forfeiture of the
amount deposited. Under these circumstances and conditions, McCullough organized
Manila Salvage Company. However said association failed and McCullough lost over
$16,000 Mexican Currency.
Other Doctrines:
Where a director in a corporation accepts a position in which his duties are incompatible with those as
such director, it is presumed that he has abandoned his office as director of the corporation.

F. Conflict of interest: interlocking directors Sec. 33


Section 33. Contracts between corporations with interlocking directors. Except in cases of fraud, and

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

provided the contract is fair and reasonable under the circumstances, a contract between two or more
corporations having interlocking directors shall not be invalidated on that ground alone: Provided, That if the
interest of the interlocking director in one corporation is substantial and his interest in the other corporation or
corporations is merely nominal, he shall be subject to the provisions of the preceding section insofar as the
latter corporation or corporations are concerned.
Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be considered
substantial for purposes of interlocking directors. (n)
Interlocking directorship when one (or some or all) of the directors in one corporation is (or are) a
director(s) in another corporation.
The interest of the interlocking director in the corporation is substantial if his stockholdings exceed 20% of the
outstanding capital stock. The interest of the director is nominal if his equity is 20% or less of the outstanding
capital stock
Effect of interlocking directorship: It is prohibited but the by-laws may contain provisions that disallow
interlocking directorship in certain cases. A contract between 2 or more corporations having interlocking
directors shall not be invalidated in that ground alone.
Effect on contracts: If the interest of the interlocking director in one of the corporations is nominal in one and
substantial in the other, a contract between the 2 corporations shall be valid, if the following conditions are
present
1. The presence of the interlocking director/trustee in the board meeting (of the corporation where his
interest is merely nominal) in which the contract was approved was not necessary to constitute a
quorum for such meeting
2. That the vote of such director/trustee was not necessary for the approval of the contract
3. That the contract is fair and reasonable under the circumstances

G. Conflict of interest: Seizing corporate opportunity Sec. 34


Section 34. Disloyalty of a director. Where a director, by virtue of his office, acquires for himself a business
opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such
corporation, he must account to the latter for all such profits by refunding the same, unless his act has been
ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital
stock. This provision shall be applicable, notwithstanding the fact that the director risked his own funds in the
venture. (n)
Doctrine of Corporate Opportunity The loyalty mandates that directors should not give preference to their
own personal amelioration by taking the opportunity to the corporation.
Section 34 applies if the corporate opportunity of the business opportunity
1.
one which the corporation is financially able to undertake
2.
from its nature, is in line with corporations business and is of practical advantage to it
3.
is one which the corporation has an interest or a reasonable expectancy.
H. Compensation of directors and officers Sec 30, Campos p.705
Section 30. Compensation of directors. In the absence of any provision in the by-laws fixing their
compensation, the directors shall not receive any compensation, as such directors, except for reasonable per
diems: Provided, however, That any such compensation other than per diems may be granted to directors by
the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

special stockholders meeting. In no case shall the total yearly compensation of directors, as such directors,
exceed ten (10%) percent of the net income before income tax of the corporation during the preceding year.
(n)
Rules on Compensation
1. By-laws may provide for a fixed compensation of the memebrs of the BOD
2. If the by-laws does not provide for a compensation, it may be granted to the directors by vote
of the stockholders representing at least a majority of the outstanding capital stock
3. Even if the by-laws does not provide for compensation, the directors are entitled to
reasonable per diems.
4. The total compensation of directors shall not exceed 10% of the net income before income
tax of the corporation during the preceding year.
No Salary
Directors are not entitled to salary. This rule is founded upon a presumption that directors
render services gratuitously and the return upon their shares adequately furnishes the
motive for services without compensation.
Assuming that compensation is intended, only the stockholders and not the directors
themselves may fix the amount thereof. But any stockholders resolution to grant such
compensation can only refer to future and not to past services. (Campos)
Per Diem (allowances of money for expenses each day)
Per diem is limited to pay for a days services.
The power of directors to fix per diems for themselves emanates from the statue itself.
Per diem may vary from year to year provided that it is reasonable.
Limitation
The 10% limit means that compensation can only be given only if there are profits.
Compensation of Officers
Their compensation may be fixed by the board.
CENTRAL COOPERATIVE v TIBE, ET AL
FACTS:
The petitioner is a national federation of farmers' cooperative marketing associations, or FACOMAS,
scattered throughout the country. Under its by- laws "The compensation, if any, and the per diems for
attendance at meetings of the members of the Board of Directors shall be determined by the
members at any annual meeting in special meeting of the Exchange called for the purpose."
In the annual stockholders meeting it was resolved that the members of the Board of Directors
attending the CCE board meetings be entitled to actual transportation expenses plus the per diems of
P30.00 and actual expenses while waiting. In this regard, Tibe collected the said amounts however
the petitioner refused to give on the ground that the resolutions are invalid. The trial court ruled in
favor of Tibe.
ISSUE: Whether or not the resolutions are valid.
RULING: NO. The Court ruled that resolutions are contrary to the By-Laws of the federation and,
therefore, are not within the power of the board of directors to enact. The By-Laws, in the aforequoted
Section 8, explicitly reserved unto the stockholders the power to determine the compensation of
members of the board of directors, and the stockholders did restrict such compensation to "actual
transportation expenses plus the per diems of P30.00 and actual expenses while waiting." Even
without the express reservation of said power, the directors are not entitled to compensation under
the Corporation Code.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

The directors, in assigning themselves additional duties, such as the visitation of FACOMAS, acted
within their power, but, by voting for themselves compensation for such additional duties, they acted
in excess of their authority, as expressed in the By-Laws.
BARRETTO v LA PREVISORIA FILIPINA
FACTS
Alberto Barretto, Jose de Amusategui and Jose Barretto (Barretto et.al.) were directors of La
Previsora Filipina from the time it has been incorporated until March 1929. La Previsora Filipina is a
mutual building and loan association. On February 1929, La Previsora had an amendment in its bylaws which provided for 1% of its net profits to be given to its directors, to wit; Translated. Not sure if I
did it right though. :)
Article 68(a). - In consideration of the valuable services rendered byMessrs. Alberto Barretto,
Ariston de Guzman, Miguel Romualdez, Pedro Mata, Vicente L. Legarda, Alexander Bachrach,
Jose de Amusategui and Jose A. Barreto for free for several years, the Company hereby
agrees and grants to each and every one of these gentlemen, an amount equal to one percent
(1%) of all the net profits of the Company in the year and years in which they stop being a
director of it. Provided, however, that this special remuneration will remain for as long as such
director live, and will cease during the time when the said gentleman becomes a director again
of the Company. As stated,an article of this Constitution is a formal contract between the
Company and each of the above gentlemen, and this agreement may not be modified or
amended only by agreement between the parties.
Barretto et.al. filed a case to recover their share of the 1% granted by the by-laws of La Previsora
for the year 1929 which amounted to P50,727.53.
ISSUE/S: W/N Barretto et.al.are entitled to the compensation granted in the amendment
RULING:NO. The authority conferred upon corporations in section 20of the Corporation Code refers
only to providing compensation for the future services of directors, officers, and employees thereof
after the adoption of the by-law or other provisions in relation thereto, and cannot in any sense be
held to authorize the giving, as in this case, of continuous compensation to particular directors after
their employment has terminated for past services rendered gratuitously by them to the corporation.
Article 68-A of the amended by-laws ofLa Previsora upon which the action is based, does not, under
the law as applied to the express provisions, create any legal obligation on its part to pay to the
persons named therein such a life gratuity or pension out of its net profits. A by-law provision of this
nature must be regarded as clearly beyond the lawful powers of a mutual building and loan
association.
The said by-laws shown on its face that there was no valid consideration for the supposed obligation
mentioned therein. It is clearly an attempt to give in the future to certain directors compensation for
past services gratuitously rendered by them to the corporation. Such a provision is without
consideration, and imposes no obligation on the corporation which can be enforced by action at law.
FOGELSON v AMERICAN WOOLEN, Campos 712-716
FACTS
Two stockholders of American Woolen Company Inc. sued the corporation and four of its directors to
stop them from implementing the proposed "Retirement Income Plan" for the corporation's salaried
employees especially the one that will be granted to the President of the corporation. The proposed
plan fixes the retirement age at 65 and sets up a percentage formula for determining the retirement
income or pension to be paid annually by the corporation to an employee after retirement. This
formula takes into account the employee's salary and length of service both before and after effective
date of the proposed plan.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

The president of the corporation. Mr. Pendleton, will be eligible for retirement on June 1 ,1949 and
under the proposed retirement plan will be entitled to receive an annual pension of 54,220 dollars ( or
2,439,900.00 pesos WOW). Then the plan of the corporation is to give the retirement pay in lump
sum than the ordinary annual payment so Mr. Pendleton will be entitled to 4,657,292 dollars at once
( 2,04,920,848 pesos INSTANT BILLIONAIRE!)
The two stockholders alleges that such pension is "excessive and unconscionable" and the purpose
of giving it by a single payment is to insure the president that he will receive such pension irrespective
of business vicissitudes which may hereafter overtake the corporation. This plan also disregard the
inadequate cash position of the corporation which during 1947 obtained a bank loan of 10,000,000
dollars that still remains unpaid. This also disregard the custom and usage of other companies with
respect to retirement income plans.
The board of directors on the other hand, argued that the proposed plan was decided in the exercise
of their Honest Business Judgment ( Business Judgment Rule/doctrine) and that the majority
stockholders as as the Commissioner of Internal Revenue approved it. The stockholders moved for a
summary judgment and was granted by the Trial court which decided in favor of the corporation
stating that " no colorable reason to disturb the exercise by the directors of their judgment and
discretion in the discharge of their duties".
The sole issue upon the appeal is whether the case should have been sent to trial rather decided
summarily in order to determine if such pension payment is indeed reasonable. It was also raised that
in granting this to the president it is very unique because he will be receiving 54,000 dollars per year
while the employees who is receiving the next largest pension will only get 7,285 per year.
ISSUE: Whether the actions of the directors on grating the retirement pay of the president can be
questioned or not?
RULING: YES, as a general rule in setting up a retirement pension plan the decision of the directors
to fund past services benefits by a single lump-sum payment rather than by installment payments
over a term of years will normally be conclusive. The practice of other companies is not conclusive,
but can be relevant.
However, there is in the case at bar a most starting disparity between the president's pension and that
of even the nearest of the other officers and employees and we should hesitate to hold that the courts
are forbidden to question its justification and accept without investigation the judgment of the
directors. A retirement plan which provides a very large pension to an officer would seem analogous
to a gift or bonus. The size of a bonus may raise a justifiable inquiry as to whether it amounts to
Spoliation of corporate property.
The court admit the valuable consideration of Mr. Pendleton's service for 30 years but the since the
size of a bonus may raise a justifiable inquiry as to whether is amounts to spoliation or waste, the
directors cannot completely and unquestionably protect themselves under the exercise of
proper business judgment rule. The court intimate no opinion as to how to decide this case, but it
should be remanded back to the trial court for trial on the merits.
DOCTRINE: A retirement plan which provides a very large pension to an officer would seem
analogous to a gift or bonus. The size of a bonus may raise a justifiable inquiry as to whether it
amounts
to
Spoliation
of
corporate
property.
I.

Using insider information Sec 27, SRC; Sec 23, SRC, Campos p.725
SEC. 27. Insiders Duty to Disclose When Trading
27.1 It shall be unlawful for an insider to sell or buy a security of the issuer, while in possession of material
information with respect to the issuer or the security that is not generally available to the public, unless: (a)

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

The insider proves that the information was not gained from such relationship; or (b) If the other party selling
to or buying from the insider (or his agent) is identified, the insider proves: (i) that he disclosed the information
to the other party, or (ii) that he had reason to believe that the other party otherwise is also in possession of
the information. A purchase or sale of a security of the issuer made by an insider defined in Subsection 3.8,
or such insiders spouse or relatives by affinity or consanguinity within the second degree, legitimate or
common-law, shall be presumed to have been effected while in possession of material non-public information
if transacted after such information came into existence but prior to dissemination of such information to the
public and the lapse of a reasonable time for the market to absorb such information: Provided, however, That
this presumption shall be rebutted upon a showing by the purchaser or seller that he was l;.not aware of the
material non-public information at the time of the purchase or sale.
27.2 For purposes of this Section, information is material non-public if: (a) It has not been generally
disclosed to the public and would likely affect the market price of the security after being disseminated to the
public and the lapse of a reasonable time for the market to absorb the information; or (b) would be considered
by a reasonable person important under the circumstances in determining his course of action whether to buy,
sell or hold a security.
27.3 It shall be unlawful for any insider to communicate material non-public information about the issuer or the
security to any person who, by virtue of the communication, becomes an insider as defined in Subsection 3.8,
where the insider communicating the information knows or has reason to believe that such person will likely
buy or sell a security of the issuer while in possession of such information.
27.4 a) It shall be unlawful where a tender offer has commenced or is about to commence for:
(i) Any person (other than the tender offeror) who is in possession of material non-public
information relating to such tender offer, to buy or sell the securities of the issuer that are sought or
to be sought by such tender offer if such person knows or has reason to believe that the
information is non-public and has been acquired directly or indirectly from the tender offeror, those
acting on its behalf, the issuer of the securities sought or to be sought by such tender offer, or any
insider of such issuer; and
(ii) Any tender offeror, those acting on its behalf, the issuer of the securities sought or to be sought
by such tender offer, and any insider of such issuer to communicate material non-public
information relating to the tender offer to any other person where such communication is likely to
result in a violation of Subsection 27.4 (a)(i).
(b) For purposes of this subsection the term securities of the issuer sought or to be sought by such tender
offer shall include any securities convertible or exchangeable into such securities or any options or
rights in any of the foregoing securities
SEC. 23. Transactions of Directors, Officers and Principal Stockholders.
23.1 Every person who is directly or indirectly the beneficial owner of more than ten per centum (10%) of any
class of any equity security which satisfies the requirements of Subsection 17.2, or who is a director or an
officer of the issuer of such security, shall file, at the time either such requirement is first satisfied or within ten
days after he becomes such a beneficial owner, director, or officer, a statement with the Commission and, if
such security is listed for trading on an Exchange, also with the Exchange, of the amount of all equity
securities of such issuer of which he is the beneficial owner, and within ten (10) days after the close of each
calendar month thereafter, if there has been a change in such ownership during such month, shall file with the
Commission, and if such security is listed for trading on an Exchange, shall also file with the Exchange, a
statement indicating his ownership at the close of the calendar month and such changes in his ownership as
have occurred during such calendar month.
23.2 For the purpose of preventing the unfair use of information which may have been obtained by such
beneficial owner, director, or officer by reason of his relationship to the issuer, any profit realized by him from

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

10

any purchase and sale, or any sale and purchase, of any equity security of such issuer within any period of
less than six (6) months, unless such security was acquired in good faith in connection with a debt previously
contracted, shall inure to and be recoverable by the issuer, irrespective of any intention of holding the security
purchased or of not repurchasing the security sold for a period exceeding six (6) months. Suit to recover
such profit may be instituted before the Regional Trial Court by the issuer, or by the owner of any security of
the issuer in the name and in behalf of the issuer if the issuer shall fail or refuse to bring such suit within sixty
(60) days after request or shall fail diligently to prosecute the same thereafter, but no such suit shall be
brought more than two (2) years after the date such profit was realized. This subsection shall not be
construed to cover any transaction where such beneficial owner was not such both at the time of the
purchase and sale, or the sale and purchase, of the security involved, or any transaction or transactions
which the Commission by rules and regulations may exempt as not comprehended within the purpose of this
subsection.
23.3 It shall be unlawful for any such beneficial owner, director, or officer, directly or indirectly, to sell any
equity security of such issuer if the person selling the security or his principal: (a) Does not own the security
sold; or (b) If owning the security, does not deliver it against such sale within twenty (20) days thereafter, or
does not within five (5) days after such sale deposit it in the mails or other usual channels of transportation;
but no person shall be deemed to have violated this subsection if he proves that notwithstanding the exercise
of good faith he was unable to make such delivery or deposit within such time, or that to do so would cause
undue inconvenience or expense.
23.4 The provisions of Subsection 23.2 shall not apply to any purchase and sale, or sale and purchase, and
the provisions of Subsection 23.3 shall not apply to any sale, of an equity security not then or thereafter held
by him in an investment account, by a dealer in the ordinary course of his business and incident to the
establishment or maintenance by him of a primary or secondary market, otherwise than on an Exchange, for
such security. The Commission may, by such rules and regulations as it deems necessary or appropriate in
the public interest, define and prescribe terms and conditions with respect to securities held in an investment
account and transactions made in the ordinary course of business and incident to the establishment or
maintenance of a primary or secondary market
J.

Liability for watered stock Sec 65.


Section 65. Liability of directors for watered stocks. Any director or officer of a corporation consenting to the
issuance of stocks for a consideration less than its par or issued value or for a consideration in any form other
than cash, valued in excess of its fair value, or who, having knowledge thereof, does not forthwith express his
objection in writing and file the same with the corporate secretary, shall be solidarily, liable with the
stockholder concerned to the corporation and its creditors for the difference between the fair value received at
the time of issuance of the stock and the par or issued value of the same. (n)
Watered Stocks are stocks that are issued for a consideration less than the par or issued price thereof.
Bonus Stocks are stocks which are issued without any valuable consideration.
Ratio: The prohibition against watered stocks is consistent with the general rule that an agreement between
the corporation and a particular subscriber by which the subscription is not to be payable in part only cannot
be either enforced by the subscriber or interposed as a defense in an action on the subscription.

K. Duty of controlling shareholder Campos 771-772


A majority shareholder is subject to the duty of good faith when he acts by voting at a stockholders meeting
with respect to a matter in which he has a personal interest. This may occur where he votes to ratify voidable
action by the directors or where the transaction is one for which a stockholders vote is necessary like merger,
dissolution, or sale of all the corporate assets.
INSURANSHARES CORP v NORTHERN FISCAL CORP Campos pages 773-780
Background of the case: Insuranshares is an investment trust company, specialising in shares of
small life insurance companies. It brought a suit against its former officers, directors, former

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

11

stockholders, and others, to recover damages it incurred from a sale which led to devaluation of most
of its assets.
FACTS:
The BODs of the corporation comprise entirely of the management group, who owns 75,933 shares
of the corporations total outstanding 284,032 shares. Out of the management group, theres a Boston
group defendants in this case who acquired control of the plenary power under the by-laws to sell,
exchange or transfer all of the securities in the corporation's portfolio, as well as access to and
physical possession of them.
They basically looted the corporation. Immediate and complete passing of control was ensured by the
successive resignation of the old directors, each resignation being followed by the election of a new
member of the board.
The defendants have insisted throughout the case that the transfer was simply a sale of stock, the
passing of control being merely a normal concomitant, and most of their argument was based upon
this premise.
ISSUE: WON the defendants acts were justified considering that such acts have brought detriment to
the financial status of the corporation.
RULING: Such act was fundamentally wrong. The Boston group were interested in only one thing,
namely, to have a free hand with the corporation's portfolio for a few weeks, and all they needed for
that purpose was to be able to name and control the officers and directors.
Perhaps there would have had to have been some modifications in their procedure, but practically
everything they did could have been done without their owning more than directors' qualifying shares.
Assuming then, as I think we must, that what is involved here is primarily a sale of control, it is an
incontrovertible fact that the act of the management group in selling control to the Boston group was
the thing which made possible the latter's criminal operations.
DOCTRINE: Those who control a corporation, either through majority stock ownership, ownership of
large blocks of stock less than a majority, officeholding, management contracts, or otherwise, owe
some duty to the corporation in respect of the transfer of the control to outsiders.
The law has long ago reached the point where it is recognized that such persons may not be wholly
oblivious of the interests of everyone but themselves, even in the act of parting with control, and that,
under certain circumstances, they may be held liable for whatever injury to the corporation made
possible by the transfer. Without attempting any general definition, and stating the duty in minimum
terms as applicable to the facts of this case, it may be said that the owners of control are under a duty
not to transfer it to outsiders if the circumstances surrounding the proposed transfer are such as to
awaken suspicion and put a prudent man on his guard unless a reasonably adequate investigation
discloses such facts as would convince a reasonable person that no fraud is intended or likely to
result.
Thus, whatever the extent of the primary duty may be, circumstances may be sufficient to call into
being the duty of active diligence and inquiry. If, after such investigation, the sellers are deceived by
false representations, there might not be liability, but if the circumstances put the seller on notice and
if no adequate investigation is made and harm follows, then liability also follows.
Justice Kirkpatrick in this case have held that the owners of control of a corporation occupy a fiduciary
relationship to the corporation and its stockholders in respect of the transfer of control and that they
owe a duty of due care a duty in which these defendants failed, with consequent loss to the
corporation.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

12

DISPOSITIVE: The judgment to be entered here will be for the plaintiff generally.
L. Duty to creditors and other stakeholders Campos p780
General Rule: Directors cannot be personally liable to corporate creditors for general inefficient management
of a solvent corporation. Their remedy is against the corporation itself. But when the corporation has become
insolvent, the directors will be deemed trustees of the creditors and should manage its assets with strict
regard to the latters interest.
IX.

Right of Inspection
Read: Campos, Vol 1 Chapter IX, pages 781-818
A. Basis of Right
1. Since stockholders do not directly participate in the management of the business they have
very little knowledge of corporate affairs. As beneficial owners of the business, they have
the right to know not only the financial condition of the corporation but also how the
corporate affairs are being managed by their elected director, so if they find it
unsatisfactory, they may be able to take necessary measures to protect their investment.
2. Right of inspection is preventive and remedial
a) Preventive it may to a limited extend serve as deterrent to an ill-intentioned
management
b) Remedial dissatisfied stockholder may resort to it as a preliminary step to seeking
more direct remedies.
B. Records covered Sec 74; 75
Section 74. Books to be kept; stock transfer agent. Every corporation shall keep and carefully
preserve at its principal office a record of all business transactions and minutes of all meetings of
stockholders or members, or of the board of directors or trustees, in which shall be set forth in detail
the time and place of holding the meeting, how authorized, the notice given, whether the meeting was
regular or special, if special its object, those present and absent, and every act done or ordered done
at the meeting. Upon the demand of any director, trustee, stockholder or member, the time when any
director, trustee, stockholder or member entered or left the meeting must be noted in the minutes; and
on a similar demand, the yeas and nays must be taken on any motion or proposition, and a record
thereof carefully made. The protest of any director, trustee, stockholder or member on any action or
proposed action must be recorded in full on his demand.
The records of all business transactions of the corporation and the minutes of any meetings shall be
open to inspection by any director, trustee, stockholder or member of the corporation at reasonable
hours on business days and he may demand, in writing, for a copy of excerpts from said records or
minutes, at his expense.
Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or
member of the corporation to examine and copy excerpts from its records or minutes, in accordance
with the provisions of this Code, shall be liable to such director, trustee, stockholder or member for
damages, and in addition, shall be guilty of an offense which shall be punishable under Section 144 of
this Code: Provided, That if such refusal is made pursuant to a resolution or order of the board of
directors or trustees, the liability under this section for such action shall be imposed upon the
directors or trustees who voted for such refusal: and Provided, further, That it shall be a defense to
any action under this section that the person demanding to examine and copy excerpts from the
corporations records and minutes has improperly used any information secured through any prior
examination of the records or minutes of such corporation or of any other corporation, or was not
acting in good faith or for a legitimate purpose in making his demand.
Stock corporations must also keep a book to be known as the "stock and transfer book", in which
must be kept a record of all stocks in the names of the stockholders alphabetically arranged; the
installments paid and unpaid on all stock for which subscription has been made, and the date of

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

13

payment of any installment; a statement of every alienation, sale or transfer of stock made, the date
thereof, and by and to whom made; and such other entries as the by-laws may prescribe. The stock
and transfer book shall be kept in the principal office of the corporation or in the office of its stock
transfer agent and shall be open for inspection by any director or stockholder of the corporation at
reasonable hours on business days.
No stock transfer agent or one engaged principally in the business of registering transfers of stocks in
behalf of a stock corporation shall be allowed to operate in the Philippines unless he secures a
license from the Securities and Exchange Commission and pays a fee as may be fixed by the
Commission, which shall be renewable annually: Provided, That a stock corporation is not precluded
from performing or making transfer of its own stocks, in which case all the rules and regulations
imposed on stock transfer agents, except the payment of a license fee herein provided, shall be
applicable. (51a and 32a; P.B. No. 268.)
Section 75. Right to financial statements. Within ten (10) days from receipt of a written request of
any stockholder or member, the corporation shall furnish to him its most recent financial statement,
which shall include a balance sheet as of the end of the last taxable year and a profit or loss
statement for said taxable year, showing in reasonable detail its assets and liabilities and the result of
its operations.
At the regular meeting of stockholders or members, the board of directors or trustees shall present to
such stockholders or members a financial report of the operations of the corporation for the preceding
year, which shall include financial statements, duly signed and certified by an independent certified
public accountant.
However, if the paid-up capital of the corporation is less than P50,000.00, the financial statements
may be certified under oath by the treasurer or any responsible officer of the corporation. (n)
C. Extent of limitations on right
1. Why is limit imposed? Corporation could be harassed, thereby impairing its efficient
operations.
2. Limitations could be imposed as long as it is reasonable and not in violation of law.
1. Limitations as to time and place
a. Time reasonable hours on business days throughout the year. Inspection should not
impede the efficient operations of the corporation
b. Place inspection has to take place in the principal office of the corporation where the
stock transfer book is kept. Corporate books cannot be taken outside principal office for
inspection
2. Purpose should inspection be material? Can corporation refuse inspection?
a. The presumption is that his purpose for inspecting is proper and material and the
corporation cannot refuse to grant hi the right on its mere belief that his motive is
improper, otherwise their refusal will make them liable for damages.
b. The burden of proving that the purpose is improper or illegal is with the corporation and
its officers.
c. Legitimate purpose germane to the interest of the stockholders as such and not
contrary to the interests of the corporation.
d. Writ of Mandamus proper remedy available for the enforcement of the right of
inspection. But it should only be granted only if the court is satisfied that justice so
requires.
D. Liability for refusal Sec. 74

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

14

GOKONGWEI v SEC ET AL
FACTS:
1. On 22 October 1976, petitioner John Gokongwei, Jr. (Gokongwei for brevity), as a stockholder of
respondent San Miguel Corporation (SMC for brevity), filed with the Securities and Exchange
Commission (SEC for brevity) a petition for declaration of nullity of amended by-laws,
cancellation of certificate of filing of amended by-laws, injunction and damages with prayer for
preliminary injunction against the majority of the members of the Board of Directors and San
Miguel Corporation as an unwilling petitioner.
2. The amended by-laws allegedly, in contravention of the law, disqualified Gokongkwei from a
vested right, as a company stockholder, of running for a position in the Board of Directors of
SMC.
3. On 28 October 1976, in connection with the same case, Gokongwei filed with the SEC an Urgent
Motion for Production and Inspection of Documents, alleging that the Secretary of SMC refused
to allow him to inspect its records despite request made by Gokongwei for production of certain
documents enumerated in the request, and that SMC had been attempting to suppress
information from its stockholders despite a negative reply by the SEC to its query regarding their
authority to do so.
4. Among the documents requested to be copied were:
a. Minutes of the stockholders meeting filed on 13 March 1961;
b. Copy of the management contract between SMC and A. Soriano Corporation (ANSCOR
for brevity);
c. Latest balance sheet of San Miguel International, Inc.;
d. Authority of stockholders to invest the funds of SMC in San Miguel International, Inc.; and
e. Lists of salaries, allowances, bonuses, and other compensation, if any, received by
Andres M. Soriano, Jr. and/or its successor-in-interest.
5. The Urgent Motion for Production and Inspection of Documents was opposed by respondents,
alleging, among others that the motion has no legal basis; that the demand is not based on good
faith; that the motion is premature since the materiality or relevance of the evidence sought
cannot be determined until the issues are joined, that it fails to show good cause and constitutes
continued harassment, and that some of the information sought are not part of the records of the
corporation and therefore, privileged.
6. On 29 December 1976, the SEC resolved the motion for production and inspection of documents
by issuing Order No. 26, Series of 1977:
a) SMC must produce and permit inspection, copying, and photographing, by or on behalf of
Gokongwei of the minutes of the stockholders meeting of SMC held on 13 March 1961,
which are in the possession, custody, and control of the said corporation. Such appears
to be material and relevant to the issues involved in the main case. This must be
undertaken under the direct and strict supervision of the Commission. Other documents
and/or papers not heretofore included are not covered by this Order and any inspection
thereof shall require the prior permission of this Commission.
b) DENIED inspection of documents: Balance Sheet of San Miguel International, Inc., List of
salaries, allowances, bonuses, compensation and/or remuneration received by respondent Jose
M. Soriano, Jr. and Andres Soriano from San Miguel International, Inc., and/or its successors-ininterest.
c) Gokongwei withdrew his request to copy and inspect the management contract between SMC
and ANSCOR.
d) Finally, the Commission holds in abeyance the resolution on the matter of production and
inspection of the authority of the stockholders of SMC to invest the funds of respondent
corporation in San Miguel International, Inc., until after the hearing on the merits of the principal
issues in the main case.
ISSUE: As a stockholder of San Miguel Corporation, is John Gokongwei, Jr. entitled to the examination of
the records he requested?

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

15

RULING: YES. Pursuant to the second paragraph of section 51 of the Corporation Law, (now section 74
of the Corporation Code), the record of all business transactions of the corporation and minutes of any
meeting shall be open to the inspection of any director, member or stockholder of the corporation at
reasonable hours.
The stockholders right of inspection of the corporations books and records is based upon their ownership
of the assets and property of the corporation. It is, therefore, an incident of ownership of the corporate
property, whether this ownership or interest be termed an equitable ownership, a beneficial ownership, or
a quasi-ownership. This right is predicated upon the necessity of self-protection. It is generally held by
majority of the courts that where the right is granted by statute to the stockholder, it is given to him as
such and must be exercised by him with respect to his interest as a stockholder and for some purpose
germane thereto or in the interest as a stockholder, and has to be proper and lawful in character and not
inimical to the interest of the corporation.
REGARDING DOCUMENTS IN RELATION TO SAN MIGUEL INTERNATIONAL, INC.: While the right of
a stockholder to examine the books and records of a wholly owned subsidiary of the corporation in which
he is a stockholder is a different thing.
In the case at bar, considering that the foreign subsidiary is wholly owned by respondent SMC and,
therefore, UNDER ITS CONTROL, it would be more in accord with equity, good faith and fair dealing to
construe the statutory right of petitioner as stockholder to inspect the books and records of the
corporation, as extending to books and records of such wholly owned subsidiary which are in SMCs
possession and control.
DOCTRINE: Stockholders have the right of inspection of the corporations books and records, based on
their ownership of the assets and property of the corporation, and as well as necessitated by the principle
of self-protection.
DISPOSITVE: In resume, subject to the qualifications aforestated, judgment is rendered GRANTING the
petition by allowing the petitioner to examine the books and records of San Miguel International, Inc. as
specified in the petition.
REPUBLIC v SANDIGANBAYAN
FACTS:
1. In two separate instances, private respondent, Eduardo Cojuangco, Jr., (Conjuangco for brevity)
in his capacity as a stockholder for both the United Coconut Planters Bank (UCPB) and San
Miguel Corporation (SMC) requested for corporate records. These requests were denied and thus
the following cases were instituted.
a. G.R. No. 88809:
On 26 December 1988, Cojuangco requested the SMC and its corporate secretary for the
production, inspection, examination/verification and/or photocopying of the SMC
corporate records to inform him of the decisions, policies, acts, and performance of the
management of the SMC under the PCGG-Board.
Since the shares of private respondent in the SMC have been sequestered by the PCGG
(Philippine Commission on Good Government), SMC sought the advice of PCGG on the
effect of such sequestration. Cojuangco was later on informed by the SMC that all
requests for the examination, inspection, and photocopying of its corporate records
should be coursed through the PCGG.
b. G.R. No. 88858:
Cojuangco sought authority to inspect and examine the corporate records of UCPB.
c. The request of Conjuangco for the inspection/examination of SMCs corporate records was
denied by the PCGG. As regards the corporate records of UCPB, Cojuangco was likewise
advised to course his request through the PCGG.
2. The Sandiganbayan, in both cases, decided in favor of Cojuangco and in separate resolutions,
allowed Cojuangco to inspect the corporate records of SMC and UCPB.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

16

3. Hence, the instant petitions for certiorari with prayer for the issuance of temporary restraining
orders. On 13 June 1989, and 20 July 1989m the Court issued a temporary restraining order in
G.R. Nos. 88809 and 88858, respectively.
ISSUES:
1. Does sequestration automatically deprive a stockholder of his right of inspection?
2. Did Cojuangco have the right to inspect and examine the corporate records of UCPB and SMC in
his capacity as a stockholder of both companies?
RULING:
1. NO, the PCGG does not become, ipso facto, the owner of the shares just because the same have been
sequestered; nor does it become the stockholder of record by virtue of such sequestration.
The Court also ruled in the case of Conjuangco, Jr., et. al. v. Roxas et. al, that the PCGG cannot vote the
sequestered shares of a private respondent.
There is therefore more reason that PCGG cannot restrain or prevent private respondent, as stockholder
from inspecting the corporate records of the SMC and the UCPB at reasonable hours on business days.
The law grants respondent/stockholder such authority.
2. YES.
CONTENTION of PETITIONER: (The petitioner in this case argues that the requests of Cojuangco may
be validly refused pending judicial determination of respondents sequestered shares, in that, were they
ill-gotten or not? It is further argued that Cojuangcos purpose in examining the corporate records of SMC
and the UCPB is merely to satisfy his curiosity regarding the performance of said corporations.)
The right of a stockholder to inspect and/or examine the records of a corporation is explicitly provided in
Section 74 of the Corporation Code, which reads (partly):
xxx
The records of business transactions of the corporation and the minutes of any meeting shall be open to
the inspection of any director, trustee, stockholder or member of the corporation at reasonable hours on
business days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his
expense.
Records indicate that Cojuangco is the ostensible owner of a substantial number of shares and is a
stockholder of record in SMC and UCPB. Being a stockholder beyond doubt, there is therefore no reason
why Cojuangco may not exercise his statutory right of inspection in accordance with Section 74 of the
Corporation Code.
There are only 3 express limitations to this statutory right:
1. It should be exercised at reasonable hours on business days;
2. The person demanding to examine and copy excerpts from the corporations records and minutes
has not improperly used any information secure through any previous examination of the records
of such operation;
3. The demand is made in good faith or for a legitimate purpose.
The PCGG cannot unilaterally deny a stockholder from exercising his statutory right of inspection based
on an unsupported and naked assertion tat private respondents motive is improper or merely for curiosity
or on the ground that the stockholder is not in friendly terms with the corporations officers. PCGG failed
to discharge the burden of proof to show that Cojuangcos action was moved by unlawful or ill-motivated
designs, which could appropriately call for a judicial protection against the exercise of such right.
DOCTRINE: The sequestration of shares does not automatically deprive a stockholder of his right to
inspection. He is still the ostensible owner of such shares and thus may exercise said right in view of the

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

17

fact that it is an incident of ownership of the corporate property, whether this ownership or interest be
termed an equitable ownership, a beneficial ownership, or a quasi-judicial ownership.
DISPOSITIVE: IN VIEW OF THE FOREGOING, the Court Resolved to DISMISS the instant petition for
lack of merit. The temporary restraining orders issued are hereby LIFTED and SET ASIDE. This
Resolution is immediately executor.
X.

Derivative Suits
Campos, Vol.1, Chapter X
A. Nature and basis Campos, pages 819-820
1. Suits by stockholders or members of a corporation based on wrongful or fraudulent acts of
directors or other persons may be individual, class or derivative suits
2. Individual suit the wrong is done to the stockholder personally and not to other
stockholders or the corporation (stockholder is denied the right of inspection)
3. Class suit the wrong is done to a group of stockholders (preferred stockholders rights are
violated)
4. Derivative suit the right of the stockholder on behalf of the corporation. It is proven to be
an effective remedy of the minority against abuses of management.
5. An individual is permitted to institute a derivative suit on behalf of the corporation wherein
he holds stock in order to protect or vindicate corporate rights, whenever officials of the
corporation refuse to sue or are the ones to be sued or hold the control of the corporation.
a) Suing stockholder is called nominal party
b) Corporation is the party in interest.
B. Requirements Campos, pages 820-824
1. Stockholder or member bring the suit must have exhausted his remedies within the
corporation (made a demand on the directors or trustees to sue and the latter have either
failed or refused to do so)
2. Stockholder or member must have been one at the time the transaction or act complained
of took place, or in the case of the stockholder, the shares must have devolved upon him
since by operation of law, unless such transaction or act continues and is injurious to the
stockholders.
3. Any benefit recovered by the stockholder or member as a result of the bringing of derivative
suit, whether by final judgment, judicial compromise or by extra judicial settlement, must be
accounted for to the corporation, who is the real party in interest
4. If the suit is successful, the plaintiff is entitled to reimbursement from the corporation for the
reasonable expenses of litigation, including attorneys fees.
PASCUAL v OROZCO
FACTS:
1. Banco Espaol-Filipino is a banking corporation, constituted as such by royal decree of the
Crown of Spain in the year 1854. Being regarded as a quasi-public institution, the CaptainGeneral of the Philippine Islands was its protector and supreme head. To him belonged the power
to appoint its directors and other managing officers, remove them from office for cause, fix the
rate of interest demandable by the bank, resolve all doubts and controversies relating to its
management, and finally exercise, as representative of Her Majestys Government, the powers
that the laws give him respecting public establishment protected and privileged.
2. These directors of the board are entitled to compensation limited to the following:
After deducting all the expenses of its administration and the part, if any, which
corresponds to the legal reserve fund, there shall be a part 10% for the directors, 5% for
the board of government. The 85% remaining shall belong to the shareholders pro rata
the number of shares owned by each.
3. There are two causes of actions present in this case.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

18

a. FIRST: During the years 1903, 1904, 1905, and 1907, Eugenio del Saz Orozco along with
other defendants, without the knowledge, consent or acquiescence of the stockholders,
deducted their respective compensation from the gross income instead of the net profits of
the Banco Espaol-Filipino. They defrauded the bank and its stockholders of approximately
P20,000.00 per annum.
b. SECOND: The immediate predecessors in office of the defendants in the first cause of action
committed the same illegality in the years 1899, 1900, 1901, and 1902.
4. The defendants in this case also constitute a majority of the present board of directors, who alone
can authorize an action against them in the name of the corporation, and that prior to the filing of
the present suit; plaintiff Candido Pascual exhausted every remedy in the premises within the
banking corporation.
5. This action was brought by the plaintiff Pascual, in his own right as a stockholder of the bank, for
the benefit of the bank, and all the other stockholders thereof. The plaintiff sues on behalf of the
corporation, which, even though nominally a defendant, is for all intents and purposes, the real
plaintiff in this case.
ISSUE: Whether or not a stockholder can maintain a suit of this character?
RULING: YES, as regards the first cause of action but not the second.
In a suit such as this, the allegedly guilty parties are usually the ones in control of the company, more
often than not being in the board of directors. Taking cognizance of a proper case is important as that the
minority be given standing in court for the purpose of taking up the cause of the corporation, and, in its
name and stead of bringing the guilty parties to be held accountable for their actions.
Now, there are two requisites that must be complied with before a suit of this kind may be allowed to
prosper:
1. That the party-filing suit must be a stockholder at the time of the transactions complained of, or
whose shares had devolved upon him, since, by operation of law.
2. It is equally important that before the shareholder is permitted, in his own name, to institute and
conduct a litigation which usually belongs to the corporation, he should show to the satisfaction of
the court that he has exhausted all the means within his reach to attain within the corporation
itself, the redress of his grievances, or action in conformity to his wishes. He must make an
earnest, not a simulated effort, with the managing body of the corporation, to induce remedial
action on their part, and this must be made apparent to the court.
It is self-evident in this case that plaintiff was not, before he acquired in September 1903, the shares
which he now owns, injured or affected in any manner by the transactions set forth in the second cause of
action.
DOCTRINE: As a matter of substantive law, that a stockholder in a corporation who was not such at the
time of the transactions complained of, or whose shares had not devolved upon him since, by operation of
law, can not maintain suits of this character, unless such transactions continue and are injurious to the
stockholder, or affect him especially and specifically in some other way.
DISPOSITIVE: The first cause of action was allowed to continue but the second one was not.
EVERETT v ASIA BANKING CORPORATION
FACTS:
Defendant, Asia Banking Corporation herein called the Bank, was a foreign banking corporation duly
licensed to transact business in the Philippines, having its principal office and place of business at Manila.
Asia Banking Corporation was never been empowered by law or licensed to do any business other than
commercial banking. Defendants Mullen, Kelly, Mears and Macintosh were residents of Manila and were
officers, agents, and employees of the Bank

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

19

At the time of the complaint, Teal and Company herein called the Company, was a domestic corporation
duly incorporated under the laws of the Philippines and having its principal office and place of business in
Manila. Plaintiffs Everett, Clifford, Teal and Robinson were the principal stockholders in the Company and
that defendant Barclay was the only other stockholder.
The business of the Company was in the merchandising of automobiles, tractors, spare parts,
accessories and repairing. The Company was in the enjoyment of a large, growing, and lucrative
business and in the possession of a valuable reputation and good-will. Since its organization, the
Company has done its banking business and financing almost exclusively with the Bank and because of
this, trust and confidence in the integrity was established between the Bank and the Company.
The Company was indebted to the Bank, the sum of P750,000, which was secured by mortgage on its
personal property and the improvements upon the real estate it occupied, which was held under a ninetynine years lease upon very favorable terms and which lease was a valuable asset and constantly
increasing in value,
By reason of good faith and good will of the defendants, the plaintiffs were induce to sign the MOA and
VTA, understanding from the defendant that the same were intended for the protection of all parties from
outside creditors, but that they did not intended to be enforced according to the letter thereof, and that
they did not contain the true agreement between the Bank and the Company which was to finance the
company without interference from the creditors, to hold a voting trust as a protection to the bank as
against the creditors and for its own advances, and an agreement that in case the Bank did not operate
under the voting trust, the said trust would be cancelled and the stock in the control of the Company
returned to its true owners.
After the execution and delivery of the voting trust and memorandum of agreement, in violation of the
obligations and duties imposed by law upon the trustee and in pursuance of a scheme to defraud these
plaintiffs, Defendant Mullen caused and procured by virtue of the powers delegated in the voting trust, the
displacement and removal from the BOD of the Company each and every person who was at the time of
execution of the voting trust a stockholder in the Company and as their replacements were the
defendants.
After excluding the real owners from voice in the management or knowledge of the affairs of the
Company, the defendants and or the Bank by agreement among themselves or because the defendants
as employees were coerced by the Bank, the said defendants gave pledges and mortgages from the
Company to the Bank and entered into contracts as directed by the Bank, and permitted the Bank to
foreclose the same and to sell the property of the Company at such times and in such manners as to be
solely to the interests of the Bank, and wholly without regard to the best interests of the Company itself in
disregard to the duties and obligations of a trustee, and permitted the Bank to bring suits or suits against
the Company, in which the Company was not represented by anyone having its interest at heart and in
which by reason of the above set forth relation of the Company to the Bank, the Bank in truth occupied
the position of both plaintiff and defendant and tricked and deluded the courts into giving judgments in
which the rights of the real parties were concealed and unknown to the courts.
In order to more effectually plunder the Company and to defraud these plaintiffs the said defendants,
Mullen, Barclay, Mears and Macintosh, made, executed and filed in the Bureau of Commerce and
Industry of the Philippine Islands, articles of incorporation of a corporation called the "Philippine Motors
Corporation.
The Bank turned over to the Philippine Motors Corporation all of the business and assets of the Company
of every name, nature and description and with the connivance and consent of the defendants acting in
their double capacity as directors of both corporations, permitted and assisted Philippine Motors
Corporation to enter and possess itself of the premises and good will of the Company and to continue and
carry on the business for the sole benefit of the new corporation and to collect the debts owing to the

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

20

Company and convert the advantages, profits and proceeds thereof to itself. At all times since the said
Philippine Motors Corporation has continued to conduct and advantage itself of the business of the
Company to the disregard of and detriment to the rights of these plaintiffs and to their damage.
These plaintiffs are credibly informed and verily believe that the defendants are now confabulating among
themselves further to conceal the facts and to damage these plaintiffs by a sale of the Philippine Motors
Corporation and all its assets tangible and intangible to a new purchaser, in which new purchaser the said
defendants will have interests, and that in case such sale should be made it will damage these plaintiffs in
a manner for which there is no adequate remedy and will cause and produce a multiplicity of actions.
ISSUE: WON plaintiffs has the legal capacity to bring the action
RULING: YES. Invoking the well-known rule that shareholders cannot ordinarily sue in equity to redress
wrongs done to the corporation, but that the action must be brought by the Board of Directors, the
appellees argue, and the court below held, that the corporation Teal and Company is a necessary party
plaintiff and that the plaintiff stockholders, not having made any demand on the Board to bring the action,
are not the proper parties plaintiff. But, like most rules, the rule in question has its exceptions. It is alleged
in the complaint and, consequently, admitted through the demurrer that the corporation Teal and
Company is under the complete control of the principal defendants in the case, and, in these
circumstances, it is obvious that a demand upon the Board of Directors to institute an action and
prosecute the same effectively would have been useless, and the law does not require litigants to perform
useless acts.
The conclusion of the court below that the plaintiffs, not being stockholders in the Philippine Motors
Corporation, had no legal right to proceed against that corporation in the manner suggested in the
complaint evidently rest upon a misconception of the character of the action. In this proceeding it was
necessary for the plaintiffs to set forth in full the history of the various transactions which eventually led to
the alleged loss of their property and, in making a full disclosure, references to the Philippine Motors
Corporation appear to have been inevitable. It is to be noted that the plaintiffs seek no judgment against
the corporation itself at this stage of the proceedings.
In our opinion the plaintiffs state a good cause of action for equitable relief and their complaint is not in
any respect fatally defective. The judgment of the court below is therefore reversed, the defendants
demurrer is overruled, and it is ordered that the return of the record to the Court within ten days from the
return of the record to the Court of First Instance.
LIKEN v SHAFFER, Campos pages 835-840
FACTS:
1. Stockholders of Shores Mueller Co (SMC) claim wrongdoing (despoil the SMC of its assets) on
the part of the defendants in connection with the affairs of the corporation.
2. SMC-corporation organized under the laws of the state of Iowa, engaged in manufacturing
pharmaceuticals and other products in Iowa.
3. 1933- SMCs assets were sold at a receivers sale by Arthur Barlow, who was appointed receiver
for the corporation.
4. Stockholders of the SMC claim that some of them are also voting stock trustees of a large
amount of stock in the corporation; that defendants despoiled SMC of its assets by means of
collusive and fraudulent means and; that as part of the fraudulent scheme, defendants caused
Shores Company to be organized and that latter has assets which the SMC was despoiled of.
5. Shores Company was owned by some of the individual defendants
6. It appears that Barlows receivership had long been terminated, and that no stockholder or
directors meeting was held since.
ISSUE: WON the corporation has the right of action against those managing it for the wrongful acts done
which caused the corporation losses.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

21

RULING: YES. Stockholders may file a derivative suit.


An unlawful diversion of the funds of the corporation is an injury to the corporation, so stockholders may
maintain an action against the directors. However, such is for the benefit of the corporation, not the
individual.
A derivative suit is to all intents and purposes, the suit of the corporation. The action was instituted for the
benefit of the corporation and so the relief couldve been granted to no other.
The fact that stockholders owns all or majority of the stocks in a corporation doesnt permit him to sue as
an individual for the wrong done to the corporation. There are only situations where a stockholder may
bring direct action in connection to corporate matters:
1. Where the wrong committed were not only injuries to the corporation, but are violations
by the wrongdoer of a duty arising from a contract (stockholder must prove that request
was made on the corporation, but it refused)
2. Where the wrongdoing on the part of those in control does not work an injury to the
corporation, but does to minority stockholders
3. Where those despoiling a corporation have as a part of the wrongdoing destroyed the
corporate entity of the wronged corporation
DOCTRINE:
Appointment of a receiver doesnt result in the dissolution of the corporation, so a stockholders derivative
suit may be brought against directors even though a corporation is in receivership.
Stockholders derivative suit where recovery is allowed, judgment is entered in favor of the corporation.
General Rule: No direct proportionate recoveries in a stockholders derivative suit because recovery is an
asset of the corporation, its creditors have first claim upon it. So, to award such recovery directly to
stockholders may cause fraud.
A Stockholder who brings a suit isnt the real plaintiff; he is merely the instigator of the action (those who
set the judicial machinery in motion in behalf of the corporation)
EVANGELISTA v SANTOS
FACTS:
This is an action by the minority stockholders of a corporation against its principal officer for damages
resulting from his mismanagement of its affairs and misuse of its assets.
Plaintiffs are minority stockholders of the Vitali Lumber Company, Inc., a Philippine corporation organized
for the exploitation of a lumber concession in Zamboanga, Philippines. Defendant holds more than 50% of
the stocks of said corporation and also is and always has been the president, manager, and treasurer.
That defendant through fault, neglect, and abandonment allowed its lumber concession to lapse and its
properties and assets, among them machineries, buildings, warehouses, trucks, etc., to disappear, thus
causing the complete ruin of the corporation and total depreciation of its stocks.
The complaint therefore prays for judgment requiring defendant: (1) to render an account of his
administration of the corporate affairs and assets: (2) to pay plaintiffs the value of their respective
participation in said assets on the basis of the value of the stocks held by each of them; and (3) to pay the
costs of suit.
The complaint does not give plaintiffs' residence, but, but purposes of venue, alleges that defendant
resides at 2112 Dewey Boulevard, corner Libertad Street, Pasay, province of Rizal. Served with summons
at that place, defendant filed a motion for the dismissal of the complaint on the ground of improper venue
and also on the ground that the complaint did not state a cause of action in favor of plaintiffs.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

22

Lower Court granted the motion for dismissal upon the two grounds alleged by defendant, and
reconsideration of Plaintiff denied. Hence, this appeal.
ISSUES:
1. WON the case was filed in the proper venue.
2. WON the Plaintiffs has the right to bring this action for their benefit.
RULING:
1. NO. Plaintiffs brought their action in CFI Rizal, believing that defendant resided in said province. But LC
found after hearing that defendant had his residence in Iloilo which was based on defendant's sworn
statement not rebutted by any proof to the contrary. Fact that defendant was sojourning in Pasay at the
time he was served with summons does not make him a resident of that place for purposes of venue.
2. NO. Defendant's maladministration has brought about the ruin of the corporation and the consequent
loss of value of its stocks. Injury is primarily to the corporation, so that the suit for the damages claimed
should be by the corporation rather than by the stockholders. The stockholders may not directly claim
those damages for themselves for that would result in the appropriation by, and the distribution among
them of part of the corporate assets before the dissolution of the corporation and the liquidation of its
debts and liabilities, something which cannot be legally done in view of section 16 of the Corporation Law,
which provides:
No shall corporation shall make or declare any stock or bond dividend or any dividend whatsoever from
the profits arising from its business, or divide or distribute its capital stock or property other than actual
profits among its members or stockholders until after the payment of its debts and the termination of its
existence by limitation or lawful dissolution.
Plaintiff stockholders have brought the action not for the benefit of the corporation but for their own benefit
(they ask that the defendant pay to them the value of their respective participation in the corporate assets
on the basis of their respective holdings). This cannot be done until all corporate debts, if there be any,
are paid and the existence of the corporation terminated by the limitation of its charter or by lawful
dissolution in view of the provisions of section 16 of the Corporation Law.
DOCTRINE: If the officers of the corporation, who are the ones called upon to protect their rights, refuse
to sue, or where a demand upon them to file the necessary suit would be futile because they are the very
ones to be sued or because they hold the controlling interest in the corporation, then in that case any one
of the stockholders is allowed to bring suit. But in that case it is the corporation itself and not the plaintiff
stockholder that is the real property in interest, so that such damages as may be recovered shall pertain
to the corporation. In other words, it is a derivative suit brought by a stockholder as the nominal party
plaintiff for the benefit of the corporation, which is the real property in interest.
DISPOSITIVE: Defendant won. Order appealed from is therefore affirmed, the objection to the venue was
correctly sustained by the LC. But without prejudice to the filing of the proper action in which the venue
shall be laid in the proper province.
REPUBLIC v CUADERNO
FACTS
Damaso Perez, a stockholder of the Republic Bank, a Philippine banking corporation domiciled in Manila,
instituted a derivative suit for and in behalf of said Bank, against Miguel Cuaderno, Bienvenido Dizon, the
Board of Directors of the Republic Bank, and the Monetary Board of the Central Bank of the Philippines.
Damaso had complained to the Monetary Board of the Central Bank against certain frauds allegedly
committed by defendant Pablo Roman, in that being chairman of the Board of Directors of the Republic
Bank, and of its Executive Loan Committee, in 1957 to 1959, "in grave abuse of his fiduciary duty and
taking advantage of his said positions and in connivance with other officials of the Republic Bank", Roman

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

23

had fraudulently granted or caused to be granted loans to fictitious and non-existing persons and to their
close friends, relatives and/or employees, who were in reality their dummies, on the basis of fictitious and
inflated appraised values of real estate properties; that said loans amounted to almost 4 million pesos;
that acting upon the complaint, Miguel Cuaderno (then Governor of the Central Bank) and the Monetary
Board ordered an investigation, which was carried out by Bank Examiners; that they and the
Superintendent of Banks of the Central Bank reported that certain mortgage loans amounting to
P2,303,400.00 were granted in violation of sections 77, 78 and 88 of the General Banking Act.
The complaint expressly pleads that the appointment of Cuaderno as technical consultant, and of
Bienvenido Dizon to head the Board of Directors of the Republic Bank, were made only to shield Pablo
Roman from criminal prosecution and not to further the interests of the Bank, and avers that both men are
Roman's alter egos.
The CFI-Manila dismissed the complaint, hence, this petition.
ISSUES:
1. WON Damaso, as stockholder of Republic Bank, has standing to bring the derivative suit?
2. WON the Corporation (Republic Bank) should be made party plaintiff or defendant? (Procedural
question)
RULING:
1. YES. Defendants controvert the right of Damaso as stockholder to question the appointment and
selection of defendants Cuaderno and Dizon, which they contend to be the result of corporate acts with
which plaintiff, as stockholder, cannot interfere. Normally, this is correct, but Philippine jurisprudence is
settled that an individual stockholder is permitted to institute a derivative or representative suit on behalf
of the corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever the
officials of the corporation refuse to sue, or are the ones to be sued or hold the control of the corporation.
In such actions, the suing stockholder is regarded as a nominal party, with the corporation as the real
party in interest. In the case at bar, if the questioned appointments were made solely to protect Roman
from criminal prosecution, by a Board composed by Roman's creatures and nominees, then the moneys
disbursed in favor of Cuaderno and Dizon would be an unlawful wastage or diversion of corporate funds,
since the Republic Bank would have no interest in shielding Roman, and the directors in approving the
appointments would be committing a breach of trust; the Bank, therefore, could sue to nullify the
appointments, enjoin disbursement of its funds to pay them, and recover those paid out for the purpose,
as prayed for in the complaint in this case
2. EITHER. What is important is that the corporation' should be made a party, in order to make the
Court's judgment binding upon it, and thus bar future relitigation of the issues. On what side the
corporation appears loses importance when it is considered that it lay within the power of the trial court to
direct the making of such amendments of the pleadings, by adding or dropping parties, as may be
required in the interest of justice (Revised Rule 3, sec. 11). Misjoinder of parties is not a ground to dismiss
an action. (NOTE: The English practice is to make the corporation a party plaintiff, while in the United
States, the usage leans in favor of its being joined as party defendant.)
DOCTRINE:
1. An individual stockholder is permitted to institute a derivative or representative suit on behalf of the
corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever the officials
of the corporation refuse to sue, or are the ones to be sued or hold the control of the corporation. In such
actions, the suing stockholder is regarded as a nominal party, with the corporation as the real party in
interest.
2. The corporation should be made a party, whether as party plaintiff or defendant, in order to make the
Court's judgment binding upon it, and thus bar future relitigation of the issues.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

24

DISPOSITIVE: Stockholder Damaso won. Case was remanded to lower court for trial and hearing of the
case on the merits.
REYES v TAN
FACTS:
The corporation, Roxas-Kalaw Textile Mills, Inc., was organized on June 5, 1954 by defendants Cesar K.
Roxas, Adelia K. Roxas, Benjamin M. Roxas, Jose Ma. Barcelona and Morris Wilson, for and on behalf of
the following primary principals with the following shareholdings: Adelia K. Roxas, 1200 Class A shares; I.
Sherman, 900 Class A shares; Robert W. Born, 450 Class A shares and Morris Wilson, 450 Class A
shares; that the respondent holds both Class A and Class B shares and number and value thereof are is
follows: Class A 50 shares, Class B 1,250 shares.
On May 8, 1957, the Board of Directors approved a resolution designating one Dayaram as co-manager
(to act as defendant Wadhumal Dalamal's designee) and Morris Wilson was likewise designated as comanager with responsibilities for the management of the factory only. An office in New York was opened
for the purpose of supervising purchases, which purchases must have the unanimous agreement of
Cesar K. Roxas, New York resident member of the board of directors, Robert Born and Wadhumal
Dalamal or their respective representatives. Several purchases aggregating $289,678.86 were made in
New York for raw materials (greige cloth, rayon and grey goods for the textile mill) and shipped to the
Philippines, which shipment were found out to consist not of raw materials but already finished products
(West Point Khaki rayon suiting materials dyed in the piece, finished rayon tafetta in cubes, cotton
eyelets, etc.), for which reasons the Central Bank of the Philippines stopped all dollar allocations for raw
materials for the corporation which necessarily led to the paralyzation of the operation of the textile mill
and its business.
The supplier of the aforesaid finished goods was the United Commercial Company of New York in which
defendant Dalamal had interests and the letter of credit for said goods were guaranteed by the Indian
Commercial Company and the Indian Traders in which firms defendant Dalamal likewise held interests;
that the resale of the finished goods was the business of the Indian Commercial Company of Manila,
which company could not obtain dollar allocations for importations of finished goods under the Central
Bank regulations; that plaintiff and some members of the board of directors urged defendants to proceed
against Dalamal, exposing his offense to the Central Bank, and to initiate suit against Dalamal for his
fraud against the corporation; that defendants refused to proceed against Dalamal and instead continued
to deal with the Indian Commercial Company to the damage and prejudice of the corporation. The prayer
asks for the appointment of a receiver and a judgment marking defendants jointly and severally liable for
the damages. Court appointed a receiver for the protection of the minority shareholders.
ISSUES: Whether or not a derivative suit will prosper.
RULING: NO. The claim that respondent Justiniani (Treasurer) did not take steps to remedy the illegal
importation for a period of two years is without merit. During that period of time respondent had the right
to assume and expect that the directors would remedy the anomalous situation of the corporation brought
about by their own wrong doing. Only after such period of time had elapsed could respondent conclude
that the directors were remiss in their duty to protect the corporation property and business. The fraud
consisted in importing finished textile instead of raw cotton for the textile mill; the fraud, therefore, was
committed by the manager of the business and was consented to by the directors, evidently beyond reach
of respondent as treasurer for that period.
The directors permitted the fraudulent transaction to go unpunished and nothing appears to have been
done to remove the erring purchasing managers. In a way the appointment of a receiver may have been
thought of by the court below so that the dollar allocation for raw material may be revived and the textile
mill placed on an operating basis.
CHASE v CFI MANILA

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

25

FACTS:
On August 20, 1960, Elton Chase, a minority stockholder of AMPARTS, filed a derivative suit in the Court
of First Instance of Manila against Buencamino et.al., majority stockholders and corporate directors of
AMPARTS charging them with breach of trust; praying for their removal as directors and, if necessary, for
the dissolution and liquidation of said corporation. Attached to the complaint was an application for the
appointment of a receiver of AMPARTS.
Buencamino et.al. opposed the application for receivership. After a hearing on the application, the court
issued an order dated June 10, 1961 denying the same, but requiring Buencamino et.al to file bond in the
amount of P100,000.00 to answer for whatever damages Chase might suffer by reason of the denial.
Chase's motion for reconsideration was denied.
After trial on the merits, the court rendered judgment finding Dr. Victor Buencamino guilty of
mismanagement and condemning him to pay AMPARTS P1,970,200 with legal interest from date of the
filing of the complaint; he is also prohibited from collecting any interest on the sum of P300,000.00 paid by
him on the 15th July, 1955 on the initial subscription, and such interest as has already been paid to him is
ordered refunded with legal interest from the date of the filing of the complaint.
On May 8, 1962, Chase filed a motion for the appointment of Lawrence Moran as receiver of Amparts
until the full amount of the above judgment against Buencamino is fully satisfied or until the dissolution or
liquidation of said corporation.
On May 12, 1962, the Court issued an order giving Chase free access to AMPARTS and its records
personally and/or through representative duly authorized and that decisions of Dr. Buencamino and/or
management of AMPARTS shall be made known to Chase who shall have the right to object and if so, the
Court, who shall resolve the difficulties, should be informed of such matters; pending a decision from the
court, the management decision shall not be made operative.
On August 27, 1962, supplementing the aforesaid order, the CFI of Manila issued an order stating that,
considering that the Buencaminos own 2/3 of the stock of the corporation, the May 12 order is equitable
and must be allowed to continue subject to the condition that once a decision of management is made
known to Chase, he must make known his objection to the Court within five (5) days from receipt of said
decision, otherwise he shall be deemed to have waived any objection to the decision.
ISSUE: Whether or not the CFI of Manila committed a grave abuse of discretion in issuing its orders of
June 10, 1961, June 21, 1961, May 12, 1962, and August 27, 1962
RULING: NO. The facts of the present case show that, in connection with the order of June 10, 1961,
which denied Chase's application for the appointment of a receiver, the court required Buencamino et.al
to file a bond in the amount of P100,000.00 to answer for whatever damages Chase might suffer by
reason of the denial. Again, perhaps by reason of the judgment rendered against Dr. Buencamino finding
him guilty of mismanagement etc., the CFI of Manila issued the order of August 27, 1962 whose pertinent
portion is quoted above.Considering the precautionary measures adopted by the CFI of Manila for the
protection of Chase's rights and interest in AMPARTS, the CFI of Manila cannot be deemed to have
committed a grave abuse of discretion
DOCTRINE:
Where corporate directors are guilty of a breach of trust and intracorporate remedy is futile, the minority
stockholders may resort to the courts for appropriate relief and, incidentally, ask for the appointment of a
receiver for the protection of their rights. In such case, however, the appointment of a receiver is a matter
addressed to the sound discretion of the court, and it has been frequently held that such discretion to
appoint a receiver who would take over the administration of the corporate business should be exercised
with great caution and only when the necessity therefor is clear.
GAMBOA v VICTORIANO

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

26

FACTS:
Benjamin Lopue et al are the owners of 1,328 shares of stock of the Inocentes de la Rama, Inc., a
domestic corporation, with an authorized capital stock of 3,000 shares, with a par value of P100.00 per
share, 2,177 of which were subscribed and issued, thus leaving 823 shares unissued. Lopue then
acquired the shares of stock held by Rafael Ledesma and Jose Sicangco, Jr., then President and VicePresident of the corporation, respectively.
Mercedes R. Borromeo, Honorio de la Rama, and Ricardo Gamboa who are the remaining members of
the board of directors of the corporation wanted to forestall the takeover by Loupe of the Inocentes de la
Rama, Inc. ; So what they did was to connive and elected Gamboa and De la Rama as president and
vice-president of the corporation and thereafter passed a resolution authorizing the sale of the 823
unissued shares of the corporation to themselves and the siblings of Gamboa and De La Rama. After
which some of these siblings were also elected to the board of directors of the corporation.
Loupe questioned the sale of the unissued 823 shares of stock of the corporation, arguing that was in
violation of the their pre-emptive rights and was made without the approval of the stockholders
representing 2/3 of the outstanding capital stock, He also questioned the newly elected members of the
BOD which for him unlawfully usurped into said office to the prejudice of the plaintiffs.
Judge Victoriano after proper hearing held restrained Gamboa et al from continuance of any act tending
to prejudice or otherwise Loupe and et al's rights in the corporate properties and funds; and he also
prevented them from disposing, transferring, selling or otherwise impairing the value of the 823 shares
illegally issued to themselves.
Gamboa entered into a compromise agreement with De la Rama whereby the contracting parties
withdrew their respective claims against each other and De La Ra,a including Loupe waived and
transferred their rights and interests over the questioned 823 shares of stock in favor of Gamboa. The
compromise agreement was approved by the trial court. As a result, Loupe filed a motion to dismiss the
complaint. Hence Gamboa appealed trying to ask the court for a relief against Loupe from stopping him to
issue those shares for themselves.
ISSUE: Whether or not Loupe waived his right against Gamboa when Gamboa entered into a
compromise agreement with De La Rama who was also a defendant in the previous case?
RULING: NO. as found by Judge Victoriano, Loupe have not waived their cause of action by entering into
a compromise agreement with the Gamboa in view of the express provision of the compromise
agreement that the same "shall not in any way constitute or be considered a waiver or abandonment of
any claim or cause of action against the other defendants."
There is also no estoppel because there is nothing in the agreement which could be construed as an
affirmative admission by Loupe of the validity of the resolution of Gamboa which is now sought to be
judicially declared null and void.
The well-known rule is that courts cannot undertake to control the discretion of the board of directors
about administrative matters as to which they have legitimate power of, action and contracts intra vires
entered into by the board of directors are binding upon the corporation and courts will not interfere unless
such contracts are so unconscionable and oppressive as to amount to a wanton destruction of the rights
of the minority. In the instant case, Loupe aver that Gamboa have concluded a transaction among
themselves as will result to serious injury to the interests of Loupe as stockholders.
It is further contended by Gamboa that the proper remedy would be to institute a derivative suit against
Loupe in the name of the corporation in order to secure a binding relief after exhausting all the possible
remedies available within the corporation.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

27

DOCTRINE: An individual stockholder is permitted to institute a derivative suit on behalf of the


corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever the officials
of the corporation refuse to sue, or are the ones to be sued or hold the control of the corporation. In such
actions, the suing stockholder is regarded as a nominal party, with the corporation as the real party in
interest. In the case at bar, however, Gamboa are alleging and vindicating their own individual interests or
prejudice, and not that of the corporation. At any rate, it is yet too early in the proceedings since the
issues have not been joined. Besides, misjoinder of parties is not a ground to dismiss an action.
Therefore petition is dismissed.
SAN MIGUEL v KAHN
FACTS:
33,133,266 shares of the outstanding capital stock of SMC were acquired 14 other corporations, and
were placed under a Voting Trust Agreement in favor of the late Andres Soriano, Jr. However, 33,133,266
SMC shares were sequestered by the PCGG, on the ground that the stock belonged to Eduardo
Cojuangco, Jr., allegedly a close associate and dummy of former President Marcos. SMC promptly
suspended payment of the other installments of the price to the 14 seller corporations.
On December, 1986, the SMC Board, by Resolution No. 86-122, "decided to assume the loans incurred
by Neptunia for the down payment ((P500M)) on the 33,133,266 shares." The Board opined that there
was "nothing illegal in this assumption (of liability for the loans)," since Neptunia was "an indirectly wholly
owned subsidiary of SMC," there "was no additional expense or exposure for the SMC Group, and there
were tax and other benefits which would redound to the SMC group of companies. However, at the
meeting of the SMC Board, Eduardo de los Angeles, one of the PCGG representatives in the SMC board,
impugned said Resolution No. 86-122.
ISSUE: Whether or not de los Angeles can file a derivative suit in behalf of the corporation.
RULING: YES. The Court ruled that it is claimed that since de los Angeles 20 shares represent only .
00001644% of the total number of outstanding shares (1 21,645,860), he cannot be deemed to fairly and
adequately represent the interests of the minority stockholders. The implicit argument that a
stockholder, to be considered as qualified to bring a derivative suit, must hold a substantial or significant
block of stock finds no support whatever in the law.
The requisites for a derivative suit are as follows:
(a) the party bringing suit should be a shareholder as of the time of the act or transaction complained of,
the number of his shares not being material;
(b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors
for the appropriate relief but the latter has failed or refused to heed his plea; and
(c) the cause of action actually devolves on the corporation, the wrongdoing or harm having been, or
being caused to the corporation and not to the particular stockholder bringing the suit.
The bona fide ownership by a stockholder of stock in his own right suffices to invest him with standing to
bring a derivative action for the benefit of the corporation. The number of his shares is immaterial since he
is not suing in his own behalf, or for the protection or vindication of his own particular right, or the redress
of a wrong committed against him, individually, but in behalf and for the benefit of the corporation.
DOCTRINE: The theory that de los Angeles has no personality to bring suit in behalf of the corporation
because his stockholding is minuscule, and there is a conflict of interest between him and the PCGG
cannot be sustained, either.
DISPOSITIVE: San Miguel Corporation won.
WESTERN INSTITUTE OF TECHNOLOGY v SALAS
FACTS:

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

28

1. Private respondents Ricardo T. Salas, Salvador T. Salas, Soledad Salas-Tubilleja, Antonio S.


Salas, and Richard S. Salas, all belonging to the same family are the majority and controlling
members of the Board of Trustees of Western Institute of Technology, Inc. (WIT, for brevity), a
stock corporation engaged n the operation, among others, of an educational institution.
2. According to petitioners (Homero L. Villasis, Dimas Enriguez, Preston F. Villasis, and Reginald F.
Vilasis), the minority stockholders of WIT, sometime in 1 June 1986, in the principal office of WIT
at La Paz, Iloilo City, a Special Board Meeting was held.
3. Prior to the aforesaid Special Board Meeting, copies of notice thereof, dated 24 May 1986, were
distributed to all Board Members. The notice allegedly indicated that the meeting to be held on 1
June 1986 included the implementation of compensation of all officers of the corporation.
4. In the said meeting, the Board of Trustees passed Resolution No. 48 series of 1986, granting
monthly compensation to the private respondents as corporate officers retroactive 1 June 1985.
Monthly compensation was rendered as follows:
a. Chairman: P9,000/month.
b. Vice Chairman: P5,000/month.
c. Corporate Treasurer: P3,500/month.
d. Corporate Secretary: P3,500/month.
e. And ten percentum of the net profits shall be distributed equally among the ten members of
the Board of Trustees.
5. A few years later, that is on 13 March 1991, petitioners filed an affidavit-complaint against private
respondents before the Office of the City Prosecutor of Iloilo. Two separate criminal informations
were filed and decided upon.
a. Criminal Case No. 37097
Article 171 of the RPC: Falsification of Public Document
Allegedly, the respondents submitted to the SEC an income statement of the corporation
for the fiscal year 1985-1986, a public document, including therein the disbursement of
the retroactive compensation of accused corporate officers in the amount of P186,470.70,
by then and there making it appear that the basis thereof Resolution No. 4, Series of
1986 was passed by the board of trustees on 30 March 1986, when in truth and in fact,
as said accused well knew, no such Resolution No. 48, Series of 1986 was passed on 30
March 1986.
b. Criminal Case No. 37098
Article 315, paragraph 1(b) of the RPC: Estafa
The respondents defrauded the corporation by disbursing the funds of the corporation by
effecting payment of their retroactive salaries in the amount of P186,470.70 and
subsequently paying themselves every 15th and 30th of the month starting 15 June 1986
until the present, in the amount of P19,500.00 per month, knowing fully well that they
have no sufficient or lawful authority to disburse such.
Even upon demand, they refused to rectify the same.
6. The respondents were acquitted in both cases.
7. Petitioners would now like to hold the private respondents civilly liable despite their acquittal in
the criminal cases. They claim that the issuance of Resolution No. 48 is illegal, the officers not
being entitled to compensation under Section 30 of the Corporation Code.
8. Petitioners also assert that the instant case is a derivative suit brought by them as minority
shareholders of WIT for and on behalf of the corporation to annul Resolution No. 48, series of
1986, which is prejudicial to the corporation.
ISSUE: Whether or not the instant case brought by petitioners is a derivative suit brought by ten as
minority shareholders of WIT?
RULING: NO. A derivative suit is an action brought by minority shareholders in the name of the
corporation to redress wrongs committed against it, for which the directors refused to sue. It is a remedy
designed by equity and has been the principal defense of the minority shareholders against abuses by the
majority. Here, however, the case is not a derivative suit but is merely an appeal on the civil aspect of

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

29

Criminal Cases Nos. 37097 and 37098 filed with the RTC of Iloilo for estafa and falsification of public
document.
Among the basic requirements for a derivative suit to prosper is that the minority shareholder who is suing
for and on behalf of the corporation must allege in his complaint before the proper forum that he is suing
on a derivate cause of action on behalf of the corporation and all other shareholders similarly situated
who wish to join. This is necessary to vest jurisdiction upon the tribunal in line with the rule that it is the
allegations in the complaint that vests jurisdiction upon the court or quasi-judicial body concerned over he
subject matter and nature of the action. The petitioners did not comply this with, either in their complaint
before the court a quo nor in the instant petition. By no amount of equity considerations, if at all deserved,
can a mere appeal on the civil aspect of a criminal case be treated as a derivative suit.
DOCTRINE: A derivative suit is an action brought by minority shareholders in the name of the corporation
to redress wrongs committed against it, for which the directors refused to sue. It is a remedy designed by
equity and has been the principal defense of the minority shareholders against abuses by the majority.
DISPOSITIVE: The petition is denied. The acquittal of the respondents in both criminal cases is not
merely based on reasonable doubt but rather on finding that the accused-private respondents did not
commit the criminal acts complained of. Acquittal in a criminal case bars the civil action arising therefrom
where the judgment of acquittal holds that the accused did not commit the criminal acts impunted to them.
XI.

Financing the corporation


A. Sources of financing Campos, Vol 2, pp. 1-6
Main sources
1. Contribution of its stockholders referred as equity of stockholders or equity investment
2. Loans or advances by creditors
3. Profits which the corporation may earn
1. Promotion is different from financing, promoting involves only equity interest because of the
high risk involved when the business venture still has to prove its worth
2. Debt financing may be resorted by organizers who may want to control of the corporation
but do not have sufficient resources of their own.
Other transactions used in raising funds
Short term financial instruments funds borrowed are usually for immediate corporate
needs which the present cash position of the corporation cannot meet, but which it
expects to be able to repay within a short period.
Capital structure refers to the aggregate securities issued by the corporation instruments
which represent relatively long term investment in the corporation. 2 classes of capital structure:
Shares of stock and Debt securities.
Senior securities - includes both debt securities and typical preferred stock
Equity securities common stock and if any participating preferred stock
How to determine which security to issue? The kind of securities which should be issued in the
financing of a proposed corporation is to be carefully studied and decided based on many factors
such as: nature of the business, its probable profitability, control of management, attraction to
different types of investors, tax advantages and if any, the wishes of the organizers. A sound
capital structure is the most important because it may spell the success or failure of the business
B. Shares of stock; kinds Sec 6; Campos Vol. 2 p6-33

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

30

Capital stock amount fixed by the corporate charter to be subscribed and paid in or secured to be
paid in by the shareholders of a corporation either in money or property, labor or services at the
organization of the corporation or afterwards and upon which it is to conduct its operations.
Capital is the actual property of the corporation including cash, real and personal property
Kinds of shares of stocks
I. Common stocks most commonly issued by corporations. It entitles the owner of such stocks to an
equal pro rata division of profits.
Ii. Preferred stocks entitles the holder to some preference either in the dividends or in the
distribution of assets upon liquidation of the corporation, or in both, or to such other preferences not
inconsistent with the corporation code. There are 2 limitations imposed in the issuances of preferred
stocks:
a. They can be issued only with a stated par value
b. The preferences must be stated both in the AIC and in the certificate of stock,
otherwise each share shall be in all respects equal to every other share.
1. Preference as to dividends dividends are payable only when there are profits earned by the
corporation and as a general rule, even if there are existing profits, the board of directors has
the discretion to determine whether or not dividends are to be declared. (Campos) Preferred
shares par value shares which enjoy preference as to dividends or assets upon dissolution
as stated in the AIC. (Aquino, Sundiang)
Participating and non participating
a. Participating participates with common shares after receiving its dividends at
preferred rate
b. Non- participating where there is no such participation
Cumulative and non-cumulative
c. Cumulative the shareholder is entitled to recover dividends in arrears. This means
that if in any given year or years no dividends are declared, the arrears for such year
or years have to be made up in subsequent years before any dividends can be paid
to the common stocks. While dividend declaration may not be compelled, once it is
declared, the shareholder is entitled to the said arrears. In the absence of agreement,
stocks are deemed cumulative.
d. Non-cumulative not entitled to arrears only to present dividends
Discretionary dividend type terms of the preferred share contract that the stockholder
could get depends on the discretion of the board of directors even if the corporation made
profits during that year.
Mandatory dividend type contract may impose a positive duty on the directors to
declare preferred dividends every year that profits are earned.
Earned cumulative or dividend credit contract that gives a right to arrears in dividends
where there were profits earned during the years when dividends were not declared. In
effect the contract merely postpones the receipt of dividends earned to a later date.
2. Voting rights preferred stock are by contract usually denied the right to vote. But unless
such right is clearly withheld, a preferred stockholder would have the right to vote, since it is
incident to stock ownership.
3. Preference upon liquidation a preferred stockholder may be given preferences not only in
the dividends but also in the distribution of the corporate assets upon liquidation of the
business.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

4.

31

Preferred stockholder is not a creditor although a preferred stockholder may enjoy


preferences over other stockholders, he is an equity holder and not a creditor of the
corporation. His investment is subject to all the risks of ownership. He can get it back only
upon liquidation of the corporation provided there are enough assets left after paying the
creditors

III. Par or no par shares Par value of a share is fixed in the AIC and is the minimum issue price of
such share. No par shares are those whose issued prices is not stated in the certificate but which
may be fixed in the AIC, or by the board of directors.
IV. Treasure shares shares which have been earlier issued as fully paid and have thereafter been
acquired by the corporation by purchase, donation, redemption of through some lawful means.
V. Redeemable shares are those which permit the issued corporation to redeem or purchase its
own shares.
VI. Founders shares classified as such in the AIC which may be given certain rights and privileges
not enjoyed by others. However if the right is exclusive right to vote and be voted for as director, it
must be for a period not exceeding 5 years counted from the approval of the SEC
Section 6. Classification of shares. The shares of stock of stock corporations may be divided into
classes or series of shares, or both, any of which classes or series of shares may have such rights,
privileges or restrictions as may be stated in the articles of incorporation: Provided, That no share may be
deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, unless
otherwise provided in this Code: Provided, further, That there shall always be a class or series of shares
which have complete voting rights. Any or all of the shares or series of shares may have a par value or
have no par value as may be provided for in the articles of incorporation: Provided, however, That banks,
trust companies, insurance companies, public utilities, and building and loan associations shall not be
permitted to issue no-par value shares of stock.
Preferred shares of stock issued by any corporation may be given preference in the distribution of the
assets of the corporation in case of liquidation and in the distribution of dividends, or such other
preferences as may be stated in the articles of incorporation which are not violative of the provisions of
this Code: Provided, That preferred shares of stock may be issued only with a stated par value. The board
of directors, where authorized in the articles of incorporation, may fix the terms and conditions of
preferred shares of stock or any series thereof: Provided, That such terms and conditions shall be
effective upon the filing of a certificate thereof with the Securities and Exchange Commission.
Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the
holder of such shares shall not be liable to the corporation or to its creditors in respect thereto: Provided;
That shares without par value may not be issued for a consideration less than the value of five ( P5.00)
pesos per share: Provided, further, That the entire consideration received by the corporation for its no-par
value shares shall be treated as capital and shall not be available for distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of insuring compliance with
constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each
share shall be equal in all respects to every other share.
Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the
holders of such shares shall nevertheless be entitled to vote on the following matters:

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

32

1. Amendment of the articles of incorporation;


2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate
property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other corporations;
7. Investment of corporate funds in another corporation or business in accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular
corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights
1. Common
2. Preferred
a) Preference as to dividends
i.
Participating and non-participating
ii.
Cumulative and non-cumulative
Discretionary
Mandatory
Earned cumulative or dividend credit
b) Voting rights
c) Preference upon liquidation
d) Preferred stockholder not a creditor
ELLINGWOOD v WOLFS HEAD OIL, see C V2 p12-17
FACTS:
The Chancellor held that the preferred stockholders were entitled to vote for the
election of directors and for all other purposes at the annual meeting, and that the
persons whose names were contained on the ticket for they voted were the legally
elected directors of the corporation. Plaintiff in this case was a holder of common
stock.
This appeal was taken to review the decision and four assignments of error were
filed. The assignments of errors are all embraced in the first error.
There is no dispute between the parties interested in this proceeding, that when the
preferred stockholders and the common stockholders met at the annual meeting held
on May 3, 1943, the corporation was in default in respect to the declaration and
payment of dividends in the amount of two years' dividends on the preferred stock. All
of said arrearages of dividends had accrued prior to 1942, and during said year 1942
the corporation declared and paid a full six per cent dividend on the preferred stock.
This being the situation the court is called upon to determine the voting rights of the
two classes of stock under the pertinent charter provisions.
ISSUE: WON the Chancellor erred in declaring that the persons owning the preferred
stock at Wolfs Head Oil Refining Company, had the sole right and power to vote at
the meeting of stockholders for the election of directors and for all other purposes
RULING: NO. It is well recognized that a certificate of incorporation may contain any
provision with respect to the stock to be issued by the corporation, and the voting
rights to be exercised by said stock, that is agreed upon by the stockholders,
provided that the provision agreed to is not against public policy.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

33

The courts of this State have held that the rights of stockholders are contract rights
and that it is necessary to look to the certificate of incorporation to ascertain what
those rights are.
Nothing is to be presumed in favor of preferences attached to stock, and when a
corporate charter attempts to confer preferences upon any class of stock provided for
by it the same should be expressed in clear language. In interpreting the meaning of
charter provisions the same method is applied as that which is followed in interpreting
written contracts generally. The instrument should be considered in its entirety, and
all of the language reviewed together in order to determine the meaning intended to
be given to any portion of it.
The charter of Wolf's Head Oil Refining Company, evidences an intention on the part
of the incorporators to make provision for the protection of the preferred stockholders.
Article V of the charter which guarantees to the holders of the preferred stock
"cumulative dividends thereon at the rate of six per cent for each and every fiscal
year of the company." This same article gives to the holders of the common stock
exclusive "voting power for the election of directors, and for all other purposes." This
is followed by the provision that the preferred stockholders shall have no voting
power.
Then comes the proviso,
That if at any time the corporation shall be in default in respect to the
declaration and payment of dividends in the amount of two years dividends
on the preferred stock, then the holders of a majority of the preferred shall
have an election to exercise the sole right to vote for the election of directors
and for all other purposes, to the exclusion of any such right on the part of
the holders of the common stock until the corporation shall have declared
and paid for a period of a full year a 6% dividend on the preferred stock,
when the right to vote for the election of directors, and for all other purposes,
shall revert to the holders of the common stock."
The language used in the charter describing the conditions under which the preferred
stockholders obtain the right to vote has nothing to say about the time when the
arrearage in dividends on said stock shall have accrued. If the position is taken that
the arrearage in dividends must have accrued after the right to vote had reverted to
the common stock, the preferred stockholders would be deprived of the right to vote
for the election of directors no matter how great the arrearage in dividends might be,
until additional dividends in the amount of two years' dividends should accrue. This
construction would take from the preferred stockholders the benefit which we think
the charter intended to confer upon them.
It is not denied that when a majority of the preferred stockholders first elected to
exercise their right to vote for the election of directors and for all other purposes in
1936, the dividends accrued and unpaid on the preferred stock amounted to 22%,
of that said accrued and unpaid dividends was more than two years' dividends.
Neither is it denied that from 1936 to May 3, 1943, additional dividends accrued on
the preferred stock amounting to 40%, and that the dividends paid on said stock
during that period amounted to 25%.
Therefore it clearly appears that when the annual meeting of the corporation was
held on May 3, 1943, dividends amounting to 37% were accrued and unpaid on the
preferred stock. Thus it appears that the corporation was in default in respect to the
declaration and payment of dividends in the amount of two years' dividends.
In view of this situation we are of the opinion that the preferred stockholders were
entitled to vote for the election of directors and for all other purposes, at the annual

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

34

meeting of the corporation held on May 3, 1943, and that the persons whose names
appeared on the ticket nominated and voted for by them are the legally elected
directors of the corporation.
LAYTON, Chief Justice (dissenting):
I regret to find myself unable to agree to the conclusion reached by a majority of the
court. With deference, it seems to me that the majority have gone out of the way to
make complex that which is simple.
Voting power attached to corporate stock is very generally lodged in the common
shares; and here the dominant purpose of Article V of the charter is to vest the voting
power in the common shares exclusively except in certain circumstances and then for
a carefully limited time. The circumstances which gives rise to the shift of voting
power from the common to the preferred shares is a default in the payment of
dividends in the amount of two years' dividends. But this shift is not automatic. The
preferred shares may, or may not, elect to exercise the right conferred on them. If
they exercise the right, the voting power shifts to the preferred shares, and remains
with them until for the period of a full year the stated dividend has been paid on the
preferred shares. Upon this happening, the voting power reverts involuntarily to the
common shares.
If, for their own reasons, the holders of the preferred shares do not choose to
exercise the right, which comes into being when dividends in the amount of two years
have not been paid on their shares, the default is enlarged, but it is a single thing.
The default, whether it be for the minimum time, or for a longer time, goes hand in
hand with the right of election. The default, an integration, cannot be split up into
several defaults, and thereby confer upon the holders of the preferred shares several
rights of election growing out of the same default.
The use of the words "continuing privilege and right" in the last sentence of the
paragraph, was very clearly meant as saving the exhaustion of the right of election as
against one exercise of it, and permitting a shifting and reshifting of the voting power
as conditions of default and the ending of them may successively occur.
If the parties had intended to say that the holders of the preferred shares were
empowered to exercise the right of election at any time when dividends on the
preference shares were in default for two years, it would have been easy to express
that intent in simple language. What the parties did say was that if at any time
dividends on the preference stock to the amount of two years' dividends should be in
arrears, upon the exercise of the right of election, the voting power attached to the
preferred shares until a full year's dividend had been paid on the preferred shares.
The conception that while the life of the voting power lodged in the preferred shares
by a default may have come to an end by the payment of a full year's dividend, yet
the right of election growing out of the same default survives, is, I think, not to be
found in the language the parties have used.
HAY v HAY, C V2 17-27 (preference upon liquidation)
FACTS:
1. The Amended Article 6 contained the following:
b. The amount of capital stock is $ 1,500,000 divided into 15, 000 shares of the par
value of $100 each
c. Stocks of the corporation is divided into 2 classes: Common Stock (8,500 shares)
and preferred stock (6,500 shares)
d. Terms of two classes of stock include, In the event of any liquidation, dissolution
or winding up of the Corporation the holders of the preferred stock shall be entitled to

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

35

be paid in full the par value thereof, and all accrued unpaid dividends thereon before
any sum shall be paid to any assets distributed among the holders of the preferred
stock of the amounts payable to them..
2. There are no corporate creditors involved.
3. The holders of the preferred stock have received from the liquidating trustees the
par value thereof.
4. No surplus profits are available with which to pay accumulated dividends.
5. There is substantial amount of assets on hand, but they would all be absorbed if
they should be applied in payment if accrued dividends on the preferred stock.
6. Appellant claims that "all accrued unpaid dividends" means that before there can
be dividend, there must be surplus profits, and that, since none ever existed the right
to such never accrued, so none are payable.
7. Respondent claims that amended article VI of the articles of incorporation relate to
payment of dividends to preferred stockholders out of surplus profits while the
corporation is a going concern, but it authorizes payment of accumulated and unpaid
dividends out of assets upon liquidation of the corporation even though there be no
surplus profits available.
ISSUE: WON the holders of a cumulative preferred stock upon liquidation of the
corporation are entitled to be paid accrued dividends from the corporate assets
above before the common stockholders become entitled to participate in the
distribution
RULING: YES. The Articles of Incorporation contains no condition to the effect that
the surplus profits must be equal to or greater than the total accrued unpaid
dividends before distribution could be made.
Appellant's construction is contrary to the fundamental concept of the law on
corporation because it fails to recognize the distinction between corporations which is
a going concern and one which is in liquidation.
The preference to "all accrued and unpaid dividends" in the AOI is the only practical
yardstick by which the total share of assets could be measured. It is the method
which amount distributable to preferred could be computed.
Holders of preferred stock are entitled to BOTH to par value and to dividends which
have not been declared/paid but which would have been if there had been surplus /
net profit
Preferences clauses are quite uniform, designed as key for distribution of assets/
surplus:1. Payment of firm's debt2. Repayment of fixed amount of preferred stock3.
Payment of any unpaid dividend accrued
The clause "unpaid dividend accrued" would only permit one interpretation, give
preference
regardless
of
any
consideration
of
profit/surplus
DISPOSITIVE: Judgement in favor of the preferred stock holders
AUGUSTA TRUST v AUGUSTA HALLOWELL & GARDINER RAILROAD, C V2 27-29
(preferred stockholder is not a creditor)
FACTS
Defendant Augusta, Hallowell & Gardiner Railroad Co. (AHG) had outstanding bonds
from AUGUSTA TRUST CO. secured by a mortgage. AHG were given the right to
convert the bonds into preferred shares of stock. The preferred shares of stock
entitles the holders fixed 4% dividend yearly, payable half- yearly and share is also
redeemable. On the back of the certificate, it states that the preferred stock were
issued in exchange for an equal amount of principal of the bonds. An action was

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

36

brought to foreclose the mortgage (walang nakalagay kung sino nag-bring ng action,
but I think yung ATC).
ISSUE: WON the holders of these preferred shares has the right to share in the
proceeds on the sale of the mortgaged property
RULING: NO. Although corporations may issue certificates in the form of certificates
of preferred stock, making the holders creditors as well as stockholders and giving
them lien upon the property of the corporation with a priority over other creditors. It is
sui generis, not governed by the ordinary rules, but by the provisions of the statutes
by which it is authorized. But the preferences given the holders of the preferred stock
in the conversion agreement here in controversy were not authorised by statute when
made. Petitioner ATCs argument that the certificates of preferred stock issued in
exchange for bonds were in fact certificates of indebtedness and not stock was not
concurred by the Court. For the reason that, all facts and circumstances convincingly
characterise the preferred stock issued by the railroad company as preferred stock.
The certificates delivered to the holders of the bond exchanged therefor designated
the stock as preferred stock and certified that holders were entitled to the number of
shares therein- full paid preferred capital stock. The holders of this stock had a right
to vote in the election of directors and entitled to receive fixed yearly dividends
payable semi-annually.
DOCTRINE: It is true that preferred stock, so called, may be issued in such a way
and under such terms as to make the certificates thereof merely evidence of
indebtedness and the holders creditors of the corporation and not stockholders. But if
the certificates contain every essential feature of a certificate of a preferred stock and
none of a contract creating relation of a creditor of the corporation, then it is a
certificate of a preferred stock. The preferred stockholders are not entitled to share in
the assets of the companies until all creditors have been paid in full.
DISPOSITIVE: Defendant won. By surrendering their bonds and taking in lieu thereof
preferred stock, the bondholders of these street railway companies ceased to be
creditors and became stockholders.
GARCIA v LIM CHUN SING
FACTS
The debt (promissory note) which is the subject matter of the complaint was not really
an indebtedness of the defendant Kim Chu Sing but of Lim Cuan Sy, who had an
account with the plaintiff Mercantile Bank in the form of "trust receipts" guaranteed by
the defendant Lim Chu Sing as surety and with chattel mortgage securities. The
plaintiff bank, without the knowledge and consent of the defendant, foreclosed the
chattel mortgage and privately sold the property covered thereby. Inasmuch as Lim
Cuan Sy failed to comply with his obligations, the plaintiff required the defendant, as
surety, to sign a promissory note for the sum of P19,105.17. The defendant had been
paying the corresponding installments until the debt was reduced to the sum of
P9,105.17 claimed in the complaint. The defendant is the owner of shares of stock of
the plaintiff Mercantile Bank of China amounting to P10,000. The plaintiff bank is now
under liquidation.
ISSUE: WON it is proper to compensate defendant Lim Chu Sing's indebtedness of
P9,105.17, which is claimed in the complaint, with the sum of P10,000 representing
the value of his shares of stock with the plaintiff Mercantile Bank of China.
RULING: NO. A share of stock or the certificate thereof is NOT an indebtedness to
the owner nor evidence of indebtedness and, therefore, it is NOT a credit.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

37

Stockholders, as such, are not creditors of the corporation. It is the prevailing doctrine
of the American courts, repeatedly asserted in the broadest terms, that the capital
stock of a corporation is a trust fund to be used more particularly for the security of
creditors of the corporation, who presumably deal with it on the credit of its capital
stock. Therefore, the defendant Lim Chu Sing not being a creditor of the Mercantile
Bank of China, although the latter is a creditor of the former, there is no sufficient
ground to justify a compensation.
DOCTRINE: The shares of a corporation do not constitute an indebtedness of the
corporation to the stockholder and, therefore, the latter is not a creditor of the former
for such shares. The indebtedness of a shareholder to a banking corporation cannot
be compensated with the amount of his shares therein, there being no relation of
creditor and debtor with respect to such shares.
DISPOSITIVE: Defendant Lim Chu sing won. Judgment appealed from is affirmed.

PHILIPPINE COCONUT PRODUCERS FEDERATION v REPUBLIC


FACTS:
The Court, in its earlier resolution adverted to, approved, upon motion of petitioner
Philippine Coconut Producers Federation, Inc. (COCOFED), the conversion of the
sequestered 753,848,312 Class "A" and "B" common shares of San Miguel
Corporation (SMC), registered in the name of Coconut Industry Investment Fund
(CIIF) Holding Companies (hereunder referred to as SMC Common Shares), into
753,848,312 SMC Series 1 Preferred Shares. The oppositors herein made the
following arguments: (1) economic disadvantage and harm that government might
suffer by such proposed conversion; (2) they question the wisdom of PCGG in
converting those sequestered shares; (3) that the conversion is invalid in view of the
Commission on Audit Circular No. 89- 296 which provides that disposal of
government property must be undertaken via public Auction; (4) that the conversion
thereof needs the acquiescence of the 14 CIIF companies; (5) As to the Motion to
Intervene by UCPB, that it should be the sole depositary of the proceeds of the
dividends.
ISSUE: Whether or not the arguments of the Oppositors herein have merits.
RULING: NO. Anent the 1st contention, it is not tenable because in fact this
conversion is a business strategy to preserve and conserve the value of the
Governments interest in the CIIF SMC shares. As to the 2nd argument, it is also
untenable because it is not within the Courts to determine wisdom of other agencies
of the government. As to the 3rd argument, likewise untenable because FIRST, there
is really no disposal of SMC shares and SECOND, there is no yet government assets
to talk about because the ownership thereto is still to be determined, hence, those
shares are akin to properties subject of attachment. As to the 4th contention, PCGG
need not obtain the acquiescence of the owners of those sequestered shares with
respect to any of its acts intended to preserve such assets. Otherwise, it would be
impossible for it to perform its function as provided by law. And as to the 5th
argument, it is also of no merit because the Court has the discretion where to deposit
those net dividends, whether it be on Development Bank of the Philippines/ Land
Bank of the Philippines or the UCPB.
3. Par or no par shares Sec 14(8), C V 1 p80, V2 p29-31
Section 14. Contents of the articles of incorporation.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

38

8. If it be a stock corporation, the amount of its authorized capital stock in lawful money of
the Philippines, the number of shares into which it is divided, and in case the share are par
value shares, the par value of each, the names, nationalities and residences of the original
subscribers, and the amount subscribed and paid by each on his subscription, and if some
or all of the shares are without par value, such fact must be stated
4. Treasury shares Sec 9, 43, 137. 57, C V2 p31-32 review power to acquire its own shares
VI(B)(5)
Section 9. Treasury shares. Treasury shares are shares of stock which have been issued
and fully paid for, but subsequently reacquired by the issuing corporation by purchase,
redemption, donation or through some other lawful means. Such shares may again be
disposed of for a reasonable price fixed by the board of directors
Section 43. Power to declare dividends. - The board of directors of a stock corporation may
declare dividends out of the unrestricted retained earnings which shall be payable in cash,
in property, or in stock to all stockholders on the basis of outstanding stock held by them:
Provided, That any cash dividends due on delinquent stock shall first be applied to the
unpaid balance on the subscription plus costs and expenses, while stock dividends shall be
withheld from the delinquent stockholder until his unpaid subscription is fully paid: Provided,
further, That no stock dividend shall be issued without the approval of stockholders
representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or
special meeting duly called for the purpose. (16a)
Stock corporations are prohibited from retaining surplus profits in excess of one hundred
(100%) percent of their paid-in capital stock, except: (1) when justified by definite corporate
expansion projects or programs approved by the board of directors; or (2) when the
corporation is prohibited under any loan agreement with any financial institution or creditor,
whether local or foreign, from declaring dividends without its/his consent, and such consent
has not yet been secured; or (3) when it can be clearly shown that such retention is
necessary under special circumstances obtaining in the corporation, such as when there is
need for special reserve for probable contingencies.
Section 137. Outstanding capital stock defined. The term "outstanding capital stock", as
used in this Code, means the total shares of stock issued under binding subscription
agreements to subscribers or stockholders, whether or not fully or partially paid, except
treasury shares.
Section 57. Voting right for treasury shares. Treasury shares shall have no voting right as
long as such shares remain in the Treasury.
5. Redeemable shares Sec. 8, C V2 p32-33
Section 8. Redeemable shares. Redeemable shares may be issued by the corporation
when expressly so provided in the articles of incorporation. They may be purchased or
taken up by the corporation upon the expiration of a fixed period, regardless of the
existence of unrestricted retained earnings in the books of the corporation, and upon such
other terms and conditions as may be stated in the articles of incorporation, which terms
and conditions must also be stated in the certificate of stock representing said shares
6. Founders shares Sec 7, C V1, p625-626
Section 7. Founders shares. Founders shares classified as such in the articles of
incorporation may be given certain rights and privileges not enjoyed by the owners of other
stocks, provided that where the exclusive right to vote and be voted for in the election of

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

39

directors is granted, it must be for a limited period not to exceed five (5) years subject to the
approval of the Securities and Exchange Commission. The five-year period shall
commence from the date of the aforesaid approval by the Securities and Exchange
Commission
C. Subscription contract
A subscription contract is for the acquisition of unissued stock of a corporation whether existing or still
to be formed and is in effect the contribution or promised contribution of a person to the capital of a
corporation.
1. Pre-incorporation See Sec 13. Reason: Since a corporation is formed for business
purposes it cannot come into being without a starting capital.
2. Post-incorporation Campos page 46
Campos Vol 2, pages 33-52, Sections 13,60, 61, 66, 80
Section 13. Amount of capital stock to be subscribed and paid for the purposes of
incorporation. At least twenty-five percent (25%) of the authorized capital stock as stated in
the articles of incorporation must be subscribed at the time of incorporation, and at least twentyfive (25%) per cent of the total subscription must be paid upon subscription, the balance to be
payable on a date or dates fixed in the contract of subscription without need of call, or in the
absence of a fixed date or dates, upon call for payment by the board of directors: Provided,
however, That in no case shall the paid-up capital be less than five Thousand (P5,000.00)
pesos
Section 60. Subscription contract. Any contract for the acquisition of unissued stock in an
existing corporation or a corporation still to be formed shall be deemed a subscription within the
meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or some
other contract.
Section 61. Pre-incorporation subscription. A subscription for shares of stock of a corporation
still to be formed shall be irrevocable for a period of at least six (6) months from the date of
subscription, unless all of the other subscribers consent to the revocation, or unless the
incorporation of said corporation fails to materialize within said period or within a longer period
as may be stipulated in the contract of subscription: Provided, That no pre-incorporation
subscription may be revoked after the submission of the articles of incorporation to the
Securities and Exchange Commission.
Section 66. Interest on unpaid subscriptions. Subscribers for stock shall pay to the
corporation interest on all unpaid subscriptions from the date of subscription, if so required by,
and at the rate of interest fixed in the by-laws. If no rate of interest is fixed in the by-laws, such
rate shall be deemed to be the legal rate
Section 80. Effects of merger or consolidation. The merger or consolidation shall have the
following effects:
1. The constituent corporations shall become a single corporation which, in case of merger,
shall be the surviving corporation designated in the plan of merger; and, in case of
consolidation, shall be the consolidated corporation designated in the plan of consolidation;
2. The separate existence of the constituent corporations shall cease, except that of the
surviving or the consolidated corporation;
3. The surviving or the consolidated corporation shall possess all the rights, privileges,
immunities and powers and shall be subject to all the duties and liabilities of a corporation
organized under this Code;

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

40

4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the
rights, privileges, immunities and franchises of each of the constituent corporations; and all
property, real or personal, and all receivables due on whatever account, including subscriptions
to shares and other choses in action, and all and every other interest of, or belonging to, or due
to each constituent corporation, shall be deemed transferred to and vested in such surviving or
consolidated corporation without further act or deed; and
5. The surviving or consolidated corporation shall be responsible and liable for all the liabilities
and obligations of each of the constituent corporations in the same manner as if such surviving
or consolidated corporation had itself incurred such liabilities or obligations; and any pending
claim, action or proceeding brought by or against any of such constituent corporations may be
prosecuted by or against the surviving or consolidated corporation. The rights of creditors or
liens upon the property of any of such constituent corporations shall not be impaired by such
merger or consolidation.
WALLACE v ECLIPSE POCAHONTAS COAL CO., Campos V2 42-45
FACTS:
In December 1916, Wallace and defendants Perkins and Griffith acting for themselves and their
associates OKeeffe and Weller (PROMOTERS of Eclipse), entered into a contract for the
purpose of taking over and operating a tract of about 600 acres of coal in McDowell County.
The promoters organized an option for a lease on the aforesaid land owned and controlled by
Wallace. The contract contained the following:
(1) Wallace would transfer, assign or cause said lease to be assigned or transferred,
first to Griffith, trustee, for himself and his associates, and by him to the corporation
when formed;
(2) In consideration of (1), the promoters would advance and supply the necessary
money to pay the purchase price for coal under the lease, namely $2,500.00 to fully
equip the property for operation;
(3) Wallace will have a one-fifth interest in the property fully paid up;
(4) To effectually and fully carry out the contract, Eclipse Pocahontas Coal Co.
(ECLIPSE) would be formed and organized with the definite and positive
agreement between Wallace and the promoters, acting for themselves and on
behalf of the corporation; and
(5) Wallace was to have and receive in stock enough to represent a one-fifth interest
fully paid up in the corporation.
Of the $25,000.00 capital stock authorized, the estimated amount necessary to cover the cost
of the lease and equipment contemplated by the contract would entitle Wallace to receive at
least 50 shares of stock of Eclipse. However, only five shares were ever issued to him. Wallace
filed a suit for specific performance, alleging that he had fully and completely performed per the
contract and that Eclipse and its promoters, agents and agents failed and refused to execute
the contract on their part. He prayed that Eclipse and the promoters be compelled to give him
all the shares of stocks due to him. Eclipse and the promoters denied the contract and put in
issue the material facts. Weller and OKeeffe denied the authority of Griffith and Perkins to bind
them and alleged want of notice of the supposed rights of Wallace. Holly Stover, a person
claiming to own some 70 shares of stock of Eclipse, not a party to the suit, appeared by petition
denying the authority of the promoters to make the alleged contract with Wallace and want of
note of it and its binding effect on him and the corporation, if indeed made.
ISSUE: Whether or not Wallace is entitled to the 50 shares of stock in Eclipse
RULING: YES. Wallace was a subscriber to the capital stock of the corporation. His contract
was to sell and convey or cause to be conveyed to the corporation the leasehold and to accept
in payment fully paid up stock to the value of the property when fully equipped for mining and

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

41

producing coal. Being entitled to this amount of stock easily ascertainable when the equipment
was completed, he became entitled to the stock. Eclipse and its promoters were held jointly and
severally liable.
DOCTRINE: Occasionally a pre-incorporation subscriber pays money or transfers property to
the promoters of the proposed corporation on account of his subscription, which money or
property they turn over to the corporation upon its incorporation. While such receipt of the
money or property by the emerging corporation is not of itself a recognition of the subscriber as
a shareholder of the shares designated in his subscription, its retention beyond a reasonable
time obligates the corporation to create such shares as to him unless accompanied by a
disclaimer of its right to the subscription price.
DISPOSITIVE: Wallace won. However, case was remanded to the circuit court to ascertain the
value of the plant and the property of Eclipse and if the capital stock held by the promoters will
be sufficient to represent one-fifth interest and such number of shares should be transferred or
issued to Wallace. If not sufficient, the circuit court has to determine the value of Wallaces
interest in Eclipse with additional legal interest.
BAYLA v SILANG TRAFFIC CO, INC.
FACTS:
Bayla purchased the following:
Sofronio
Bayla.......

T.

8 shares P360

Purchase price to be
paid 5% upon the
execution of the contract
Venancio
8 shares 375
and the remainder in
Toledo........
installments
of
5%,
payable
within
the
1st
Josefa
15 shares 675
month
of
each
and
every
Naval..............
quarter starting July 1,
1935, w/ interest on deferred payments at 6%/annum until paid. They also agreed to
forfeit in favor of seller in case of default w/o court proceedings
However the BOD of Silang Traffic passed a resolution on Aug 1, 1937 rescinding the
agreement. Bayla filed an action in the CFI against Silang Traffic Co. Inc to recover
certain sum of money w/c they had paid severally to the corporation on account of
shares of stock they individually agreed to take and pay for under certain conditions.
Silang Traffic pose the defense that the resolution is not applicable to the petitioners
Sofronio T. Bayla, Josefa Naval, and Paz Toledo because on the date thereof "their
subscribed shares of stock had already automatically reverted to the defendant, and
the installments paid by them had already been forfeited" that said resolution of August
1, 1937, was revoked and cancelled by a subsequent resolution.
RTC: absolved defendant. BOD resolution cancelled. Petitioners appealed
ISSUES:
(1) W/N the subsequent BOD resolution is valid?
(2) W/N under the contract between the parties the failure of the purchaser to pay any
of the quarterly installments on the purchase price automatically gave rise to the
forfeiture of the amounts already paid and the reversion of the shares to the
corporation?
HELD:
(1) NO. Silang Traffic have to pay petitioners

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

42

The noted agreement is entitled "Agreement for Installment Sale of Shares in the
Silang Traffic Company, Inc.,"; that while the purchaser is designated as "subscriber,"
the corporation is described as "seller" Whether a particular contract is a subscription
or a sale of stock is a matter of construction and depends upon its terms and the
intention of the parties.
subscription - mutual agreement of the subscribers to take and pay for the stock of a
corporation
purchase - independent agreement between the individual and the corporation to buy
shares of stock from it at stipulated price
Rules governing subscriptions and sales of shares are different. Corporation
Law regarding calls for unpaid subscription and assessment of stock (sections 37-50)
do not apply to a purchase of stock.
The Corporation has no legal capacity to release an original subscriber to its capital
stock from the obligation to pay for his shares, it is inapplicable to a contract of
purchase of shares.
The contract in question being one of purchase and not subscription as we have
heretofore pointed out, we see no legal impediment to its rescission by agreement of
the parties.
We may add that there is no intimation in this case that the corporation was insolvent,
or that the right of any creditor of the same was in any way prejudiced by the
rescission. The attempted revocation of said rescission by the resolution of August 22,
1937, was invalid, it not having been agreed to by the petitioners.
(2.) NO. The provision regarding interest on deferred payments would not have been
inserted if it had been the intention of the parties to provide for automatic forfeiture and
cancelation of the contract.
The Contract did not expressly provide that the failure of the purchaser to pay any
installment would give rise to forfeiture and cancelation without the necessity of any
demand from the seller.
Art. 1100 of the Civil Code: persons obliged to deliver or do something are not in
default until the moment the creditor demands of them judicially or extrajudicially the
fulfillment of their obligation, unless the obligation or the law expressly provides that
demand shall not be necessary in order that default may arise by reason of the nature
and circumstances of the obligation it shall appear that the designation of the time at
which that thing was to be delivered or the service rendered was the principal
inducement to the creation of the obligation.
TRILLANA v QUEZON COLLEGE INC.
FACTS:
Damasa Crisostomo sent a letter to the Board of Trustees of the Quezon College
subscribing to 200 shares of its capital stock at par value of Php100 each. Damasa
Crisostomo died on October 26, 1948. As no payment appears to have been made on
the subscription mentioned in her letter, the Quezon College, Inc. presented a claim
before the Court of First Instance of Bulacan in her testate proceeding, for the
collection of the sum of P20,000, representing the value of the subscription to the
capital stock of the Quezon College, Inc. This claim was opposed by the administrator
of the estate, and the Court of First Instance of Bulacan, after hearing issued an order

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

43

dismissing the claim of the Quezon College, Inc. on the ground that the subscription in
question was neither registered in nor authorized by the Securities and Exchange
Commission. From this order the Quezon College, Inc. has appealed.
ISSUE: Whether or not the subscription applied for by Damasa Crisostomo is an
enforceable contract.
RULING: NO. It appears that the application sent by Damasa Crisostomo to the
Quezon College, Inc. was written on a general form indicating that an applicant will
enclose an amount as initial payment and will pay the balance in accordance with law
and the regulations of the College. On the other hand, in the letter actually sent by
Damasa Crisostomo, the latter (who requested that her subscription for 200 shares be
entered) not only did not enclose any initial payment but stated that "babayaran kong
lahat pagkatapos na ako ay makapagpahuli ng isda." There is nothing in the record to
show that the Quezon College, Inc. accepted the term of payment suggested by
Damasa Crisostomo, or that if there was any acceptance the same came to her
knowledge during her lifetime. As the application of Damasa Crisostomo is obviously at
variance with the terms evidenced in the form letter issued by the Quezon College, Inc.,
there was absolute necessity on the part of the College to express its agreement to
Damasa's offer in order to bind the latter. Conversely, said acceptance was essential,
because it would be unfair to immediately obligate the Quezon College, Inc. under
Damasa's promise to pay the price of the subscription after she had caused fish to be
caught. In other words, the relation between Damasa Crisostomo and the Quezon
College, Inc. had only thus reached the preliminary stage whereby the latter offered its
stock for subscription on the terms stated in the form letter, and Damasa applied for
subscription fixing her own plan of payment, a relation, in the absence as in the
present case of acceptance by the Quezon College, Inc. of the counter offer of Damasa
Crisostomo, that had not ripened into an enforceable contract.
DOCTRINE: Indeed, the need for express acceptance on the part of the Quezon
College, Inc. becomes the more imperative, in view of the proposal of Damasa
Crisostomo to pay the value of the subscription after she has harvested fish, a
condition obviously dependent upon her sole will and, therefore, facultative in nature,
rendering the obligation void, under article 1115 of the old Civil Code which provides as
follows: "If the fulfillment of the condition should depend upon the exclusive will of the
debtor, the conditional obligation shall be void. If it should depend upon chance, or
upon the will of a third person, the obligation shall produce all its effects in accordance
with the provisions of this code." It cannot be argued that the condition solely is void,
because it would have served to create the obligation to pay, wherein only the
potestative condition was held void because it referred merely to the fulfillment of an
already existing indebtedness.
DISPOSITIVE: Nazario Trillana won.
EDWARD KELLER v COB GROUP (liability of subscribers)
FACTS:
1. THIS CASE IS ABOUT THE LIABILITY OF A MARKETING DISTRIBUTOR
UNDER ITS SALES AGREEMENTS WITH THE OWNER OF THE
PRODUCTS.
2. Edward A. Keller & Co., Ltd. appointed COB Group Marketing, Inc. as
exclusive distributor of its household product, Brite and Nuvan in Panay and
Negros. Under that agreement, Keller sold on credit its products to COB Group
Marketing.
3. As security for COB Group Marketings credit purchases up to the amount of
P35,000, one Asuncion Manahan mortgaged her land to Keller. Manahan

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

4.

5.

6.

7.

8.

44

assumed solidarily with COB Group Marketing the faithful performance of all
the terms and conditions of the sales agreement.
In July 1970, the parties executed a second sales agreement whereby COB
Group marketings territory was extended to Northern and Southern Luzon. As
security for the credit purchases up to P25,000 of COB Group Marketing for
that area, Tomas C. Lorenzo, Jr. and his father Tomas, Sr. (now deceased)
executed a mortgage on their land in Nueva Ecija. Like Manahan the Lorenzos
were solidarily liable with COB Group Marketing for its obligations under the
sales agreement.
On 8 May (Not sure what year. Didnt say.) the board of directors of COB Group
Marketing were apprised by Jose E. Bax, the firms president and general
manager, that the firm owned Keller about P179,000.
Various actions were committed by the directors of COB Group Marketing
that the company was, in fact liable to Keller.
- Bax executed two chattel mortgages over its 12 trucks as security for
its obligation to Keller. The second mortgage did not push through, but
nonetheless served the purpose of being admissions of the liability
COB Group Marketing to Keller.
- Moises P. Adao and Tomas C. Lorenzo proposed to pay Keller P5,000
on 30 November 1971 and thereafter every 30 th day of the month for
three years until the obligation had been fully paid.
- They also proposed to substitute the Manhan mortgage with a
mortgage on Adaos lot at 72, 7th Avenue, Cubao, Quezon City.
Keller sued on 16 September 1971 COB Group Marketing, Inc., its
stockholders and the mortgagors, Manahan and Lorenzo. COB Group
Marketing, Trinidad C. Ordonez, and Johnny de la Fuente were declared in
default.
On the other hand, Bax although not an accountant, presented his own
reconciliation statements wherein he showed the COB Group Marketing, Inc.
overpaid Keller P100,596.72. He claimed overpayment although his answer did
not allege at all that there was an overpayment to Keller.
The lower court ruled in favor of COB Group Marketing, Inc. The Appellate
Court affirmed.

ISSUE:
Whether or not the stockholders abovementioned are liable for the obligations of COB
Group Marketing, Inc.?
RULING: YES. The lower courts not only allowed Bax to nullify his admissions as to
the liability of COB Group Marketing but they also erroneously rendered judgment in
favor in the amount of its supposed overpayment in the sum of P100,596.72, in spite of
the fact that COB Group Marketing was declared in default and did not file any
counterclaim for the supposed overpayment.
This Court must now reverse the decision of the lower courts.
It is settled that a stockholder is personally liable for the financial obligations of a
corporation to the extent of his unpaid subscription. (Vda. de Salvatierra v. Garlitos, 103
Phil. 757, 764; 18 CJs 1211-2)
While the evidence shows that the amount due from the COB Group Marketing is
P185,509.60 as of 31 July 1971 or P186,354.70 as of 31 August 1971, the amount
prayed for in Kellers complaint is P182,994.60 as of 31 July 1971. The latter amount
should be the one awarded to Keller because a judgment entered against a party in
default cannot exceed amount prayed for.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

45

DOCTRINE:
It is settled that a stockholder is personally liable for the financial obligations of a
corporation to the extent of his unpaid subscription. (Vda. de Salvatierra v. Garlitos, 103
Phil. 757, 764; 18 CJs 1211-2)
DISPOSITIVE:
COB Group Marketing, Inc. is ordered to pay Edward A. Keller & Co., Ltd. the sum of
P182,994.60 with 12% interest per annum from 1 August 1971 up to the date of
payment plus P20,000 as attorneys fees.
Asuncion Manahan and Tomas C. Lorenzo Jr. are ordered to pay solidarity with COB
Group Marketing the sums of P35,000 and P25,000 respectively.
The following respondents are solidarily liable with COB Group Marketing, Inc. up to
the amounts of their unpaid subscription to be applied to the companys liability herein:
Jose E. Bax: P36,000.
Francisco C. de Castro: P36,000.
Johnny de la Fuente: P12,000
Sergio C. Ordonez: P12,000
Trinidad C. Ordonez: P3,000
Magno C. Ordonez: P3,000
Adoracion C. Ordonez: P3,000
Tomas C. Lorenzo, Jr.: P3,000
Luz M. Aguilar-Adao: P6,000.
LINGAYEN GULF ELECTRIC v BALTAZAR (unanimous consent of other shareholders
to release subscriber from obligation cannot prejudice creditors of corporation)
FACTS:
Plaintiff, Lingayen Gulf Electric Power Company is a domestic corporation with an
authorized capital stock of 3,000 shares with a par value of P100 per share. The
defendant Baltazar subscribed for 600 shares on account of which he had paid upon
the organization of the corporation the sum of P15,000. After incorporation, the
defendant made further payments on account of his subscription, leaving a balance of
P18,500 unpaid for, which amount, the plaintiff now claims in this action.
A majority of the stockholders of the corporation, among them the herein defendant,
held a meeting and adopted stockholders' resolution No. 17. In the resolution, it was
agreed upon by the stockholders present to call the balance of all unpaid subscribed
capital stock as of July 23, 1946, the first 50 per cent payable within 60 days beginning
August 1, 1946, and the remaining 50 per cent payable within 60 days beginning
October 1, 1946. The resolution also provided, that all unpaid subscription after the due
dates of both calls would be subject to 12 per cent interest per annum and that after the
expiration of 60 days' grace which would be on December 1, 1946, for the first call, and
on February 1, 1947, for the second call, all subscribed stocks remaining unpaid would
revert to the corporation.
The plaintiff wrote a letter to the defendant reminding him that the first 50 percent of his
unpaid subscription would be due. The defendant answered asking the corporation that
he be allowed to pay his unpaid subscription, the defendant also agreed that if he could
not pay the balance of his subscription, his unpaid subscription would be reverted to
the corporation.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

46

The defendant wrote another letter to the members of the BOD of the plaintiff
corporation, offering to withdraw completely from the corporation by selling out to the
corporation all his shares of stock in the total amount of P23,000.
The BOD of the plaintiff corporation held a meeting, and in the course of the said
meeting they adopted Resolution No. 17, on the ground that the previous stockholders'
resolution was null and void, and because the plaintiff corporation was not in a financial
position to absorb the unpaid balance of the subscribed capital stock.
The stockholders of the corporation held another meeting, where the stockholders
adopted resolution No. 4, whereby it was agreed to revalue the stocks and assets of
the company so as to attract outside investors to put in money for the rehabilitation of
the company.
The legal counsel of the plaintiff corporation wrote a letter to the defendant, demanding
the payment of the unpaid balance of his subscription. Copy of this letter was sent by
registered mail to the defendant. The defendant ignored the said demand.
ISSUE: Was the defendant released from the obligation of the unpaid balance of his
subscription by virtue of stockholders' resolution Nos. 17 and 4?
RULING:NO. We agree with the lower court that the law requires that notice of any call
for the payment of unpaid subscription should be made not only personally but also by
publication. This is clear from the provisions of section 40 of the Corporation Law, Act
No. 1459, as amended:
SEC. 40. Notice of call for unpaid subscriptions must be either personally
served upon each stockholder or deposited in the post office, postage
prepaid, addressed to him at his place of residence, if known, and if not
known, addressed to the place where the principal office of the corporation
is situated. The notice must also be published once a week for four
successive weeks in some newspaper of general circulation devoted to the
publication of general news published at the place where the principal
office of the corporation is established or located, and posted in some
prominent place at the works of the corporation if any such there be. If
there be no newspaper published at the place where the principal office of
the corporation is established or located, then such notice may be
published in any newspaper of general news in the Philippines.
It will be noted that section 40 is mandatory as regards publication, using the word
"must". As correctly stated by the trial court, the reason for the mandatory provision is
not only to assure notice to all subscribers, but also to assure equality and uniformity in
the assessment on stockholders.
When the corporation becomes insolvent, with proceedings instituted by creditors to
wind up and distribute its assets, no call or assessment is necessary before the
institution of suits to collect unpaid balance on subscription.
But when the corporation is a solvent concern, the rule is:
Plaintiffs cannot recover because the suit was not proceeded by a call or
assessment against the defendant as a subscriber, and that until this is done
no right of action accrues. In a suit by a solvent going corporation to collect a
subscription, and in certain suits provided by statute this would be true.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

47

Going to the claim of defendant and appellant that Resolution No. 17 of 1946 released
him from the obligation to pay for his unpaid subscription, the authorities are generally
agreed that in order to effect the release, there must be unanimous consent of the
stockholders of the corporation. We quote some authorities:
Subject to certain exceptions, the general rule is that a valid and binding subscription
for stock of a corporation cannot be cancelled so as to release the subscriber from
liability thereon without the consent of all the stockholders or subscribers. A
subscription cannot be cancelled by the company, even under a secret or collateral
agreement for cancellation made with the subscriber at the time of the subscription, as
against persons who subsequently subscribed or purchased without notice of such
agreement.
In particular circumstances, as where it is given pursuant to a bona fide compromise, or
to set off a debt due from the corporation, a release, supported by consideration, will be
effectual as against dissenting stockholders and subsequent and existing creditors. A
release which might originally have been held invalid may be sustained after a
considerable lapse of time.
In the present case, the release claimed by defendant and appellant does not fall under
the exception above referred to, because it was not given pursuant to a bona fide
compromise, or to set off a debt due from the corporation, and there was no
consideration for it.
As already found by the trial court, the release attempted in Resolution No. 17 was not
valid for lack of a unanimous vote. If found that at least seven stockholders were
absent from the meeting when said resolution was approved.
In conclusion we hold that under the Corporation Law, notice of call for payment for
unpaid subscribed stock must be published, except when the corporation is insolvent,
in which case, payment is immediately demandable. We also rule that release from
such payment must be made by all the stockholders.
D. Pre-emptive right Sec 39: Campos Vol 2 52-58; 62-63
Section 39. Power to deny pre-emptive right. All stockholders of a stock corporation shall
enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in
proportion to their respective shareholdings, unless such right is denied by the articles of
incorporation or an amendment thereto: Provided, That such pre-emptive right shall not
extend to shares to be issued in compliance with laws requiring stock offerings or minimum
stock ownership by the public; or to shares to be issued in good faith with the approval of the
stockholders representing two-thirds (2/3) of the outstanding capital stock, in exchange for
property needed for corporate purposes or in payment of a previously contracted debt.
WHAT IS THE PRE-EMPTIVE RIGHT?
It is the option privilege of an existing stockholder to subscribe to a proportionate part of
shares subsequently issued by the corporation, before the same can be disposed of in favor
others.
WHY A PRE-EMPTIVE RIGHT?
To protect existing stockholder equity. If the right is not recognized, the SHs interest in the
corporation will be diluted by the subsequent issuance of shares.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

48

Basis of Right; Common Law Rule


Under the prevailing view in common law, the preemptive right is limited to shares issued in
pursuance of an increase in the authorized capital stock and does not apply to additional
issues of originally authorized shares which form part of the existing capital stock.
This common law principle which was generally understood to be applicable in this
jurisdiction has now to give way to the express provisions of the Corporation Code on the
matter.
Extent and Limitations of Preemptive Right under the Code
WHAT IS THE EXTENT OF THE PRE-EMPTIVE RIGHT?
All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to
all issues or dispositions of shares of any class, in proportion to their respective
shareholdings.
Exception:When such right is denied by the AOI or an amendment thereto.
LIMITATIONS: The pre-emptive right does not extend to: (Sec. 39)
1)Initial Public Offerings (IPOs);
2)Issuance of shares in exchange for property needed for corporate purposes, including
cases wherein an absorbing corporation issues new stocks to the SHs in pursuance to the
merger agreement (Sec. 39)
Why?
(a) Because it is beneficial for the corporation to save its cash;
(b) A swap is more expedient than determining the monetary
equivalent of the property.
3)Issuance of shares in payment of a previously contracted debt (Sec. 39)
Why?
(a) The obligation is extinguished outright;
(b) Corporation does not have to shell out money to fulfill its obligations;
(c) Money that would have otherwise been used for interest payments can be channelled to
more productive corporate activities.
Note: In Nos. (2) and (3), such acts require approval of 2/3 of the OCS or 2/3 of total
members.
In Close Corporations
In close corporations, the preemptive rights extends to ALL stock to be issued, including reissuance of treasury shares,EXCEPTif provided otherwise by the AOI. (Sec. 102).Note that
the limitations in Sec. 39 do not apply.
Waiver of Preemptive Right
The waiver of the preemptive right must appear in the Articles of Incorporation or an
amendment thereto in order to be binding on ALL stockholders, particularly future
stockholders. (Sec. 39)
If it appears merely in a waiver agreement and NOT in the AOI, and was unanimously agreed
to by all existing stockholders:

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

49

The existing stockholders cannot later complain since they are all bound to their
private agreement.
However, future stockholders will NOT be bound to such an agreement.
Any stockholder who has not exercised his preemptive right within a reasonable time will be
deemed to have waived it.
When the issue is in breach of trust
The issue of shares may still be objectionable if the Directors have acted in breach of trust
and their primary purpose is to perpetuate or shift control of the corporation, or to freeze out
the minority interest.
Remedies when right violated/denied
WHAT ARE THE REMEDIES WHEN THE PRE-EMPTIVE RIGHT IS UNLAWFULLY
DENIED?
(1) Injunction;
(2) Mandamus;
(3) Cancellation of the shares (NOTE: but only if no innocent 3rd parties are prejudiced)
(4) In certain cases, a derivative suit]
STOKES v CONTINENTAL, C V2 64-73
FACTS:
1. Continental Trust Co (CTC)- domestic banking corporation in NY, organized in 1980,
with capital stock of $500,000 (5000 shares of par value at $100 each)
2. Stokes- original stockholder, owning all stock issued to him upon organization and
those later acquired; holds 221 shares in total
3. Jan 29, 1902- CTC had a surplus of $ 1, 048, 450.94 which made the book value of
the stock at that time $309. 69 per share.
4. Jan 2, 1902- Blair & Co, strong and influential firm of private bankers in NY proposed
that if stockholders could vote and increase capital stock to $1,000,000 they will buy
it at $450 per share, it being understood that they can nominate 19 out of the 21
trustees to be elected.
5. Stockholders met up immediately and a resolution to increase the stock was
adopted.
6. Stokes demanded for his right to subscribe for 221 shares of the new stock at par
and offered to pay it immediately.
7. Stokes demand was refused.
8. A resolution directing sale to Blair and Co was then accepted, but before its adoption
again, Stokes demanded and was refused.
9. Jan 30- stock was increased, and in the same day was sold to Blair & Co. At the
price named.
10. Trial court- in favor of Stokes. He had the right to subscribe for portion of the
increase
ISSUE: WON Stokes had legal right to subscribe and pay for the same
RULING: YES. Stockholders who held old stocks has a right to subscribe for and take new
stocks in proportion to their respective shares. Stokes has an inherent right to his
proportionate share of any dividend declared, or any surplus arising from the dissolution. The
new stock came into existence through the exercise of a right by stockholders, and the

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

50

increase of stock resulted to the voting power of Stokes to be reduced by one half, and while
he consented to the increase he did not consent to the disposition of the new stock by a sale.
Ownership of stock is in the nature of an inherent but indirect power to control the
corporation. The stock when issued doesn't belong to the corporation, in a way it only holds it
in trust for those stockholders who are beneficial owners. A share of stock is a share in the
power to increase the stock. Rules: a. Stockholders has an inherent right to a proportionate
share of the new stock issued for money only and not to purchase property or to effect
consolidation B. While he can waive his right, he cannot be deprived of it without his consent
except: when stock is issued at a fixed price
On the waiver of his rights: his actions does not deem or conclude that he doesn't want to
subscribe. *actions- the constant demand to subscribe.
DOCTRINE: Stockholders who held old stocks has a right to subscribe for and take new
stocks in proportion to their respective shares. Ownership of stock is in the nature of an
inherent but indirect power to control the corporation. The stock when issued doesn't belong
to the corporation, in a way it only holds it in trust for those stockholders who are beneficial
owners
DISPOSITIVE: Stokes won and was awarded
SUPER CORPO REVIEWER: The directors were under the legal obligation to give the SHplaintiff an opportunity to purchase at the price fixed before they could sell his property to a
third party. By selling to strangers without first offering to sell to him, the defendant wrongfully
deprived him of his property and is liable for such damages as he actually sustained.
THOM v BALTIMORE, C V2 73-75
FACTS:
At a stockholders meeting of Baltimore Trust Company, holders of more than 2/3 of its
outstanding shares approved a plan for the trust companys issuance of 15,000 shares of its
stock ($112/share) for the purpose of acquiring the 10,000 shares of the National Union Bank
stock ($168/share). The whole of the new issue of 15,000 shares of the trust companys stock
was required for the acquisition of the bank stock. Said increase of trust companys capital
stick was authorised by a charter amendment duly adopted by its stockholders. Charter
provides that In the event of the issue of any additional stock of the company for the purpose
of accomplishing the merger with or acquiring any other bank or trust company or other
property, the directors may issue said stock without preferential subscription rights to such
extent and on such terms as the board may in each instance deem proper.
Plaintiffs, as owner of 6,416 of the 70,000 shares of the trust companys capital stock,
protested against such merger agreement and the use of such proposed new issue of stock
for the exchange purposes which involved disregard of the privilege of proportional purchase
(pre-emptive right). They claim that right of pre-emption is inherent in their stock ownership.
LC held that such pre-emptive right would exist if the new shares had been intended to be
sold for cash, but that, as they were to be issued in payment for property, consisting the stock
of the National Union Bank of Maryland, the asserted right was not enforceable. Hence this
appeal.
ISSUE: WON the appellants as stockholders of Baltimore Trust Company, were entitled to
exercise the right to purchase a due proportion of a supplemental issue of its capital stock
(pre-emptive right)?
RULING: NO. The right adheres in stock ownership as an essential means of enabling a
stockholder to maintain the existing ratio of his proprietary interest and voting power in the

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

51

corporation, which is to to be exercised when new stock is to be issued for money needed to
increase the companys assets.
But in transactions involving the acquisition of property by corporation in exchange for shares
of their stock the determining consideration to the owners of the property may be the
advantage of sharing as stockholders in the profits of the corporation with which they are
contracting. It would not be feasible to consummate a transfer based upon such consideration
if the pre-emptive right asserted were to be held enforceable with respect to every new issue
of stock regardless of the object of its disposition.
DOCTRINE: Where the share are issued in exchange for property needed for corporate
purposes, or for a debt previously contracted, the stockholder cannot demand his pre-emptive
right.
DISPOSITIVE: Defendant won. LC affirmed.
SUPER CORPO REVIEWER: Independently of the charters, the SHs of a corporation have a
preferential right to purchase new issues of shares, to the proportional extent of their
respective interests in the capital stock then outstanding, when the privilege can be exercised
consistently with the object which the disposition of the additional stock is legally designed to
accomplish. In the present case, every SH of the bank, for each of the shares, was to receive
1 1/2 shares of the stock co. (share in exchange for property). It would not be feasible to
consummate a transfer based upon such consideration if the preemptive right were to be held
enforceable with respect to every new issue of stock regardless of the object of the
disposition.
FULLER v KROGH C V2 75-78
FACTS
Norcor Company, organized by Fuller and Krogh was in need of a new building. Cormier
company was organized to build such a building for rental to Norcor. Fuller was elected
President, Mrs. Fuller vice president, and Krogh secretary-treasurer. Fuller and Krogh each
purchased additional stock, in equal amounts through April 1955, at which time each owned
218 shares each. After which, Cormier had serious financial difficulties. Cormier left behind
on its payments to the building contractor. Krogh was financially sound, hence, took over the
responsibility of completing during the end of that year. He handled the details of
construction and acted as the general contractor.
Upon completion, Cormier leased the building to Norcor. However, Cormier was deeply in
debt, owing $38,000 to Krogh for completion of the building, $10,000 note to one Abrams,
and apparently had debts to others. In December 1954, Cormier issued 75 shares to Krogh
in satisfaction of $7,500 of its debt. Shortly after, Abrams demanded payment of his note,
hence, Krogh purchased 84 shares and Fuller 25 shares to satisfy debt to Abrams.
Thereafter, Cormier issued 100 additional shares to Krogh thereby reducing its debt to
approximately $500.
Fuller now sued Krogh praying for an order permitting Fuller to purchase sufficient unissued
stock of Cormier to equalize the number of shares held by plaintiff and defendant.
ISSUES:
1. WON Fuller has pre-emptive rights to purchase stock previously authorized but unissued
2. If so, whether he had waived those rights.
RULING:
1. YES. On principle, it would seem the preemptive right of a shareholder should not be
denied when property is to be taken as consideration for the stock excepting in those
peculiar circumstances when the corporation has great need for the particular property,

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

52

and the issuance of the stock, therefore, is the only practical and feasible method by
which the corporation can acquire it for the best interest of all the stockholders. Such is
NOT the situation in the case at bar because the understanding was that Krogh would not
press for payment of his claim. Later he was willing to accept stock in lieu of cash when
Cormier was unable to pay.
2. YES. At the time the stock was issued, Fuller and his wife constituted the majority of the
board of directors and Fuller was president. He signed the certificates. He knew of each
transaction for the issuance of stock and the reason therefor. As a director and president,
he had as much duty as Krogh, if not more, to go through the formality, if required, of
offering the stock to himself as a stockholder. He was aware of his preemptive rights and
of the intended issues of stock to Krogh; and under the circumstances he and Krogh
dealt with each other and with the corporation, he had notice and the opportunity to
exercise his preemptive rights, which he did not within any reasonable time. We can only
conclude he waived his rights.
DOCTRINE:
A preemptive right of a shareholder in a corporation is recognized so universally as to have
become axiomatic in corporation law. Generally, the preemptive right of a stockholder is his
right to retain and maintain his relative and proportionate voice and influence in the control
and management of the affairs of a corporation by purchasing an amount of capital stock to
be issued and sold by the corporation proportionate to his then holdings before the stock can
be sold to others, whether they be outsiders or stockholders.
DISPOSITIVE: Fuller was NOT allowed to exercise his pre-emptive rights.
judgment affirmed.

Lower court

SUPER CORPO REVIEWER: Preemptive right is not to be denied when the property is to be taken
as consideration for the stock except in those peculiar circumstances when the corporation has great
need for the particular property, and the issuance of stock is the only practical and feasible method by
which the corp. can acquire it for the best interest of the SHs. Ground: practical necessity.[cf. Sec. 39]
BENITO v SEC
FACTS:
On February 6, 1959, the Articles of Incorporation of respondent Jamiatul Philippine-Al
Islamia, Inc. (originally Kamilol Islam Institute, Inc.) were filed with the Securities and
Exchange Commission (SEC) and were approved on December 14, 1962. The corporation
had an authorized capital stock of P200,000.00 divided into 20,000 shares at a par value of
P10.00 each. Of the authorized capital stock, 8,058 shares worth P80,580.00 were
subscribed and fully paid for. Petitioner Datu Tagoranao Benito subscribed to 460 shares
worth P4,600.00.
On October 28, 1975, the respondent corporation filed a certificate of increase of its capital
stock from P200,000.00 to P1,000,000.00. Thus, P110,980.00 worth of shares were
subsequently issued by the corporation from the unissued portion of the authorized capital
stock of P200,000.00. Of the increased capital stock of P1,000,000.00, P160,000.00 worth of
shares were subscribed by Mrs. Fatima A. Ramos, Mrs. Tarhata A. Lucman and Mrs. Moki-in
Alonto.
Petitioner Datu Tagoranao filed a petition alleging that the additional issue (worth
P110,980.00) of previously subscribed shares of the corporation was made in violation of his
pre-emptive right to said additional issue and that the increase in the authorized capital stock
of the corporation from P200,000.00 to P1,000,000.00 was illegal considering that the
stockholders of record were not notified of the meeting wherein the proposed increase was in
the agenda.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

53

Respondents denied the material allegations of the petition and claimed that petitioner has no
cause of action and that the stock certificates covering the shares alleged to have been sold
to petitioner were only given to him as collateral for the loan of Domocao Alonto and Moki-in
Alonto. The SEC affirmed the sale.
ISSUE: Whether or not the issuance of the unissued shares was subject to the pre-emptive
right of the stockholders.
RULING: NO.The Court held that the questioned issuance of the unsubscribed portion of the
capital stock worth P110,980.00 is not invalid even if assuming that it was made without
notice to the stockholders as claimed by petitioner. The power to issue shares of stocks in a
corporation is lodged in the board of directors and no stockholders' meeting is necessary to
consider it because additional issuance of shares of stocks does not need approval of the
stockholders.
Petitioner bewails the fact that in view of the lack of notice to him of such subsequent
issuance, he was not able to exercise his right of pre-emption over the unissued shares.
However, the general rule is that pre-emptive right is recognized only with respect to new
issue of shares, and not with respect to additional issues of originally authorized shares. This
is on the theory that when a corporation at its inception offers its first shares, it is presumed to
have offered all of those which it is authorized to issue. An original subscriber is deemed to
have taken his shares knowing that they form a definite proportionate part of the whole
number of authorized shares. When the shares left unsubscribed are later re-offered, he
cannot therefore claim a dilution of interest.
DOCTRINE: (BASED ON THE OLD CORPORATION LAW) Pre-emptive right is recognized
only with respect to new issue of shares, and not with respect to additional issues of originally
authorized shares.
DISPOSITIVE: Dismissed for lack of merit.
DEE v SEC
FACTS:
Naga Telephone Company, Inc. was organized in 1954, the authorized capital was
P100,000.00. In 1974 Naga Telephone Co., Inc. (Natelco) decided to increase its authorized
capital to P3,000,000.00. As required by the Public Service Act, Natelco filed an application
for the approval of the increased authorized capital with the then Board of Communications
on which a decision was rendered approving the application subject to certain conditions,
among which was: That the issuance of the shares of stocks will be for a period of one year
from the date hereof, "after which no further issues will be made without previous authority
from this Board."
Natelco filed its Amended Articles of Incorporation with the Securities and Exchange
Commission. When the amended articles were filed with the SEC, the original authorized
capital of P100,000.00 was already paid. Of the increased capital of P2,900,000.00 the
subscribers subscribed to P580,000.00 of which P145,000 was fully paid.
ISSUE:Whether or not Natelco stockholders have a right of preemption to the 113,800 shares
in question.
RULING: NO. The general rule is that pre-emptive right is recognized only with respect to
new issues of shares, and not with respect to additional issues of originally authorized
shares. This is on the theory that when a corporation at its inception offers its first shares, it is
presumed to have offered all of those which it is authorized to issue. An original subscriber is

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

54

deemed to have taken his shares knowing that they form a definite proportionate part of the
whole number of authorized shares. When the shares left unsubscribed are later re-offered,
he cannot therefore claim a dilution of interest.
Thus, the questioned issuance of the 113,800 stocks is not invalid even assuming that it was
made without notice to the stockholders as claimed by the petitioner. The power to issue
shares of stocks in a corporation is lodged in the board of directors and no stockholders
meeting is required to consider it because additional issuance of shares of stocks does not
need approval of the stockholders. Consequently, no pre-emptive right of Natelco
stockholders was violated by the issuance of the 113,800 shares to CSI.
Accordingly, it is clear that since the trial judge in the lower court did not have jurisdiction in
issuing the questioned restraining order, disobedience thereto did not constitute contempt, as
it is necessary that the order be a valid and legal one. It is an established rule that the court
has no authority to punish for disobedience of an order issued without authority.
E. Debt Securities C V2 90-92; 97-98; 110
Borrowings
Borrowings are usually represented by promissory notes, bonds or debentures.
Oftentimes, a financial institution will be willing to lend large amounts to private corporations
only on the condition that such institution will have some representation on the Board of
Directors. The role of such representative is to see to it that his institution's investment is
protected from mismanagement or unfavorable corporate policies.
Bonds and Debentures
BONDS: secured by a mortgage or pledge of corporate property
must be registered with the SEC, as provided by Sec. 38 of the
Corporation Code
DEBENTURES:issued on the general credit of the corporation
not secured by any collateral; THEREFORE, are not bonded indebtedness in the true
sense, and stockholder approval is NOT required (although it would generally be a good idea
to obtain it)
Convertible securities; stock options
NOTE: Under the SEC rules, stock option must first be approved by the SEC.
Also, if the stock option is granted tonon-stockholders,or todirectors, officers, or managing
groups,there must first be SH approval of 2/3 of the OCS before the matter is submitted to
the SEC for approval.
Of course it goes without saying that the corporation must set aside enough of the junior
securities in case the holders of the option decide to exercise such option.
Hybrid securities
Because preferred shares and bonds are created by contract, it is possible to create stock
which approximates the characteristics of debt securities. Hybrid securities, as the name
implies, therefore combine the features of preferred shares and bonds.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

55

Determining the true nature of the security is crucial for tax purposes. The American courts
use the following criteria:
(1)Is the corporation liable to pay back the investor at a fixed maturity date?
(2)Is interest payable unconditionally at definite intervals, or is it dependent on earnings?
(3)Does the security rank at least equally with the claims of other creditors, or is it
subordinate to them?
What is paid
To who paid
When paid
Nature
Taxability
Maturity date
Rank on
dissolution

BONDS
Interest
Credtitor-investor
Whether the corporation has profits
or not
Expense
Can be deducted for tax purposes
Yes
Ranked together with other
corporate creditors

STOCK
Dividends
Stockholder
Only if there are profits
Not an expense
CANNOT be deducted
No
Superior to stockholders, inferior to
corporate creditors

F. Securities Regulation Code (SRC)


1. What are securities Sec 3.1 SRC
3.1. "Securities" are shares, participation or interests in a corporation or in a
commercial enterprise or profit-making venture and evidenced by a certificate,
contract, instruments, whether written or electronic in character. It includes:
(a) Shares of stocks, bonds, debentures, notes evidences of indebtedness, assetbacked securities;
(b) Investment contracts, certificates of interest or participation in a profit sharing
agreement, certifies of deposit for a future subscription;
(c) Fractional undivided interests in oil, gas or other mineral rights;
(d) Derivatives like option and warrants;
(e) Certificates of assignments, certificates of participation, trust certificates, voting
trust certificates or similar instruments
(f) Proprietary or nonproprietary membership certificates in corporations; and
(g) Other instruments as may in the future be determined by the Commission.
2. Registration of securities Sec. 8 SRC
Section 8. Requirement of Registration of Securities. 8.1. Securities shall not be
sold or offered for sale or distribution within the Philippines, without a registration
statement duly filed with and approved by the Commission. Prior to such sale,
information on the securities, in such form and with such substance as the
Commission may prescribe, shall be made available to each prospective
purchaser.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

56

8.2. The Commission may conditionally approve the registration statement under
such terms as it may deem necessary.
8.3. The Commission may specify the terms and conditions under which any
written communication, including any summary prospectus, shall be deemed not to
constitute an offer for sale under this Section.
8.4. A record of the registration of securities shall be kept in Register Securities in
which shall be recorded orders entered by the Commission with respect such
securities. Such register and all documents or information with the respect to the
securities registered therein shall be open to public inspection at reasonable hours
on business days.
8.5. The Commission may audit the financial statements, assets and other
information of firm applying for registration of its securities whenever it deems the
same necessary to insure full disclosure or to protect the interest of the investors
and the public in general.
3. Exempt securities and exempt transactions Sec. 9, Sec. 10, SRC
Section 9. Exempt Securities. 9.1. The requirement of registration under
Subsection 8.1 shall not as a general rule apply to any of the following classes of
securities:
(a) Any security issued or guaranteed by the Government of the Philippines, or by
any political subdivision or agency thereof, or by any person controlled or
supervised by, and acting as an instrumentality of said Government.
(b) Any security issued or guaranteed by the government of any country with which
the Philippines maintains diplomatic relations, or by any state, province or political
subdivision thereof on the basis of reciprocity: Provided, That the Commission may
require compliance with the form and content for disclosures the Commission may
prescribe.
(c) Certificates issued by a receiver or by a trustee in bankruptcy duly approved by
the proper adjudicatory body.
(d) Any security or its derivatives the sale or transfer of which, by law, is under the
supervision and regulation of the Office of the Insurance Commission, Housing and
Land Use Rule Regulatory Board, or the Bureau of Internal Revenue.
(e) Any security issued by a bank except its own shares of stock.
9.2. The Commission may, by rule or regulation after public hearing, add to the
foregoing any class of securities if it finds that the enforcement of this Code with
respect to such securities is not necessary in the public interest and for the
protection of investors.
Section 10. Exempt Transactions. 10.1. The requirement of registration under
Subsection 8.1 shall not apply to the sale of any security in any of the following
transactions:
(a) At any judicial sale, or sale by an executor, administrator, guardian or receiver
or trustee in insolvency or bankruptcy.
(b) By or for the account of a pledge holder, or mortgagee or any of a pledge lien
holder selling of offering for sale or delivery in the ordinary course of business and
not for the purpose of avoiding the provision of this Code, to liquidate a bonafide
debt, a security pledged in good faith as security for such debt.
(c) An isolated transaction in which any security is sold, offered for sale,
subscription or delivery by the owner therefore, or by his representative for the
owners account, such sale or offer for sale or offer for sale, subscription or delivery
not being made in the course of repeated and successive transaction of a like
character by such owner, or on his account by such representative and such owner
or representative not being the underwriter of such security.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

57

(d) The distribution by a corporation actively engaged in the business authorized by


its articles of incorporation, of securities to its stockholders or other security holders
as a stock dividend or other distribution out of surplus.
(e) The sale of capital stock of a corporation to its own stockholders exclusively,
where no commission or other remuneration is paid or given directly or indirectly in
connection with the sale of such capital stock.
(f) The issuance of bonds or notes secured by mortgage upon real estate or
tangible personal property, when the entire mortgage together with all the bonds or
notes secured thereby are sold to a single purchaser at a single sale.
(g) The issue and delivery of any security in exchange for any other security of the
same issuer pursuant to a right of conversion entitling the holder of the security
surrendered in exchange to make such conversion: Provided, That the security so
surrendered has been registered under this Code or was, when sold, exempt from
the provision of this Code, and that the security issued and delivered in exchange,
if sold at the conversion price, would at the time of such conversion fall within the
class of securities entitled to registration under this Code. Upon such conversion
the par value of the security surrendered in such exchange shall be deemed the
price at which the securities issued and delivered in such exchange are sold.
(h) Brokers transaction, executed upon customers orders, on any registered
Exchange or other trading market.
(i) Subscriptions for shares of the capitals stocks of a corporation prior to the
incorporation thereof or in pursuance of an increase in its authorized capital stocks
under the Corporation Code, when no expense is incurred, or no commission,
compensation or remuneration is paid or given in connection with the sale or
disposition of such securities, and only when the purpose for soliciting, giving or
taking of such subscription is to comply with the requirements of such law as to the
percentage of the capital stock of a corporation which should be subscribed before
it can be registered and duly incorporated, or its authorized, capital increase.
(j) The exchange of securities by the issuer with the existing security holders
exclusively, where no commission or other remuneration is paid or given directly or
indirectly for soliciting such exchange.
(k) The sale of securities by an issuer to fewer than twenty (20) persons in the
Philippines during any twelve-month period.
(l) The sale of securities to any number of the following qualified buyers:
(i) Bank;
(ii) Registered investment house;
(iii) Insurance company;
(iv) Pension fund or retirement plan maintained by the Government of the
Philippines or any political subdivision thereof or manage by a bank or other
persons authorized by the Bangko Sentral to engage in trust functions;
(v) Investment company or;
(vi) Such other person as the Commission may rule by determine as qualified
buyers, on the basis of such factors as financial sophistication, net worth,
knowledge, and experience in financial and business matters, or amount of
assets under management.
10.2. The Commission may exempt other transactions, if it finds that the
requirements of registration under this Code is not necessary in the public interest
or for the protection of the investors such as by the reason of the small amount
involved or the limited character of the public offering.
10.3. Any person applying for an exemption under this Section, shall file with the
Commission a notice identifying the exemption relied upon on such form and at
such time as the Commission by the rule may prescribe and with such notice shall
pay to the Commission fee equivalent to one-tenth (1/10) of one percent (1%) of
the maximum value aggregate price or issued value of the securities.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

XII.

58

Consideration for issuance of shares


A. Form of consideration Sec 62, C V2 140-141
Section 62. Consideration for stocks. Stocks shall not be issued for a consideration less
than the par or issued price thereof. Consideration for the issuance of stock may be any or a
combination of any two or more of the following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and necessary or
convenient for its use and lawful purposes at a fair valuation equal to the par or issued value
of the stock issued;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital; and
6. Outstanding shares exchanged for stocks in the event of reclassification or conversion.
Where the consideration is other than actual cash, or consists of intangible property such as
patents of copyrights, the valuation thereof shall initially be determined by the incorporators or
the board of directors, subject to approval by the Securities and Exchange Commission.
Shares of stock shall not be issued in exchange for promissory notes or future service.
The same considerations provided for in this section, insofar as they may be applicable, may
be used for the issuance of bonds by the corporation.
The issued price of no-par value shares may be fixed in the articles of incorporation or by the
board of directors pursuant to authority conferred upon it by the articles of incorporation or the
by-laws, or in the absence thereof, by the stockholders representing at least a majority of the
outstanding capital stock at a meeting duly called for the purpose.
WHAT FORMS OF CONSIDERATION AREACCEPTABLEFOR ISSUANCE OF SHARES?
cash;
property actually received by the corporation: must be necessary or convenient for its use
and lawful purposes;
labor performed for or services actually rendered to the corporation
(NOTE: Future services are NOT acceptable!);
previously incurred indebtedness by the corporation;
amounts transferred from unrestricted retained earnings to stated capital;
outstanding shares exchange for stocks in the event of reclassification or conversion
WHAT FORMS AREUNACCEPTABLE?
future services
promissory notes
value less than the stated par value
HOW IS THE ISSUED PRICE OF NO-PAR SHARES FIXED?

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

59

It may be fixed as follows:


(1)In the AOI; or
(2)By the BOD pursuant to authority conferred upon it by the AOI or the by-laws; or
(3)In the absence of the foregoing, by the SHs representing at least a majority of the
outstanding capital stock at a meeting duly called for the purpose (Sec. 62)
IF THE CONSIDERATION FOR SHARES IS OTHER THAN CASH, HOW IS THE VALUE
THEREOF DETERMINED?
It is initially determined by the incorporators or the Board of Directors, subject to approval by
the SEC. (Sec. 62)

NATIONAL EXCHANGE CO v DEXTER


FACTS:
Dexter subscribed to the corporate stock of CS Salmon & Co. amounting to P30,000, which
was to be paid from the first dividends to be declared on the shares of the said company. The
payments will be taken from the dividends Dexter will be receiving on his shares, until the full
price or value of such shares have been fully paid.
An initial amount of P15,000 was paid from the dividends of Dexters shares as declared by
the company. However, no other dividend was thereafter declared by the company, and thus,
no other payment was made for the subscription.
The National Exchange Co., Inc., as assignee (through the Philippine National Bank)
became the asignee C. S. Salmon & Co., who instituted an action in the CFI Manila to
recover the remaining amount from Dexter for the purpose of recovering from Dexter a
balance of P15,000, the par value of 150 shares of the capital stock of C. S. Salmon &co.,
with interest and costs.
CFI ruled for National Exchange to recover the amount from which I.B.Dexter appealed.
The CFI ruled in favor of National Exchange, thus, Dexter appealed to the SC.
ISSUE: Whether the stipulation contained in the subscription to the effect that the
subscription is payable from the first dividends declared on the shares has the effect of
relieving the subscriber from personal liability in an action to recover the value of the shares,
and if such stipulation is valid.
RULING: The said stipulation is unlawful, because it is illegal to issue stock for this stipulation
obligates the subscriber to pay nothing for the shares except as dividends may accrue upon
the stock.
In the contingency that dividends are not paid, there is no liability at all. This is a
discrimination in favor of the particular subscriber, and hence the stipulation is unlawful.
Again since it obligates the subscriber to pay nothing for the shares except dividends as may
accrue upon the stock, then in case the dividends are not paid there is no liability at all.
Dexter must pay for the amount claimed with interest.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

60

The law prohibits the issuance of shares by corporations except for actual cash to the par
value of the stock or its full equivalent in property actually received by it at a fair valuation
equal to the par value of the stock or bonds so issued.
B. Watered stock; liability of directors Sec 65, C V2 142-144
Section 65. Liability of directors for watered stocks. Any director or officer of a corporation
consenting to the issuance of stocks for a consideration less than its par or issued value or
for a consideration in any form other than cash, valued in excess of its fair value, or who,
having knowledge thereof, does not forthwith express his objection in writing and file the
same with the corporate secretary, shall be solidarily, liable with the stockholder concerned to
the corporation and its creditors for the difference between the fair value received at the time
of issuance of the stock and the par or issued value of the same. (n)
Watered Stocks
WHAT IS WATERED STOCK?
Stocks issued as fully paid up in consideration of property at an overvaluation. Oftentimes,
the consideration received is less than the par value of the share.
NOTE: No-par shares CAN be watered stock:when they are issued for less
than their issued value as fixed by the corp. in accordance with law.
WHAT ARE THE WAYS BY WHICH WATERED STOCK CAN BE ISSUED?
(1)Gratuitously, under an agreement that nothing shall be paid to the corporation;
(2)Upon payment of less than its par value in money or for cost at a discount;
(3)Upon payment with property, labor or services, whose value is less than the par value of
the shares; and
(4)In the guise of stock dividends representing surplus profits or an increase in the value of
property, when there are no sufficient profits or sufficient increases in value to justify it.
WHAT IS THE LIABILITY OF DIRECTORS FOR THE ISSUANCE OF WATERED STOCK?
Directors and officers who consented to the issuance of watered stocks aresolidarily
liablewith the holder of such stocks to the corp. and its creditors for the difference between
the fair value received at the time of the issuance and the par or issued value of the share.
The liability will be to all creditors, whether they became such prior or subsequent to the
issuance of the watered stock. Reliance by the creditors on the alleged valuation of corporate
capital is immaterial and fraud is not made an element of liability.
NOTE: In the Philippines, it is thestatutory obligation theorythat is controlling
(cf. Sec. 65).
TRIPLEX SHOE CO. v RICE & HUTCHINS, INC. C V2 149
SUMMARY OF THE CASE: In this case, the stocks issued to the Dillman faction were no-par
value shares, the consideration for which were never fixed as required by law. Hence, their
issuance was void. Moreover, the stocks were issued to the Dillmans for services rendered
and to be rendered. Future services are not lawful consideration for the issuance of stock.
FACTS:

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

61

The AOI of Triplex Shoe provided an authorized capital stock of $150,000 with 750 preferred
shares at par value of $100 each and no par value stocks worth $75,000 in all.
A resolution by the BOD has been made. It provided for an increase in the:
authorized capital stock; and
the exclusive grant of voting power on the holders of common stock.
Rice & Hutchins, a Boston-based shoe manufacturing and wholesaling company, bought 249
preferred stocks along with 83 common stocks. Dillmans and Solly, on the other hand, was
given a total of 540 shares of common stock in consideration of services that they have
rendered and services that they are to render in the future.
An annual meeting of SH commenced, and the B ticket, which was supported by the
Dillman faction, defeated the A ticket supported by Rice & Hutchins over the election of
directors. The case was filed quesitoning tha validity of the common shares issued to the
Dillman faction.
ISSUE: WON the stocks issued to the Dillman faction were valid stock.
RULING: NO. The no-par stocks issued to Dillman were invalid, noting that the original
authorized capital stock indicated no number of shares. Issuance of such no-par value shares
is not only unauthorized by any law in the State of Delaware but also inoperative and
meaningless.
Also, because of the following:
The consideration for the no-par value shares was not fixed as required by the law they
essentially fixed the consideration for those share by granting them in return for the services
that the Dillman have rendered and hell be rendering.
Since the AOI did not grant the BOD such power, the BODs resolution to grant the Dillman
faction was invalid
DOCTRINE: Shares issued without statutory authority are void. These are shares issued
under the corporations charter but has done so without observing the statutory formalities.
DISPOSITIVE: The Delaware Supreme Court invalidated all the no-par-value common
shares issued by Triplex.
SUPER CORPO REVIEWER: In this case, the stocks issued to the Dillman faction were no
par value shares, the consideration for which were never fixed as required by law. Hence,
their issuance was void. Moreover, the stocks were issued to the Dillmans for services
rendered and to be rendered. Future services are not lawful consideration for the issuance of
stock.
McCARTY v LANGDEAU, C V2 149-152
FACTS:
1. ANTECEDENT DECISION OF THE TRIAL COURT: C.H. Langdeau, the Receiver of
Estate Life Insurance, was awarded judgment against John L. McCarty for the sum of
$379,280, the balance due on a contract between McCarty and the company.
2. CASE: C.H. Langdeau filed suit against John L. McCarty, alleging that on or about 15
July 1955, John L. McCarty executed a written agreement stating that he will
purchase 19,370 shares of no par stock of Estate Life Insurance Company at a cost
of $20.00 per share. The following are its terms and conditions:

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

62

McCarty will give a $20.00 down payment and the balance of $387,380 would be
paid in equal monthly installments, not exceeding 30 in all. The balance due is to
be evidenced by a note payable as herein provided, without interest.
The minimum payment per month would be $20.00.
The company would have a lien upon the stock so purchased until the note was
paid or the contract terminated.
McCarty was nevertheless to receive as much stock as his actual payments had
paid for.
3. McCarty made payments totaling $8,120 and made no payments thereafter.
However, the company did not elect to terminate the contract. It retained certificates
for 411 shares in McCartys name.
4. POINT OF CONTENTION: The above contract is void since it violates Article 12,
Section 6 of the Texas Constitution, Vernons Ann. St., which provides:
no corporation shall issue stock or bonds except for money paid, labor done
or property actually received, and all fictitious increase of stock or
indebtedness shall be VOID.

ISSUE: Is the transaction of issuance of shares between Estate Life Insurance and John
McCarty void for having consideration not in the form of money, property, or labor?
RULING: NO. There is no declaration in the constitutional provision that a transaction, in
which something other than money, property, or labor is received in payment for the
corporations stock, shall be utterly void. It prohibits such a transaction and therefore makes it
unlawful, but that is the extent to which it goes.
The word void is used but once in the constitutional provision, and that, it is to be noted, is
not in the clause, which prohibits the issuance of stock for other than money, property, or
labor. It is in the distinct clause, which says that, all fictitious increase of stock or
indebtedness shall be void. While the term is found in that clause of the section, the framers
of the Constitution avoided its use in the other. It must be assumed that they did so
deliberately.
There is an essential difference between prohibiting a certain form of transaction making it
unlawful and declaring that it, with all securities, issuing out of it, shall be utterly void.
The Constitutional Provision was not intended as a shield for the stockholder who has not
paid for his stock. It was not framed for his benefit. It was aimed against his acquiring stock
except upon lawful payment. It was designated for the protection of the corporation and its
creditors.
DOCTRINE: The issuance of shares of stock may not be considered void based solely on the
allegation that such was not issued for money, property, or labor. Indeed, the act is unlawful,
but it is not void. To decide for invalidity would be tantamount to providing defrauders an
escape from liability simply by declaring such contracts void and no longer enforceable.
DISPOSITIVE: The judgment of the trial court is affirmed. The contract is enforceable.
SUPER CORPO REVIEWER: McCarty agreed to purchase shares of a corp. with a
downpayment of only $20, with the balance due to be evidenced by a note. McCarty failed to
pay a big portion of the balance. The Court affirmed the judgement against McCarty for the
balance due on the contract.
McCarty contends that the contract is void. But the law only prohibits the issuance of stock. If it
is understood that the stock will not be issued to the subscriber until the note is paid, the
contract is valid and not illegal.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

63

If a security such as a note, which is not a valid consideration, is accepted, the law does not
say that such note, or the stock issued for it, shall be void. What is void by express provision of
law is the fictitious increase of stock or indebtedness. The law was designed for the protection
of the corporation and its creditors. It emphasizes the stockholders obligations to make full and
lawful payment in accord with its mandate, rather than furnish him with a defense when he has
failed in that obligation. Its purpose is to give integrity to the corporations capital. None of these
objects would be promoted by declaring a note given by a subscriber for stock uncollectible in
the hands of a bona fide stockholder.
RHODE v DOCK-HOP COMPANY, C V2 152-158
FACTS:
This is an action by the judgment creditor of a company against a certain number of
stockholders seeking to collect from them what are claimed to be unpaid balances on the par
value of their shares.
The complainant alleged that the defendants were subscribers and stockholders of the
corporation and that said stockholders only paid 25 cents for a $1 on the par value of the
stocks.
Defendants denied that they were either stockholders or subscribers, or that the full par value
of their stock had not been paid.
ISSUE: WON the defendants are required, because of the creditors claim, to make up for
any difference which may exist between what was actually paid on their stock and its par
value.
RULING: NO. The stocks issued were held to be watered stocks which are stocks issued for
less than their par value. The Court held that the stockholders were innocent transferees of
watered stock and cannot be held to answer for the deficiency of the stocks even at the suit
of the creditor of the company. The creditors remedy is against the original owner of the
watered stock.
We are free to follow the rule that the transferee of watered stock who takes it in ignorance of
its real character is not required, even at the suit of a creditor of the company, to pay in
anything more upon it, and we have no hesitation in following it, both as the rule almost
universally adopted elsewhere, and as the only one consistent with the principle upon which a
recovery is permitted in any case against the owner of stock issued by the corporation as fully
paid.
The stockholder is held upon the principle that one giving credit to a corporation is entitled to
rely upon its ostensible capitalization as the basis for the credit given, and that when the
corporation issues watered stock and thereby assumes an ostensible capitalization in excess
of its real assets, the transaction necessarily involves the misleading of subsequent creditors,
and, whether done with that purpose actually in mind or not, is at least a constructive fraud
upon such creditors. In other words, the essence of the right of the creditor to brush aside the
issuance of the stock as fully paid and to show that it was not such and to compel the
payment of the balance upon it, is that its issuance as fully paid was as to him a fraud.
Campos note: The innocent purchaser of watered stocks is thus treated like the holder in
good faith of a negotiable instrument, based on the policy of encouraging the free
transferability of shares as a means of enhancing the growth of commerce and industry.
Apparently the remedy of the defrauded creditor would be against the original owner of the
watered stocks
SUPER CORPO REVIEWER: This case involves an action to collect unpaid balances on par
value of shares. It was held that innocent transferees of watered stock cannot be held to

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

64

answer for the deficiency of the stocks even at the suit of the creditor of the company. The
creditors remedy is against the original owner of the watered stock.
C. How payment of subscription enforced C V2, 158-163
1. When balance on subscription payable Sec 13
Section 13. Amount of capital stock to be subscribed and paid for the purposes of
incorporation. At least twenty-five percent (25%) of the authorized capital stock as
stated in the articles of incorporation must be subscribed at the time of
incorporation, and at least twenty-five (25%) per cent of the total subscription must
be paid upon subscription, the balance to be payable on a date or dates fixed in the
contract of subscription without need of call, or in the absence of a fixed date or
dates, upon call for payment by the board of directors: Provided, however, That in
no case shall the paid-up capital be less than five Thousand (P5,000.00) pesos
2. Payment of balance of subscription Sec 67
Section 67. Payment of balance of subscription. Subject to the provisions of the
contract of subscription, the board of directors of any stock corporation may at any
time declare due and payable to the corporation unpaid subscriptions to the capital
stock and may collect the same or such percentage thereof, in either case with
accrued interest, if any, as it may deem necessary.
Payment of any unpaid subscription or any percentage thereof, together with the
interest accrued, if any, shall be made on the date specified in the contract of
subscription or on the date stated in the call made by the board. Failure to pay on
such date shall render the entire balance due and payable and shall make the
stockholder liable for interest at the legal rate on such balance, unless a different
rate of interest is provided in the by-laws, computed from such date until full
payment. If within thirty (30) days from the said date no payment is made, all stocks
covered by said subscription shall thereupon become delinquent and shall be
subject to sale as hereinafter provided, unless the board of directors orders
otherwise.
3. Delinquency sale Sec 68; 69
Section 68. Delinquency sale. The board of directors may, by resolution, order
the sale of delinquent stock and shall specifically state the amount due on each
subscription plus all accrued interest, and the date, time and place of the sale
which shall not be less than thirty (30) days nor more than sixty (60) days from the
date the stocks become delinquent.
Notice of said sale, with a copy of the resolution, shall be sent to every delinquent
stockholder either personally or by registered mail. The same shall furthermore be
published once a week for two (2) consecutive weeks in a newspaper of general
circulation in the province or city where the principal office of the corporation is
located.
Unless the delinquent stockholder pays to the corporation, on or before the date
specified for the sale of the delinquent stock, the balance due on his subscription,
plus accrued interest, costs of advertisement and expenses of sale, or unless the
board of directors otherwise orders, said delinquent stock shall be sold at public
auction to such bidder who shall offer to pay the full amount of the balance on the
subscription together with accrued interest, costs of advertisement and expenses of
sale, for the smallest number of shares or fraction of a share. The stock so
purchased shall be transferred to such purchaser in the books of the corporation
and a certificate for such stock shall be issued in his favor. The remaining shares, if
any, shall be credited in favor of the delinquent stockholder who shall likewise be

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

65

entitled to the issuance of a certificate of stock covering such shares.


Should there be no bidder at the public auction who offers to pay the full amount of
the balance on the subscription together with accrued interest, costs of
advertisement and expenses of sale, for the smallest number of shares or fraction
of a share, the corporation may, subject to the provisions of this Code, bid for the
same, and the total amount due shall be credited as paid in full in the books of the
corporation. Title to all the shares of stock covered by the subscription shall be
vested in the corporation as treasury shares and may be disposed of by said
corporation in accordance with the provisions of this Code.
Section 69. When sale may be questioned. No action to recover delinquent stock
sold can be sustained upon the ground of irregularity or defect in the notice of sale,
or in the sale itself of the delinquent stock, unless the party seeking to maintain
such action first pays or tenders to the party holding the stock the sum for which
the same was sold, with interest from the date of sale at the legal rate; and no such
action shall be maintained unless it is commenced by the filing of a complaint within
six (6) months from the date of sale. (47a)
4. Recovery of unpaid subscription Sec 69; 70
Section 70. Court action to recover unpaid subscription. Nothing in this Code
shall prevent the corporation from collecting by action in a court of proper
jurisdiction the amount due on any unpaid subscription, with accrued interest, costs
and expenses

Unpaid Subscriptions
Unpaid subscriptions are not due and payable until a call is made by the
corporation for payment. (Sec. 67)
An obligation arising from non-payment of stock subscriptions to a corporation
cannot be offset against a money claim of an employee against the employer.
(Apodaca v. NLRC, 172 SCRA 442)
Intereston all unpaid subscriptions shall be at the rate of interest fixed in the bylaws. If there is none, it shall be the legal rate. (Sec. 66)
How Payment of Shares Enforced
HOW ARE UNPAID SUBSCRIPTIONS COLLECTED?
(1)Call for payment as necessary, i.e. the BOD declares the unpaid subscriptions
due and payable (Sec. 67);
(2)Delinquency sale (Sec. 68; to be discussed in the next section)
(3) Court action for collection (Sec. 70)
VELASCO v POIZAT
FACTS:
1. Miguel Velasco- assignee in insolvency of The Philippine Chemical
Product Co. (TPCPC)
2. Jean Poizat- stockholder in TPCPC from its inception, and for sometime
acted as its treasurer and manager

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

66

3. TPCPC- capital of P50,000 divided into 500 shares (P100 per share)
4. He initially subscribed to 20 shares and paid in his subscription P500 (par
for 5 shares)
5. Velasco is seeking to recover P1,500, the amount subscribed upon the
remaining shares
6. July 1914- a BOD meeting was held and 2 resolutions were adopted:
a. Directors or shareholders should make good by new subscriptions,
in proportion to their respective holdings, 15 shares which had
been surrendered by Infante.
*it seems that this shareholder had already paid 25% of his
subscription, an understanding had been reached by him and the
management that he will be released from the obligation of his
subscription, it being understood that he will not be refunded for what
he has already paid.
*the directors present shall subscribed to taking up his shares, leaving
a deficiency of 300 for voluntary subscriptions from stockholders not
present at that time
b. Jean Poizat, who was absent at the meeting, should be required to
pay the amount of his subscription upon the 15 shares for which he
was still indebted to the company. In case he should refuse, the
management should be authorized to undertake judicial
proceedings against him.
7. When Poizat learned of this, he said hed rather lose the 25% than to
continue investing in a ruinous proposition.
8. TPCPC soon went to involuntary insolvency.
9. Velasco, being named an assignee
10. Poizats principal contention is that the call by the BOD was not made
pursuant to the requirements of the Corporation Code.
ISSUE: WON Poizat may be held liable
RULING: YES. A stock subscription is a contract between the corporation on one
side, and the subscriber on the other, and courts will enforce it for or against either.
As a rule, stock subscription doesnt require an express promise to pay the amount
subscribed, as the law implies a promise to pay on the part of the subscriber.
Section 36 of the Corporation Law recognizes that a stock subscription is
subsisting liability from the time the subscription is made, since it requires to pay
interest quarterly from that date unless he is relieved from such liability by the bylaws of the corporation.
The provisions of the Corporation Law recognizes the remedies for enforcement of
stock subscription: Put up the unpaid stock for sale and dispose of it for the
account of the delinquent subscriber and, by action in court.
In addition, when insolvency supervenes upon a corporation and the court
assumes jurisdiction to wind up, all unpaid stock subscriptions become payable on
demand, and are at once recoverable in an action instituted by the assignee or
receiver appointed by court.
Even if the officers of the corporation failed to perform their duty to make a call or
assessment before the institution of collection suits, it cannot be a reason for a
subscriber to escape from his lawful obligation.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

67

DISPOSITIVE: Velasco won. Poizat is liable for the amount of his subscription
upon the unpaid shares.
DOCTRINE: The corporation has no legal capacity to release an original subscriber
to its capital stock from the obligation of paying for his shares, in whole or in part
MIRANDA v TARLIC RICE MILL
FACTS:
This is an appeal by the plaintiff ROMANA MIRANDA, in her capacity as judicial
administratrix of the intestate estate of her deceased father, Alberto Miranda from a
decision of Judge A. M. Recto of the Court of First Instance of Tarlac.
On June 8, 1926 Alberto Miranda subscribed to 100 shares (par value of P100 per
share) of the company. He obligated himself to pay certain sums of money at
certain specified dates. He later executed a
document assigning, mortgaging or transferring to the credit of the company a
parcel of land.
The company borrowed P10,000 from a certain Mariano Tablante. The sum of
P10,000 obtained from Mariano Tablante was retained by the corporation. When
the promissory note became due, Alberto Miranda arranged for an extension of
time in which to pay it, and on July 19, 1929 he sold the aforementioned parcel of
land under pacto de retro to Vicente Panlilio for P10,000, and paid Mariano
Tablante. Alberto Miranda died on May 24, 1930. The defendant corporation
ceased to do business from the year 1928, and the other stockholders have not
paid for their shares in accordance with their subscription agreement, and no action
has been taken by the corporation to require them to do so.
The principal contention of the appellant is that the officers of the company violated
the terms of the power of attorney given by Alberto Miranda in mortgaging the land
for the P10,000 because the only sum due and payable by Miranda was only
P3,000.
ISSUE:WON the action by the Plaintiff- Appellant as administratrix of a stockholder
to recover what was paid in to the corporation by the stockholder is valid/ must be
upheld?
RULING: NO. It does not appear that Miranda sought to evade the satisfaction of
the mortgage. On the contrary, he repaid to Tablante the sum owed the company.
The phrase in accordance with the subscription contract found in the power of
attorney probably was intended to mean in pursuance of the subscription
agreement, that is, referred to the obligation and had no particular reference to the
dates when the installments were to be paid.
It was the intention of the parties that the property should be mortgaged
immediately for a sum not to exceed P10,000, not only for the purpose of paying
the subscription agreement of Alberto Miranda, but also for the purpose, as stated
in the power of attorney, of increasing the capital of the corporation, not the capital
stock, in order to carry out the purposes for which it was to be organized. This view
of the matter is confirmed by the subsequent conduct of the parties. Although the
corporation retained the full amount of the loan obtained from Mariano Tablante,
and Alberto Miranda had to pay that obligation, he never sought, so far as the
record shows, to recover from the corporation any part of the sum of P10,000.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

68

No call is necessary when a subscription is payable, not upon call or demand by


the directors or stockholders, but immediately, or on a specified day, or on or before
a specified day, or when it is payable in installments at specified times. In such
cases, it is the duty of the subscriber to pay the subscription or installment thereof
as soon as it is due, without any call or demand, and, if he fails to do so, an action
may be brought at any time.
DOCTRINE: Section 38 of the Corporation Law provides that the Board of Directors
of every corporation may at any time declare due and payable to the corporation
unpaid subscriptions to the capital stock and may collect the same with interest
accrued thereon or such percentage of said unpaid subscriptions as it may deem
necessary. Justice Fischer expresses the opinion that this power of directors is
absolute and cannot be limited by the subscription contract , but this does not
mean that the directors may not rely on the subscription contract if they see fit to do
so.
DISPOSITIVE: Defendant won. Decision appealed from is affirmed, with the costs
against the appellant
DE SILVA v ABOITIZ & CO
FACTS
Plaintiff De Silva subscribed 650 shares of stock of Aboitiz & Co. of which he has
paid only the total value of 200 shares, there remaining 450 shares unpaid, for
which he was indebted to the corporation in the sum of P225,000, the value
thereof.
On April 22, 1922, he was notified by the secretary of the corporation of a
resolution adopted by the board of directors of the corporation on the preceding
day, declaring the unpaid subscriptions to the capital stock of the corporation to
have become due and payable on the following May 31st at the office thereof, the
payment to be made to the treasurer, and stating that all such shares as may have
not been paid then, with the accrued interest up to that date, will be declared
delinquent, advertised for sale at public auction, and sold on the following June
16th, for the purpose of paying up the amount of the subscription and accrued
interest, with the expenses of the advertisement and sale, unless said payment
was made before.
The proper advertisement having been published, Plaintiff filed a complaint before
the Court praying for an injunction alleging that the Corporation has exceeded its
authority in prescribing another method of paying the subscription to the capital
stock different from that provided in article 46 of its by-laws, in declaring the
aforesaid 450 shares delinquent, and in directing the sale thereof, as advertised.
Article 46 reads thus:
ART. 46. The net profit resulting from the annual liquidation shall be distributed as
follows: Ten per cent (10%) for the Board of Directors and in the manner prescribed
in article twenty-six (26) of these by-laws; ten per cent (10%) for the general
manager; ten per cent (10%) for the reserve fund, and seventy per cent (70%) for
the shareholders in equal parts; Provided, however, That from this seventy per cent
dividend the Board of Directors may deduct such amount as it may deem fit for the
payment of the unpaid subscription to the capital stock and not pay any dividend to
the holders of the said unpaid shares until they are fully paid; Provided, further,
That when all the shares have been paid in full as provided in the preceding
paragraph, the Board of Directors may also deduct such amount as it may deem fit
for the creation of an emergency special fund, or extraordinary reserve fund when

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

69

in its judgment the same may convenient for the development of the business of
the corporation or for meeting any such contingencies as may arise from its
operation, whenever the distributable dividend is found, after the foregoing
deduction, to be not less than ten per cent (10%) of the paid up capital stock.
ISSUE: WON the Board of Directors exceeded its executive authority in causing
the advertisement for sale at public auction of the delinquent shares of De Silva?
RULING: NO. Under the Corporation Law, the Corporation has 2 other remedies in
dealing with delinquent shares. First is to put up the unpaid stock for sale and
dispose of it for the account of the delinquent subscriber. Second is to collect by
action in any court. In the instant case the board of directors of the defendant
corporation elected to avail itself of the first of said two remedies, and, complying
strictly with the provisions of sections 37 to 49, inclusive, of the aforesaid
Corporation Law, which is binding upon it and its stockholders. it being an artificial
entity created by virtue of that same law (sec. 2), the board of directors made use
of the discretionary power granted to it by that law and declared that payment of
plaintiff's subscription to 450 shares which had not been paid by him was due, and
that said shares were delinquent, and performed all the other acts subsequent to
said declaration that are mentioned in the complaint, as it did not deem it
advantageous to the corporation to apply on the payment of said shares, as was
authorized by the by-law, a part of the profit that was, or might have been realized,
and was distributable among the stockholders in equal parts.
DOCTRINE: Under the Corporation Law, the Corporation has 2 other remedies in
dealing with delinquent shares. First is to put up the unpaid stock for sale and
dispose of it for the account of the delinquent subscriber. Second is to collect by
action in any court.
DISPOSITIVE: Aboitiz & Co. won.
SUPER CORPO REVIEWER: Da Silva subscribed to 650 shares and paid for 200.
The company notified him that his shares will be declared delinquent and sold in a
public auction if he does not pay the balance. Da Silva did not pay. The company
advertised a notice of delinquency sale. Da Silva sought an injunction because the
by-laws allegedly provide that unpaid subscriptions will be paid from the dividends
allotted to stockholders.
The Court held that by-laws provide that unpaid subscriptions may be paid from
such dividends. Company has other remedies provided for by law such as a
delinquency sale or specific performance.
NATIONAL EXCHANGE CO v DEXTER
FACTS:
This action was instituted in the Court of First Instance of Manila by the National
Exchange Co., Inc., as assignee (through the Philippine National Bank) of C. S.
Salmon & Co., for the purpose of recovering from I. B. Dexter a balance of
P15,000, the par value of one hundred fifty shares of the capital stock of C. S.
Salmon & co., with interest and costs. Upon hearing the cause the trial judge gave
judgment for the plaintiff to recover the amount claimed, with lawful interest from
January 1, 1920, and with costs. From this judgment the defendant appealed.
It appears that on August 10, 1919, the defendant, I. B. Dexter, signed a written
subscription to the corporate stock of C. S. Salmon & Co. in the following form: I

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

70

hereby subscribe for three hundred (300) shares of the capital stock of C. S.
Salmon and Company, payable from the first dividends declared on any and all
shares of said company owned by me at the time dividends are declared, until the
full amount of this subscription has been paid.
Upon this subscription the sum of P15,000 was paid in January, 1920, from a
dividend declared at about that time by the company, supplemented by money
supplied personally by the subscriber. Beyond this nothing has been paid on the
shares and no further dividend has been declared by the corporation. There is
therefore a balance of P15,000 still paid upon the subscription.
ISSUE: Whether or not the stipulation contained in the subscription to the effect
that the subscription is payable from the first dividends declared on the shares has
the effect of relieving the subscriber from personal liability in an action to recover
the value of the shares.
RULING: NO. In discussing this problem we accept as sound law the proposition
propounded by the appellant's attorneys and taken from Fletcher's Cyclopedia as
follows: In the absence of restrictions in its character, a corporation, under its
general power to contract, has the power to accept subscriptions upon any special
terms not prohibited by positive law or contrary to public policy, provided they are
not such as to require the performance of acts which are beyond the powers
conferred upon the corporation by its character, and provided they do not constitute
a fraud upon other subscribers or stockholders, or upon persons who are or may
become creditors of the corporation.
Pursuant to such, we find that the Philippine Commission inserted in the
Corporation Law, enacted March 1, 1906, the following provision: "no corporation
shall issue stock or bonds except in exchange for actual cash paid to the
corporation or for property actually received by it at a fair valuation equal to the par
value of the stock or bonds so issued."
The prohibition against the issuance of shares by corporations except for actual
cash to the par value of the stock to its full equivalent in property is thus enshrined
in both the organic and statutory law of the Philippine; Islands; and it would seem
that our lawmakers could scarely have chosen language more directly suited to
secure absolute equality stockholders with respect to their liability upon stock
subscriptions. Now, if it is unlawful to issue stock otherwise than as stated it is selfevident that a stipulation such as that now under consideration, in a stock
subcription, is illegal, for this stipulation obligates the subcriber to pay nothing for
the shares except as dividends may accrue upon the stock. In the contingency that
dividends are not paid, there is no liability at all. This is discrimination in favor of the
particular subcriber, and hence the stipulation is unlawful.
DOCTRINE: No corporation shall issue stock or bonds except in exchange for
actual cash paid to the corporation or for property actually received by it at a fair
valuation equal to the par value of the stock or bonds so issued.
DISPOSITIVE: The judgment appealed from must be affirmed, and it is so ordered,
with costs against the appellant.
SUPER CORPO REVIEWER: Dexter subscribed to 300 shares. The subscription
contract provided that the shares will be paid solely from the dividends. Company
became insolvent. Assignee in insolvency sued Dexter for the balance. Dexter's

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

71

defense was that under the contract, payment would come from the dividends.
Without dividends, he cannot be obligated to pay.
The Court held that the subscription contract was void since it works a fraud on
creditors who rely on the theoretical capital of the company (subscribed shares).
Under the contract, this theoretical value will never be realized since if there are no
dividends, stockholders will not be compelled to pay the balance of their
subscriptions.
LUMANLAN v CURA
FACTS:
The appellant is a corporation duly organized under the laws of the Philippine
Islands with its central office in the City of Manila. The plaintiff-appellee Bonifacio
Lumanlan, on July 31, 1922, subscribed for 300 shares of stock of said corporation
at a par value of P50 or a total of P15,000. Julio Valenzuela, Pedro Santos and
Francisco Escoto, creditors of this corporation, filed suit against it in the Court of
First Instance of Manila, case No. 37007, praying that a receiver be appointed, as it
appeared that the corporation at that time had no assets except credits against
those who had subscribed for shares of stock. The court named Tayag as receiver
for the purpose of collecting, said subscriptions. As Bonifacio Lumanlan had only
paid P1,500 of the P15,000, par value of the stock for which he subscribed, the
receiver on August 30, 1930, filed a suit against him in the Court of First Instance of
Manila, civil case No. 37492, for the collection of P15,109, P13,500 of which was
the amount he owed for unpaid stock and P1,609 for loans and advances by the
corporation to Lumanlan. In that case Lumanlan was sentenced to pay the
corporation the above-mentioned sum of P15,109 with legal interest thereon from
August 30, 1930, and costs. Lumanlan appealed from this decision.
ISSUE:Whether or not Bonifacio Lumanlan is entitled to a credit against the
judgment in case No. 37492 for P11,840and an additional sum of P2,000, which is
25 per cent on the principal debt, as he had to file this suit to collect, or receive
credit for the sum which he had paid Valenzuela for and in place of the corporation,
or a total of P13,840.
RULING: YES. It appears from the record that during the trial of the case now
under consideration, the Bank of the Philippine Islands appeared in this case as
assignee in the "Involuntary Insolvency of Dizon & Co., Inc. That bank was
appointed assignee in case No. 43065 of the Court of First Instance of the City of
Manila on November 28, 1932. It is therefore evident that there are still other
creditors of Dizon & Co., Inc. This being the case that corporation has a right to
collect all unpaid stock subscriptions and any other amounts which may be due it.
It is established doctrine that subscriptions to the capital of a corporation constitute
a fund to which the creditors have a right to look for satisfaction of their claims and
that the assignee in insolvency can maintain an action upon any unpaid stock
subscription in order to realize assets for the payment of its debts. The Corporation
Law clearly recognizes that a stock subscription is a subsisting liability from the
time the subscription is made, since it requires the subscriber to pay interest
quarterly from that date unless he is relieved from such liability by the by-laws of
the corporation. The subscriber is as much bound to pay the amount of the share
subscribed by him as he would be to pay any other debt, and the right of the
company to demand payment is no less incontestable.
SUPER CORPO REVIEWER: Lumanlan had unpaid subscriptions. Companys
receiver sued him for the balance and won. While the case was on appeal, the

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

72

company and Lumanlan entered into a compromise whereby Lumanlan would


directly pay a creditor of the company. In exchange, the company would forego
whatever balance remained on the unpaid subscription. Lumanlan agreed since he
would be paying less than his unpaid subscription. Afterwards, the corporation still
sued him for the balance because the company still had unpaid creditors.
Lumanlans defense was the compromise agreement.
The Court held that the agreement cannot prejudice creditors. The subscriptions
constitute a fund to which they have a right to look to for satisfaction of their claims.
Therefore, the corporation has a right to collect all unpaid stock subscriptions and
any other amounts which may be due it, notwithstanding the compromise
agreement.
PNB v BITULOK SAWMILL
FACTS:
The Philippine Lumber Distributing Agency, Inc. was organized sometime in
early1947 upon the initiative of the late President Manuel Roxas who for the
purpose, had called several conferences between him and the subscribers and
organizers of the Philippine Lumber Distributing Agency, Inc. The purpose is to
insure a steady supply of lumber, which could be sold at reasonable prices to
enable the war sufferers to rehabilitate their devastated homes. President Roxas
convinced the lumber producers to form a lumber cooperative and to pool their
sources together in order to wrest, particularly, the retail trade from aliens who were
acting as middlemen in the distribution of lumber.
At the beginning, the lumber producers were reluctant to organize as they believed
that it would not be easy to eliminate from the retail trade the alien middlemen who
had been in this business from time immemorial, but because President Roxas
made it clear that such a cooperative agency would not be successful without a
substantial working capital which the lumber producers could not entirely shoulder,
and as an inducement he promised and agreed to finance the agency by making
the Government invest P9.00 by way of counterpart for every peso that the
members would invest.
This assurance by the President was relied upon by such lumber producers,
however as predicted their contributions was not enough for the operation of its
business especially having in mind the primary purpose of putting an end to alien
domination in the retail trade of lumber products. Nor was there any appropriation
made by the legislature for the "counterpart fund" as promised by President
Roxas- namely P9.00 contributions from the Government for every peso invested
by defendant lumber producers.
However to remedy this situation while no appropriation is yet made by the
Legislature, President Roxas instructed Hon. Emilio Abello, then Executive
Secretary and Chairman of the Board of Directors of the Philippine National Bank,
to grant the Philippine Lumber Agency an overdraft in the original sum of
P250,000.00 which was later increased to P350,000.00. This was approved by the
Board of Directors of the Philippine National Bank and such loan was granted to
Philippine Lumber after securing by chattel mortgages the stock of the lumber
agency.
The Philippine Government did not invest the P9.00 for every peso coming from
defendant lumber producers. The loan extended to the Philippine Lumber
Distributing Agency by the Philippine National Bank was not paid. Hence, these
suits.x

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

73

The lower court, dismissed the case of PNB for it is grossly unfair and unjust for the
plaintiff bank now to compel the lumber producers to pay the balance of their
subscriptions. Its basis is EQUITY, such as when President Roxas made
representations to PNB to grant said overdraft to the agency, it was the only way by
which President Roxas could make good his commitment that the Government
would invest in said agency to the extent already mentioned because, according to
President Roxas, the legislature had not appropriated any amount for such
counterpart. Consequently, viewing from all considerations of equity in the case,
the Trial Court finds that plaintiff bank should not collect any more from the
defendants the balance of their subscriptions to the capital stock of the Philippine
Lumber Distributing Agency, Inc.
ISSUE: Whether or not the Trial Court is correct?
RULING: NO, based on the law the judgment reached by the lower court cannot be
sustained. It would be unwarranted to ascribe to the President Roxas the view that
the payment of the stock subscriptions, as thus required by law, could be not
complied anymore because the promised funds of the Government would not be
available.
It is a well-settled principle that with all the vast powers lodged in the Executive, he
is still devoid of the prerogative of suspending the operation of any statute or any of
its terms. The Constitution specifically enjoins the President to see to it that all laws
be faithfully executed not break it or make exceptions.
Neither did President Roxas ever give defendant lumber producers to understand
that the failure of the Government for any reason to put up the counterpart fund
could terminate their statutory liability.
The "equity of the case" ruled by the Trial court is not legally impeccable.
DOCTRINE: A corporation cannot release an original subscriber from paying for
his shares without a valuable consideration. Once a certain person subscribed , he
has the obligation to see to it that he be able to pay it if not he will be held liable for
such amount to the corporation.
EDWARD KELLER v COB
FACTS:
Edward A. Keller & Co., Ltd. appointed COB Group Marketing, Inc. as exclusive
distributor of its household products, Brite and Nuvan in Panay and Negros, as
shown in the sales agreement dated March 14, 1970 . Under that agreement Keller
sold on credit its products to COB Group Marketing.
As security for COB Group Marketing's credit purchases up to the amount of
P35,000, one Asuncion Manahan mortgaged her land to Keller. Manahan assumed
solidarily with COB Group Marketing the faithful performance of all the terms and
conditions of the sales agreement.
In July, 1970 the parties executed a second sales agreement whereby COB Group
Marketing's territory was extended to Northern and Southern Luzon. As security for
the credit purchases up to P25,000 of COB Group Marketing for that area, Tomas
C. Lorenzo, Jr. and his father Tomas, Sr. (now deceased) executed a mortgage on
their land in Nueva Ecija. Like Manahan, the Lorenzos were solidarily liable with
COB Group Marketing for its obligations under the sales agreement.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

74

The credit purchases of COB Group Marketing, which started on October 15, 1969,
limited up to January 22, 1971. On May 8, the board of directors of COB Group
Marketing were apprised by Jose E. Bax the firm's president and general
manager, that the firm owed Keller about P179,000. Bax was authorized to
negotiate with Keller for the settlement of his firm's liability. On the same day, May
8, Bax and R. Oefeli of Keller signed the conditions for the settlement of COB
Group Marketing's liability. Twelve days later, or on May 20, COB Group Marketing,
through Bax executed two second chattel mortgages over its 12 trucks (already
mortgaged to Northern Motors, Inc.) as security for its obligation to Keller
amounting to P179,185.16 as of April 30, 1971.
ISSUE: Whether or not the lower courts erred in nullifying the admissions of liability
made in 1971 by Bax as president and general manager of COB Group Marketing
and in giving credence to the alleged overpayment computed by Bax.
RULING: YES. The lower courts not only allowed Bax to nullify his admissions as
to the liability of COB Group Marketing but they also erroneously rendered
judgment in its favor in the amount of its supposed overpayment in the sum of
P100,596.72, in spite of the fact that COB Group Marketing was declared in
default and did not file any counterclaim for the supposed overpayment. The lower
courts harped on Keller's alleged failure to thresh out with representatives of COB
Group Marketing their "diverse statements of credits and payments". This
contention has no factual basis. That means that there was a conference on the
COB Group Marketing's liability. Bax in that discussion did not present his
reconciliation statements to show overpayment.
Bax admitted that Keller sent his company monthly statements of accounts but he
could not produce any formal protest against the supposed inaccuracy of the said
statements. He lamely explained that he would have to dig up his company's
records for the formal protest. He did not make any written demand for
reconciliation of accounts.
DOCTRINE: A corporate creditor to the extent of their unpaid subscription may sue
stockholders. As to the liability of the stockholders, it is settled that a stockholder is
personally liable for the financial obligations of a corporation to the extent of his
unpaid subscription.
DISPOSITIVE: The decisions of the lower courts are reversed and set aside.
GARCIA v SUAREZ
FACTS:
1. On 4 October 1924, Angel Suarez subscribed to 16 shares of the capital
stock of the Compaia Hispano-Filipina, Inc., a corporation, which is duly
formed and organized. Of the 16 shares, at the par value of P100 each,
Suarez only paid P400, the value of 4 shares.
2. On 5 June 1931, Gerardo Garcia was appointed by the court, receiver of
the Compaia Hispano-Filipino, Inc., to collect all the credits of said
corporation, pay its debts, and dispose of the remainder of its assets and of
its properties.
3. On 18 June 1931, Garcia made a demand upon Suarez to pay the balance
of his subscription, but such was in vain. Thus on 10 July 1933, Garcia
brought an action in the Court of First Instance of Manila to recover from
Suarez.
4. On 10 October, 1935, a similar complaint was filed against defendant
Suarez and after trial, judgment was rendered ordering Suarez to pay the

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

75

plaintiff, receiver of Compaia Hispano-Filipino, Inc., the sum of P1,200,


with legal interest thereon from 4 October 1924, and the costs.
5. Suarez now asserts that he was released from the obligation to pay the
balance of his subscription a evidenced by a letter allegedly signed by R.
Pando, acting president of the subject corporation.
ISSUES:
1. Has the action against Suarez already prescribed, seeing that 10 years
had already elapsed from the time she purchased the shares?
2. Does the President of Compaia Hispano-Filipino have the power of
releasing Suarez from the obligation to pay the balance of his subscription?
RULING:
1. NO. The subscription to the capital stock of the corporation, unless
otherwise stipulated, is not payable at the moment of the subscription but
on a subsequent date, which may be fixed by the corporation. Hence,
section 38 of the Corporation Law, amended by Act No. 3518, provides
that:
The board of directors or trustees of any stock corporation formed,
organized, or existing under this Act may at any time declare due and
payable to the corporation unpaid subscriptions to the capital stock.
The board of directors of the Compaia Hispano-Filipino, Inc., not having
declared due and payable the stock subscribed by Suarez, the prescriptive
period of the action for the collection thereof only commenced to run from
18 June 1931, when Garcia, in his capacitysz as receiver as in the exercise
of the power conferred upon him by the said section 38 of the Corporation
Law, demanded of Suarez to pay the balance of his subscription. The
present action having been filed on 10 October 1935, the defense of
prescription is entirely without basis.
2. NO. There can be no doubt that a corporation may effectually release a
subscriber from liability on his subscription, in whole or in part, or allow him
to modify his contract, if ALL stockholders expressly or impliedly gave
consent.
The agents or officers of the corporation have no such power, however,
unless it is expressly conferred upon them by the charter or statute, or by
the stockholders by a by-law or otherwise (Thomas v. Wentworth Hotel
Co., 117 PAC., 1041; Flether, Encyc. Of Private Corporations. Sec. 638)
It has not been established that the stockholders of the Compaia
Hispano-Filipino, Inc., have in any wise consented to release the Suarez
from this obligation, or that the acting president, R. Pando, was expressly
authorized by the stockholders, or was authorized by the by-laws of the
corporation, to release Suarez from his obligation.
DOCTRINE: A corporation has no legal capacity to release a subscriber to its
capital stock from the obligation to pay for his shares; and any agreement to this
effect is invalid. (Velasco v. Poizat, 37 Phil. 802)
A corporation has no power to release an original subscriber to its capital stock
from the obligation of paying for his shares, without a valuable consideration for
such release. (Philippine Trust Co. v. Rivera, 4 Phil. 469)
DISPOSITIVE: Plaintiff Garcia won. Costs against defendant.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

76

5. Effect of delinquency Sec 71


Section 71. Effect of delinquency. No delinquent stock shall be voted for or be
entitled to vote or to representation at any stockholders meeting, nor shall the
holder thereof be entitled to any of the rights of a stockholder except the right to
dividends in accordance with the provisions of this Code, until and unless he pays
the amount due on his subscription with accrued interest, and the costs and
expenses of advertisement, if any.
WHAT IS DELINQUENT STOCK? (Sec. 67)
Stock that remains unpaid 30 days after the date specified in the subscription
contract or the date stated in the call made by the Board.
WHAT ARE THE EFFECTS OF DELINQUENCY?
1.The holder thereof loses all his rights as a stockholder except only the rights to
dividends;
2. Dividends will not be paid to the stockholder but will be applied to the unpaid
balance of his subscription plus costs and expenses. Also, stock dividends will be
withheld until full payment is made.
3.Such stockholder cannot vote at the election of directors or at any meeting on
any matter proper for stockholder action.
4.Stockholder cannot be counted as part of the required quorum.
5.Stockholder cannot be voted for as director of the corporation.
WHAT IS THE PROCEDURE FOR THE CONDUCT OF A DELINQUENCY SALE?
(Sec. 68)
(1)Issuance of Board resolution
The BOD issues a resolution ordering the sale of delinquent stock, specifically
stating the amount due on each subscription plus all accrued interest, and the date,
time and place of the sale.
Note: The sale shall not be less than 30 days nor more than 60 days from the date
the stocks become delinquent.
(2)Notice of sale and publication
Notice of the date of delinquency sale and a copy of the resolution is sent to every
delinquent stockholder either personally or by registered mail. The notice is
likewise published once a week for 2 consecutive weeks in a newspaper of general
circulation in the province or city where the principal office of the corporation is
located.
(3)Sale at public auction
If the delinquent stockholder fails to pay the corporation on or before the date
specified for the delinquency sale, the delinquent stock is sold at public auction to
such bidder who shall offer to pay the full amount of the balance on the
subscription together with accrued interest, costs of advertisement and expenses
of sale, for the smallest number of shares or fraction of a share.
(4)Transfer and issuance of certificate of stock
The stock so purchased is transferred to such purchaser in the books of the
corporation and a certificate of stock covering such shares is issued.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

77

If there is no bidder at the public auction who offers to pay the full amount of the
balance on the subscription and its attendant costs, the corporation may bid for the
shares, and the total amount due shall be credited as paid in full in the books of the
corporation. Title to all the shares of stock covered by the subscription shall be
vested in the corporation as treasury shares and may be disposed of by said
corporation in accordance with the Code.
Note that this is subject to the restrictions imposed by the Code on corporations as
regards the acquisition of their own shares. (See the discussion under Dividends
and Purchase by Corporation of its Own Shares.)
CAN A DELINQUENCY SALE BE QUESTIONED? (Sec.69)
Yes. This is done by filing a complaint within 6 months from the date of sale, and
paying or tendering to the party holding the stock the sum for which said stock was
sold, with interest at the legal rate from the date of sale. No action to recover
delinquent stock sold can be sustained upon the ground of irregularity or defect in
the notice of sale, or in the sale itself of the delinquent stock unless these
requirements are complied with.
D. Unpaid but non-delinquent subscriptions C V2 186-208
1. Rights Sec 72
Section 72. Rights of unpaid shares. Holders of subscribed shares not fully paid
which are not delinquent shall have all the rights of a stockholder.
2. Interest of unpaid subscription Sec 62
Section 62. Consideration for stocks. Stocks shall not be issued for a
consideration less than the par or issued price thereof. Consideration for the
issuance of stock may be any or a combination of any two or more of the following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and
necessary or convenient for its use and lawful purposes at a fair valuation equal to
the par or issued value of the stock issued;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital; and
6. Outstanding shares exchanged for stocks in the event of reclassification or
conversion.
Where the consideration is other than actual cash, or consists of intangible property
such as patents of copyrights, the valuation thereof shall initially be determined by
the incorporators or the board of directors, subject to approval by the Securities
and Exchange Commission.
Shares of stock shall not be issued in exchange for promissory notes or future
service.
The same considerations provided for in this section, insofar as they may be
applicable, may be used for the issuance of bonds by the corporation.
The issued price of no-par value shares may be fixed in the articles of incorporation
or by the board of directors pursuant to authority conferred upon it by the articles of
incorporation or the by-laws, or in the absence thereof, by the stockholders
representing at least a majority of the outstanding capital stock at a meeting duly
called for the purpose
3. Issuance of certificate of stock Sec 63, 64
Section 63. Certificate of stock and transfer of shares. The capital stock of stock
corporations shall be divided into shares for which certificates signed by the
president or vice president, countersigned by the secretary or assistant secretary,

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

78

and sealed with the seal of the corporation shall be issued in accordance with the
by-laws. Shares of stock so issued are personal property and may be transferred
by delivery of the certificate or certificates indorsed by the owner or his attorney-infact or other person legally authorized to make the transfer. No transfer, however,
shall be valid, except as between the parties, until the transfer is recorded in the
books of the corporation showing the names of the parties to the transaction, the
date of the transfer, the number of the certificate or certificates and the number of
shares transferred.
No shares of stock against which the corporation holds any unpaid claim shall be
transferable in the books of the corporation
Section 64. Issuance of stock certificates. No certificate of stock shall be issued
to a subscriber until the full amount of his subscription together with interest and
expenses (in case of delinquent shares), if any is due, has been paid.
Rights and Obigations of Holders of Unpaid but Non-delinquent Stock
WHAT ARE THE RIGHTS OF UNPAID SHARES?
Holders of subscribed shares not fully paid which are not delinquent shall have
all the rights of a stockholder (Sec. 72)
1.
2.
3.
4.

Rights
management and control
financial / economic rights
remedial rights
right to sue individual / class / derivative
FUA CUN v SUMMERS
FACTS:
Chua Soco subscribed for 500 shares of stock of the defendant Banking
Corporation at a par value of P100 per share, paying one-half of the subscription
price in cash. A receipt was issued to Soco,
Soco executed a promissory note in favor of the Fua Cun for P25,000 payable in
90 days, drawing interest at 1 per cent per month, securing the note with a chattel
mortgage on the shares of stock subscribed for by Soco, who also endorsed the
receipt above mentioned and delivered it to Fua Cun.
Fua Cun thereupon took the receipt to the manager of the defendant Bank and
informed him of the transaction with Soco, but was told to await action upon the
matter by the BOD.
Soco become indebted to the China Banking Corporation in the sum of P37,731.68
for dishonored acceptances of commercial paper and in an action brought against
him to recover this amount.
Soco's interest in the 500 shares subscribed for was attached and the receipt
seized by the sheriff. The attachment was levied after the defendant bank had
received notice of the facts that the receipt had been endorsed over to the Fua
Cun.
Fua Cun filed an action maintaining that by virtue of the payment of the 1/2 of the
subscription price of 500 shares, Soco in effect became the owner of 250 shares
and praying that his lien on said shares, by virtue of the chattel mortgage, be
declared to hold priority over the claim of the defendant Banking Corporation.
The trial court rendered judgment in favor of the Fua Cun
ISSUE: WON Fua Cuns lien is superior to China Banking Corporations lien

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

79

RULING: YES. At common law a corporation has no lien upon the shares of
stockholders for any indebtedness to the corporation and our attention has not
been called to any statute creating such lien here. On the contrary, section 120 of
the Corporation Act provides that "no bank organized under this Act shall make any
loan or discount on the security of the shares of its own capital stock, nor be the
purchaser or holder of any such shares, unless such security or purchase shall be
necessary to prevent loss upon a debt previously contracted in good faith, and
stock so purchased or acquired shall, within six months from the time of its
purchase, be sold or disposed of at public or private sale, or, in default thereof, a
receiver may be appointed to close up the business of the bank in accordance with
law."
Section 35 of the United States National Banking Act of 1864 contains a similar
provision and it has been held in various decisions of the United States Supreme
Court that a bank organized under that Act can have no lien on its own stock for the
indebtedness of the stockholders even when the by-laws provide that the shares
shall be transferable only on the books of the corporation and that no such transfer
shall be made if the holder of the shares is indebted to the corporation.
The reasons for this doctrine are obvious; if banking corporations were given a lien
on their own stock for the indebtedness of the stockholders, the prohibition
against granting loans or discounts upon the security of the stock would become
largely ineffective.
SUPER CORPO REVIEWER: Chua Soco bought 500 shares of China Banking
Corp. at par value of P100.00, paying the sum of P25,000.00, 50% of the
subscription price. Chua mortgaged the said shares in favor of plaintiff Fua Cun to
secure a promissory note for the sum of P25,000.00. In the meantime, Chua
Soco's interest in the 500 shares were attached and levied upon to satisfy his debt
with China Banking Corp. Fua Cun brought an action to have himself declared to
hold priority over the claim of China Bank, to have the receipt for the shares
delivered to him, and to be awarded damages for wrongful attachment, on the
ground that he was owner of 250 shares by virtue of Chua Soco's payment of half
of the subscription price.
1 for the said 500 shares in his favor.
BALTAZAR v LINGAYEN GULF ELECTRICS
FACTS:
1. Case of 3 consolidated cases: Baltazar vs LGE, Ungson,
Estrada,Fernandez, Yuson and Acena; Rose v LGE et al and; Baltazar and
Rose vs LGE, et al.
2. Lingayen Gulf Electric (LGE) doing business with capital stock of
P300,000 divided into 3,000 shares of voting stock at P100 par value, per
share.
3. Baltazar and Rose- incorporators, subscribed to 600 and 400 shares of
capital stock, or total par value of P60, 000 and P40, 000, respectively
4. It has been LGEs practice to issue Certificates of stock to its individual
subscribers for unpaid shares of stock.
5. Baltazar, who paid in 535 was issued non-assessable certificates of stock,
corresponding to 535 shares, but after transfers to third persons and
acquisitions, he was left with 341 share fully paid and non-assessable; also
had 65 shares with par value of P6,500 for which no certificate was issued.
6. Rose, had 375 shares fully paid, duly covered by certificates.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

80

7. Respondents, Ungson, Estrada, Fernandez and Yuson were small


stockholder, all holding a number of fully paid-up shares of stock, or not
more than 100 shares, with par value of P100
8. Acena, incorporator and stockholder, holding 600 shares, certificates were
issued.
9. 2 of the defendants have been elected as members of the BOD, largely on
the vote of Acena, while Baltazar and Rose were elected mainly on the
vote of the others.
10. There was an Ungson group and Baltazar group.
11. Date of stockholders was fixed to first Tuesday or Friday of every year, but
was to be held on May 1, 1955 for electing new officers and BOD for the
calendar year.
12. In connection with the meeting, since Jan 1 1955, there was a realignment
effected and the fight for control of the management and property of the
corporation was close and keen.
13. Total number of fully paid up shares held by stockholders of both groups
were almost equal
14. Unson group- been in complete control of the management and property
since Jan 1955 , to retain such passed 3 resolutions:
a. Reso 2- declared all watered stocks issued to Acena, Baltazar,
Rose and Jubenville, of no value and cancelled from the books
b. Reso 3- all unpaid subscriptions should bear interest annually from
the year of subscription on the basis of quarterly payment, and any
or all payments already made on said subscriptions should be
credited to pay interest first, then capital debt after all interest is
fully paid.
*unpaid subscriptions without the interest- accrued and collectible shall
be declared of no value and cancelled from its books
c. Reso 4- any and all shares of stock of the LGE issued and as fully
paid-up to stockholders whose subscription to a number of shares
have been declared delinquent with the accrued interest on the
unpaid, are hereby incapacitated to utilize or avail of the voting
power until such is fully paid up.
15. Baltazar and Rose prayed that defendants may be enjoined from carrying
out the object and purpose of the resolutions, and be allowed to vote on
their fully paid shares of stock as evidenced by stock certificates
16. Defendants answered:
a. plaintiffs were in control before and made no serious effort or
attempt to retrieve the corporation from its financial collapse,
caused by accumulated indebtedness and inefficient management,
which resulted to losses, manipulation of funds, nepotism,
unconscionable grant of big salaries and allowances, illegal
payments, unaccounted funds, etc.
b. 3 resolutions were only to bolster the faith in the assets of the
corporation
17. They came up with an amicable settlement which the lower court approved
and held that both parties must comply with. Terms include: So-called
watered stocks are valid, and the certificate of stock allegedly representing
profit of Acena, will be returned
ISSUE: WON withdrawing or nullifying the voting power of shares of stock is valid,
notwithstanding the existence of partial payments, evidenced by certificates duly
issued.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

81

RULING: NO. Aside from the practice of the corporation, to issue certificates of
stock to its individual subscribers for unpaid shares of stock and gave voting power
to shares fully paid; the law provides:
Sec 37- No certificate of stock shall be issued to a subscriber as fully paid
up until the full par value thereof, or the full subscription in the case of no
par stock, has been paid by him to the corporation.
Payment of the par value is a prerequisite for the issuance of certificates
of par value stocks, and makes payment of the full subscription as a
prerequisite for the issuance of certificates of no par value stocks. The law
provides a condition before a shareholder can vote his shares.
Since the defendant-corporation had applied the payments made by the
stockholders to the full par value of the shares of stock subscribed by them,
instead of the accepted interest, as shown by the capital stock shares
certificate issued for the payments made, and the stockholders had accepted
such certificates issued for such payments, the said application of payments
must be deemed to have been agreed upon by the Corporation and the
stockholders, and the same cannot now be changed without the consent of the
stockholders concerned. The law and by-laws do not contain any provision
prohibiting such, it would therefore result that a corporation may, upon request
of an interested stockholder, as his option, apply payment by them to the full
par value of shares of capital leaving its collection later of the accrued interest
on unpaid subscriptions, and that once such option has been exercised and the
corresponding stock certificates have been issued, the corporation cannot, by a
unilateral act, legally nullify and cancel the capital stock certificates so issued.
DISPOSITIVE: Ungson group won. The shares of stock are not entitled to vote.
DOCTRINE: Payment of the par value is a prerequisite for the issuance of
certificates of par value stocks, and makes payment of the full subscription as a
prerequisite for the issuance of certificates of no par value stocks.
SUPER CORPO REVIEWER: Baltazar, et al. subscribed to a certain number of
shares of Lingayen Gulf Electric Power. They had made only partial payment of the
subscription but the corporation issued them certificates corresponding to shares
covered by the partial payments. Corporation wanted to deny voting rights to all
subscribed shares until total subscription is paid.
The Court held that shares of stock covered by fully paid capital stock shares
certificates are entitled to vote. Corporation may choose to apply payments to
subscription either as: (a) full payment for corresponding number of stock the par
value of which is covered by such payment; or (b) as payment pro-rata to each
subscribed share. The corporation chose the first option, and, having done so, it
cannot unilaterally nullify the certificates issued.
Note: The Camposes are of the opinion that 64 of Corporation Code makes the
Lingayen Gulf inapplicable at present.
NAVA v PEERS MARKETING
FACTS:
This is a mandamus case. Teofilo Po as an incorporator subscribed to 80 of
PEERS MARKETING CORP.

(P100/share) for P8,000. Po paid P2,000 or 25% of the amount of his


subscription. No certificate of stock was issued to him or, for that matter, to any

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

82

incorporator, subscriber or stockholder. No stock certificate was issued to Po.


Teofilo Po sold to Ricardo A. Nava for P2,000, 20 of his 80 shares. In the deed of
sale Po represented that he was "the absolute and registered owner of twenty
shares" of PEERS MARKETING CORP. Nava requested the officers of the
corporation to register the sale in the books of the corporation. Corporations
officers denied the request because Po has not paid fully the amount of his
subscription. Nava was informed that Po was delinquent in the payment of the
balance due on his subscription and that the corporation had a claim on his entire
subscription of 80 shares which included the 20 shares that had been sold to Nava.

Nava filed a Petition for Mandamus in CFI Negros Occ. Bacolod City to compel
the corporation and its EVP Renato Cusi and secretary Amparo Cusi, to register
the 20 shares in Nava's name in the corporations transfer book contending that
under section 37 a certificate of stock may be issued for shares the par value of
which have already been paid for although the entire subscription has not been
fully paid. He contends that Peers Marketing Corporation should issue a certificate
of stock for the 20 shares, notwithstanding that Po had not paid fully his
subscription for the 80 shares, because section 37 requires full payment for the
subscription, as a condition precedent for the issuance of the certificate of stock,
only in the case of no par stock. Nava relies on Baltazar vs. Lingayen Gulf Electric
Power Co., Inc., L-162,36-38, June 30, 1965, 14 SCRA 522, where it was held that
section 37 "requires as a condition before a shareholder can vote his shares that
his full subscription be paid in the case of no par value stock; and in case of stock
corporation with par value, the stockholder can vote the shares fully paid by him
only, irrespective of the unpaid delinquent shares".

Corporations Defense: no shares of stock against which the corporation holds an


unpaid claim are transferable in the books of the corporation

ISSUE:WON the officers of Peers Marketing Corporation can be compelled by


mandamus to enter in its stock and transfer book the sale made by Po to Nava of
the 20 shares forming part of Po's subscription of 80 shares.

RULING: NO. No stock certificate was issued to Po. No clear legal duty on the
part of the officers of the corporation to register the 20 shares in Nava's name.
There is no cause of action for mandamus.
There is no parallelism between this case and the Baltazar case. In the Baltazar
case the SH, an incorporator, was the holder of a certificate of stock for the shares
the par value of which had been paid by him. Issue was whether the said shares
had voting rights although the incorporator had not paid fully the total amount of his
subscription. That is not the issue in this case. In the Baltazar case, it was held that
where a SH subscribed to a certain number of shares with par value and he made
a partial payment and was issued a certificate for the shares covered by his partial
payment, he is entitled to vote the said shares, although he has not paid the
balance of his subscription and a call or demand had been made for the payment
of the par value of the delinquent shares.
The usual practice is for the SH to sign the form on the back of the stock
certificate. Certificate may thereafter be transferred from one person to another. If
the holder of the certificate desires to assume the legal rights of a SH to enable him
to vote at corporate elections and to receive dividends, he fills up the blanks in the
form by inserting his own name as transferee. Then he delivers the certificate to the
secretary of the corporation so that the transfer may be entered in the corporation's
books. The certificate is then surrendered and a new one issued to the transferee.
That procedure cannot be followed in the instant case because the 20 shares in

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

83

question are not covered by any certificate of stock in Po's name. Moreover, the
corporation has a claim on the said shares for the unpaid balance of Po's
subscription.

The transfer made by Po to Nava is not the "alienation, sale, or transfer of stock"
that is supposed to be recorded in the stock and transfer book, as contemplated in
section 52 of the Corporation Law.

DOCTRINE: Without stock certificate, which is the evidence of ownership of


corporate stock, the assignment of corporate shares is effective only between the
parties to the transaction. A stock subscription is a subsisting liability from the time
the subscription is made. The subscriber is as much bound to pay his subscription
as he would be to pay any other debt. The right of the corporation to demand
payment is no less incontestable.

DISPOSITIVE: Defendant won. TC's judgment dismissing the petition


for mandamus is affirmed.

SUPER CORPO REVIEWER: Teofilo Co subscribed to 80 shares of Peers


Marketing Corp. at P100.00 a share for a total of P8,000.00. He, however, paid only
P2,000.00 corresponding to 20 shares or 25% of total subscription. Nava bought 20
shares from Co and sought its transfer in the books of the corporation. The
corporation refused to transfer said shares in its books.
It was held that the transfer is effective only between Co and Nava and does not
affect the corporation. TheFua Cunruling applies.Lingayen Gulfdoes not apply
because, unlike in Lingayen Gulf, no certificate of stock was issued to Co.
E. Certificate of stock Sec 63, 67
Section 63. Certificate of stock and transfer of shares. The capital stock of stock
corporations shall be divided into shares for which certificates signed by the president or vice
president, countersigned by the secretary or assistant secretary, and sealed with the seal of
the corporation shall be issued in accordance with the by-laws. Shares of stock so issued are
personal property and may be transferred by delivery of the certificate or certificates indorsed
by the owner or his attorney-in-fact or other person legally authorized to make the transfer.
No transfer, however, shall be valid, except as between the parties, until the transfer is
recorded in the books of the corporation showing the names of the parties to the transaction,
the date of the transfer, the number of the certificate or certificates and the number of shares
transferred.
No shares of stock against which the corporation holds any unpaid claim shall be transferable
in the books of the corporation. (35)
Section 67. Payment of balance of subscription. Subject to the provisions of the contract of
subscription, the board of directors of any stock corporation may at any time declare due and
payable to the corporation unpaid subscriptions to the capital stock and may collect the same
or such percentage thereof, in either case with accrued interest, if any, as it may deem
necessary.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

84

Issuance of Certificate
Certificate of stock
CONDITION FOR ISSUANCE: payment of full amount of subscription price plus
interest, if any is due(Sec. 64)
CERTIFICATION THAT: person named therein is a holder or owner of a
stated number of shares in the corporation.
INDICATES: 1. kind of shares
2. date of issuance
3. par value, if par value shares
BEARS:Signaturesof the proper officers, usually president
or secretary, as well as thecorporate seal
AMOUNT ISSUED: For no more than the number of shares authorized in
articles of incorporation; excess would bevoid
Nature and function of a certificate of stock
A certificate of stock is not necessary to render one a stockholder in a corporation.
Nevertheless, a certificate of stock is the paper representation or tangible evidence of the
stock itself and of the various interests therein. The certificate is not stock in the corporation
but is merely evidence of the holder's interest and status in the corporation, his ownership of
the shares represented thereby, but is not in law the equivalent of such ownership. It
expresses the contract between the corporation and the SH, but it is not essential to the
existence of a share in stock or the creation of the relation of shareholder to the corporation.
(Tan v. SEC, 206 SCRA 740)
Requisites for valid issuance of formal certificate of stock(Sec. 63)
(1)The certificates must be signed by the President / Vice-President, countersigned by
the secretary or assistant secretary, and sealed with the seal of the corporation.
A mere typewritten statement advising a SH of the extent of his ownership in a corporation
without qualification and/or authentication cannot be considered as a formal certificate of
stock. (Bitong v. CA, 292 SCRA 503)
(2)Delivery of the certificate
There is no issuance of a stock certificate where it is never detached from the stock books
although blanks therein are properly filled up if the person whose name is inserted therein
has no control over the books of the company. (Bitong v. CA, 292 SCRA 503)
(3)Par value of par value shares / Full subscription of no par value shares must be fully
paid.
(4)Surrender of the original certificate if the person requesting the issuance of a
certificate is a transferee from a SH.
LOST OR DESTROYED CERTIFICATE

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

85

WHAT IS THE PROCEDURE FOR THE ISSUANCE OF NEW CERTIFICATES TO


REPLACE THOSE STOLEN, LOST OR DESTROYED?(Sec. 73)
(1)File an affidavit in triplicate with the corporation. The affidavit must state the
following:
a)
b)
c)
d)

Circumstances as to how the certificates were SLD;


Number of shares represented; and
Serial number of the certificate
Name of issuing corporation
(2)The corporation will publish noticeafter the affidavit and other information and
evidence have been verified with the books of the corporation, (Note however that this is
not mandatory. The corporation has the discretion to decide whether to publish or not.)
The notice will contain the following information:

a)
b)
c)
d)
e)

Name of the corporation


Name of the registered owner;
Serial number of the certificate;
Number of shares represented by the certificate;
Effect of expiration of 1 year period from publication and failure to present contest within
that period.
(3)SLD certificate is removed from the booksif after one year from date of last
publication, no contest is presented.
NOTE: One-year period will not be required if the applicant files a bond good for 1 year.
(4)The corporation will then issue new certificates.
However, if a contest has been presented to the corporation, or if an action is pending court
regarding the ownership of the SLD certificate, the issuance of the new certificate shall be
suspended until the final decision by the court.
NOTE: Should corporation issue new certificates without the conditions being fulfilled and a
third party proves that he is the rightful owner of the shares, the corporation may be held
liable to the latter EVEN IF it acted in good faith.
NOTE: Even if the above procedure was followed, if there wasfraud,bad faith,
ornegligenceon the part of the corporation and its officers, the corporation may be held
liable.

XIII.

Dividends and purchases by corporation of its own shares (Read on your own)
A. Form of dividends Sec 43; C V2 209-210
1. Cash
2. Stock
3. Property
Section 43. Power to declare dividends. - The board of directors of a stock corporation may declare
dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in
stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash
dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus
costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his
unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

86

approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at
a regular or special meeting duly called for the purpose. (16a)
Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%)
percent of their paid-in capital stock, except: (1) when justified by definite corporate expansion
projects or programs approved by the board of directors; or (2) when the corporation is prohibited
under any loan agreement with any financial institution or creditor, whether local or foreign, from
declaring dividends without its/his consent, and such consent has not yet been secured; or (3) when it
can be clearly shown that such retention is necessary under special circumstances obtaining in the
corporation, such as when there is need for special reserve for probable contingencies.
IN WHAT FORMS CAN DIVIDENDS BE ISSUED?
1.Cash
2.Property scrip - certificate issued to SHs instead of cash dividends which entitles them to a certain
amount in the future
3.Stock dividends
Stock dividends are distribution to the SHs of the companys own stock.
Stock dividends cannot be declared without first increasing the capital stock unless unissued shares
are available.
New shares are issued to the SHs in proportion to their interest.
No new income unless sold for cash.
Civil fruits belong to the usufructuary and not to the naked owner.
Can only be issued to SHs.
Whenever fractional shares result, corp may pay in cash or issue fractional share warrants.

DIFFERENTIATE BETWEEN CASH DIVIDENDS AND STOCK DIVIDENDS.

Voting requirements
for issuance
Effect on delinquent
stock
Can this be issued
by Executive
Committee?

CASH DIVIDEND
Board of directors

STOCK DIVIDEND
Board of directors + 2/3 OCS

Shall be applied to the


unpaid balance on the
scubscription plus costs
and expenses
No. (Sec 35)

Shall be withheld from the


delinquent stockholder until
his unpaid sbscription is fully
paid
No, since this requires SH
approval (Sec. 35)

FROM WHERE CAN DIVIDENDS BE SOURCED?


Dividends can be sourced only out of the unrestricted retained earnings of the corporation.
Unrestricted retained earningsis defined as "the undistributed earnings of the corporation which
have not been allocated for any managerial, contractual or legal purposes and which are free for
distribution to the stockholders as dividends." (SEC Rules Governing Redeemable and Treasury
Shares, 1982)

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

87

Retained earningshas been defined as "net accumulated earnings of the corporation out of
transactions with individuals or firms outside the corporation." (Simmons, Smith, Kimmel,
Intermediate Accounting, 1977, ed. P. 635)The term implies the limitation that no corporation can
declare dividends unless its legal or stated capital is maintained. It does not include:
premium on par stock i.e. difference between par value and selling price of stock by corp since this is
regarded as paid-in capital; but SEC allowed declaration of stock dividends out of such premiums
transactions involving treasury stocks which are considered expansions and contractions of paid-in
capital;
donations as additional paid- in capital;
increase in value of existing assets, being merely unrealized capital element
If subscribed shares have not been fully paid, the unpaid portion of subscribed capital stock is an
asset, and as long as the net capital asset (after payment of liabilities) including this unpaid portion is
at least equal to the total par value of the subscribed shares, any excess would be surplus or
earnings from which dividends may be declared. However, if a deficit exists, subsequent profits must
first be applied to cover the deficit.
Restrictions on dividend distribution include:
BODs appropriation of certain earnings for certain purposes;
Agreements with creditors, bondholders and preferred SHs requiring retention of certain percent of
corporate earnings to protect their interest and to secure redemption of their securities upon maturity;
SEC-imposed restrictions pursuant to law, like those imposed on banks and insurance companies;
Restriction on the retained earnings equivalent to the cost of treasury shares held by the corporation,
which is lifted only after such shares are reissued or retired (Sec. 195, PD 612)
NIELSON & CO v LEPANTO CONSOLIDATED
FACTS
This is a motion for reconsideration by Lepanto questioning the Courts decision in ordering Lepanto
to issue and deliver to Nielson shares of stock together with fruits thereof.
In the Courts previous decision, the Court declared that pursuant to the modified agreement
regarding the compensation of Nielson which provides, among others, that Nielson would receive
10% of any dividends declared and paid, when and as paid, Nielson should be paid 10% of the stock
dividends declared by Lepanto during the period of extension of the contract.
ISSUE: WON Nielson may be entitled to stock dividends pursuant to the management contract and
Corporation Law?
RULING: NO. Under Section 16 of the Corporation Law stock dividends can not be issued to a
person who is not a stockholder in payment of services rendered. And so, in the case at bar Nielson
can not be paid in shares of stock which form part of the stock dividends of Lepanto for services it
rendered under the management contract. The Court sustain the contention of Lepanto that the
understanding between Lepanto and Nielson was simply to make the cash value of the stock
dividends declared as the basis for determining the amount of compensation that should be paid to
Nielson, in the proportion of 10% of the cash value of the stock dividends declared. And this
conclusion of finds support in the record. In the minutes of the meeting of the Board of Directors of
Lepanto on August 21, 1940, the Chairman stated that he believed that it would be better to tie the

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

88

computation of the 10% participation of Nielson & Company, Inc. to the dividend, because Nielson will
then be able to definitely compute its net participation by the amount of the dividends declared.
DOCTRINE: Stock dividends are issued only to stockholders.
DISPOSITIVE: Lepanto won.
SUPER CORPO REVIEWER: Stock dividends are issued only to SHs This is so because only
stockholders are entitled to dividends. A stock dividend really adds nothing to the interest of each
stockholder; the proportional interest of each stockholder remains the same. If a stockholder is
deprived of his stock dividends - and this happens if the shares of stock forming part of the stock
dividends are issued to a non-stockholder - then the proportion of the stockholder's interest changes
radically. Stock dividends are civil fruits of the original investment, and to the owners of the shares
belong the civil fruits.
B. Sources of dividends Sec 43, C V2 215-218; SEC Memo Circular N. 11, 5 December 2008,
Guidelines on the determination of Retained Earnings Available for Dividend Declaration
FROM WHERE CAN DIVIDENDS BE SOURCED?
Dividends can be sourced only out of the unrestricted retained earnings of the corporation.
Unrestricted retained earningsis defined as "the undistributed earnings of the corporation which
have not been allocated for any managerial, contractual or legal purposes and which are free for
distribution to the stockholders as dividends." (SEC Rules Governing Redeemable and Treasury
Shares, 1982)
Retained earningshas been defined as "net accumulated earnings of the corporation out of
transactions with individuals or firms outside the corporation." (Simmons, Smith, Kimmel,
Intermediate Accounting, 1977, ed. P. 635)The term implies the limitation that no corporation can
declare dividends unless its legal or stated capital is maintained. It does not include:
premium on par stock i.e. difference between par value and selling price of stock by corp since this is
regarded as paid-in capital; but SEC allowed declaration of stock dividends out of such premiums
transactions involving treasury stocks which are considered expansions and contractions of paid-in
capital;
donations as additional paid- in capital;
increase in value of existing assets, being merely unrealized capital element
If subscribed shares have not been fully paid, the unpaid portion of subscribed capital stock is an
asset, and as long as the net capital asset (after payment of liabilities) including this unpaid portion is
at least equal to the total par value of the subscribed shares, any excess would be surplus or
earnings from which dividends may be declared. However, if a deficit exists, subsequent profits must
first be applied to cover the deficit.
Restrictions on dividend distribution include:
BODs appropriation of certain earnings for certain purposes;
Agreements with creditors, bondholders and preferred SHs requiring retention of certain percent of
corporate earnings to protect their interest and to secure redemption of their securities upon maturity;

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

89

SEC-imposed restrictions pursuant to law, like those imposed on banks and insurance companies;
Restriction on the retained earnings equivalent to the cost of treasury shares held by the corporation,
which is lifted only after such shares are reissued or retired (Sec. 195, PD 612)

BERKS v BROADCASTING v CRAUMER C V2 218-221


FACTS: In 1931 the three defendants, together with once Landis, incorporated and organized the
plaintiff company, Berks Broadcasting Company, under the Corporation Act of 1874, for the purpose
of constructing and operating a radio broadcasting station in Reading. The authorized capital was
$100,000 and stock in that amount was issued to the 4 incorporators, who became directors.
According to the book entries of the corporation, the stock was fully paid for by the receipt from each
of the shareholders of $5,000 and by the fixing of a value of $80,000 upon an asset denominated
Franchise and Promotion expenses.
A year later, this letter was written off the books. Increases in the valuation of the fixed assets were
recorded.
As of December 31, 1941, the balance sheet of the company showed assets in excess of the
liabilities and the issued capital stock in the amount of $2, 545.94. However, the existence of that
alleged surplus depended on the inclusion in the assets of the write-ups of $26,000, which still
remained on the balance sheet, for, if that amount were eliminated, so far from there being a surplus
there would then have been a deficiency to the extent of $23, 454.06.
In June, the stockholders again entered into an agreement for the sale of their stock to certain parties
for $210,000, subject to the approval of the Federal Communications Commissions. The sellers
continued to control the company. Two months before the making of the agreement, the defendants
had declared and paid a dividend of $4,000. The approval of the Commission being delayed, the
directors declared a total of $13,000. These dividends were declared on the basis of earnings of the
company during that year of $12,309.78, which, together with the alleged surplus of $2,545.94 as of
the ened of year 1943, made surplus of $14,855.72. If the $26,000 writeups where to be excluded,
the amount would be far short of the requirement. New stockholders brought this action to recover
the $13,000 which the defendants unlawfully declared and paid out as dividends.
ISSUE: Whether or not dividents may be declared from other sources other than surplus.
RULING: NO. Dividends can only be declared only from the surplus, i.e. the excess in the value of
the assets over the liabilities and the issued capital stock. To do otherwise would be illegal The object
of the prohibition is to protect the creditors in view of the limited liability of the SHs and also to protect
the SHs by preserving the capital so that the purposes of the corp. may be performed.
Surplus must be bona fide i.e. founded upon actual earnings or profits and not to be dependent for its
existence upon a theoretical estimate of an appreciation in the value of the companys assets.
The prohibition does not apply, however, to stock dividends because creditors and SHs will not be
affected by their declaration since they do not decrease the companys assets.
DOCTRINE: Dividends can only be declared only from the surplus. Surplus must be bona fide i.e.
founded upon actual earnings or profits and not to be dependent for its existence upon a theoretical
estimate of an appreciation in the value of the companys assets.
Since our Corporation Code allows dividends only out of unrestricted retained earnings, an increase
in the value of existing assets cannot be a source of even a stock dividend.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

90

DISPOSITIVE: Judgment reversed, and record remanded with direction to enter judgment for plaintiff
and against defendants in the sum of $13,000 with interest as set forth in the statement of claim.
SUPER CORPO REVIEWER: Dividends can only be declared only from the surplus, i.e. the excess
in the value of the assets over the liabilities and the issued capital stock. To do otherwise would be
illegal The object of the prohibition is to protect the creditors in view of the limited liability of the SHs
and also to protect the SHs by preserving the capital so that the purposes of the corp. may be
performed.
Surplus must be bona fide i.e. founded upon actual earnings or profits and not to be dependent for its
existence upon a theoretical estimate of an appreciation in the value of the companys assets.
The prohibition does not apply, however, to stock dividends because creditors and SHs will not be
affected by their declaration since they do not decrease the companys assets.
LICH v UNITED STATES C V2 222-232
FACTS:
United States Rubber Company (US Rubber) is a corporation organized and existing under the laws
of the State of New Jersey, having been originally incorporated in 1892 under an Act entitled "An Act
Concerning Corporations," approved April 7, 1875, Revision 1877, p. 175, and, acts amendatory
thereof and supplementary thereto. Sophia G. Lich, is, and was during the years in question, the
holder of three hundred shares of non-cumulative preferred stock of the US Rubber.
In each of the fiscal years of 1935, 1936, and 1937, the annual net earnings of the US Rubber were
$2,231,377.69, $10,172,484.46, and $8,607,902.92, respectively; in each of the said years, however,
there was a deficit of $25,870,402.67, $17,204,158.52, and $10,471,626.89, respectively, and a
corresponding impairment of capital. The deficit, representing the accrued losses of prior years,
existed in 1934 and was carried over into the succeeding years, varying in each year only as to
amount. It definitely appears that in each of the said years the annual net earnings were applied to
the deficit, thereby effecting substantial reductions. There were no dividends declared on either the
preferred or the common stock during the said fiscal years.
US Rubber, in 1938, pursuant to and in accordance with a statute reconstructed its capital structure.
There was issued, in lieu of the outstanding common stock of no par value, common stock of the par
value of $10. This reconstruction reduced the capital liability and created a capital surplus, which was
applied to the then existing deficit, resulting in its cancellation. Thereafter, in the years 1938, 1939,
and 1940, the deficit having been cancelled, the annual net earnings for each of the said years were
productive of net profits and were available for the declaration and lawful payment of dividends; in
each of the said years dividends on the non-cumulative preferred stock were declared and paid in full.
No dividends, however, were declared on the common stock.
On March 5, 1941, US Rubber declared a dividend, payable on April 30, 1941, on both the preferred
and common stock. This declaration of dividends, which is herein questioned, specifically
contemplates payment from the net profits of the current year and from no other fund. It is to be noted
that in the years in question, to wit, 1935, 1936, and 1937, US Rubber, despite the deficit, maintained
adequate reserves.
Lich alleges that the established preference as to dividends, to wit, priority of payment, extends not
only to the current year, but to the prior years of 1935, 1936, and 1937, to the extent of the annual net
earnings of the said years; and, that dividends may not be paid on the common stock at this time until
the dividends are paid on the preferred stock for the years in question, either in full or in proportion to
the annual net earnings of those years.
ISSUE: Whether or not Lich is entitled to dividends for the years of 1935, 1936, and 1937, to the
extent of the annual net earnings of the said years

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

91

RULING: NO. In the immediate case there were, in the years in question, to wit, 1935, 1936, and
1937, no net profits to which the inchoate right to dividends could have attached. There was, in each
of the said years, a substantial deficit which greatly exceeded the annual net earnings of the
corresponding year, and, to the reduction of which the annual net earnings were applied. It is manifest
that the annual net earnings of each of the said years resulted, not in a profit, but in a reduction of the
deficit. There was in each of the said years no source from which dividends could have been paid
lawfully; the payment of dividends under the circumstances would have been unlawful.
No dividend is earned in any year unless the operations for that year produce a fund (which need not
be cash) which may someday be available for the dividend. The hoped-for profits of 1938 can never
be used for dividends, but must be applied to prior losses."
If the annual net earnings of a corporation are justifiably applied to legitimate corporate purposes,
such as payment of debts, reduction of deficits, and restoration of impaired capital, the right of noncumulative preferred stockholders to the payment of dividends is lost. If the annual net earnings are
applied against prior losses and are thereby completely absorbed, there are no net profits from which
dividends may be lawfully paid or to which the inchoate right to dividends may attach. If the annual
net earnings are lawfully expended, the right of non-cumulative preferred stockholders therein is lost.
The payment of dividends from annual net earnings, when the liabilities of a corporation exceed the
assets, would be in derogation of the rights of creditors. The payment of dividends under such
circumstances, while debts accrue, would be contrary, not only to sound business practice, but to the
legislative policy.
The corporation maintained in the years in question adequate reserves for insurance, pensions, and
contingencies. It does not appear, however, that the sum retained in this account was
disproportionate or that it represented profits withheld from the non-cumulative preferred
stockholders. It appears in the immediate case that the reserves are, and have been, maintained in
accordance with the sound business policy. The directors are charged with the management of the
corporate business, and, in the absence of fraud or bad faith, their authority must be regarded as
absolute. Questions of management and policy must be left to their honest judgment and discretion
DOCTRINE: Dividends on non-cumulative preferred stock are payable only out of net profits and for
the years in which said net profits are actually earned.
The right to dividends is conditional upon: (1) accrual of net profits, and (2) retention in the business.
If the annual net earnings of a corp. are justifiably applied to legitimate corp. purposes, such as
payment of debts, reduction of deficits and restoration of impaired capital, the right of non-cumulative
preferred stockholders to the payments of dividends is lost. If they are applied against prior losses
and thereby completely absorbed, there are no net profits from which dividends may be lawfully paid.
DISPOSITIVE: US Rubber won.
SUPER CORPO REVIEWER: Dividends on non-cumulative preferred stock are payable only out of
net profits and for the years in which said net profits are actually earned.
The right to dividends is conditional upon: (1) accrual of net profits, and (2) retention in the business.
If the annual net earnings of a corp. are justifiably applied to legitimate corp. purposes, such as
payment of debts, reduction of deficits and restoration of impaired capital, the right of non-cumulative
preferred stockholders to the payments of dividends is lost. If they are applied against prior losses
and thereby completely absorbed, there are no net profits from which dividends may be lawfully paid.
C. Authority to declare dividend C 218-221

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

92

SOME RULES ON DIVIDEND DECLARATION:


1.BOD has discretion whether or not to declare dividends and in what form.
Exception:Stock dividends, in which case a 2/3 vote of OCS is necessary.
However, such discretion cannot be abused and the BOD cannot accumulate surplus profits
unreasonably on the excuse that it is needed for expansion or reserves.
2.BOD should declare dividends when surplus profits of the corporation exceed 100% of the
corporation's paid-in capital stock.
Exceptions:
(a)When justified by definite corporate expansion projects or programs approved by the Board;
(b) When creditors prohibit dividend declaration without their consent as a condition for the loan, and
such consent has not yet been secured;
(c) When retention is necessary under special circumstances obtaining in the
corporation, e.g. when there is a need for special reserve for probable contingencies. (Sec. 43)
4.The corporation may be subjected to additional tax when it fails to declare dividends, thereby
unreasonably accumulating profits. (See Sec. 25, NIRC)
5.The dividends received are based on stock held whether or not paid. However, if the stocks are
delinquent, the amount will first be applied to the payment of the delinquency plus costs and
expenses; stock dividends will not be given to a delinquent SH.
KEOUGH v ST. PAUL MILK CO., C 235-239
FACTS
1. This case involves 3 suits.
2. Plaintiff (employee and trustee) brought an action against defendant (employer) which sought
(a) to recover salary alleged to be due (salary suit),
(b) to recover shares of stock (stock division suit), and
(c) to have certain actions of the defendant to be annulled (representative suit).
3. Plaintiff, Patrick Keough, was a farmer and a dairy man who conducted milk route in St. Paul.
4. In 1916 Patrick Keough and his brother James re-entered the dairy business as partners with
Ryan and Peter A. Hanson.
5. The amount contributed by each is involved in the stock suit; $20,000 by the Keoughs,
$15,000 by Ryan, and $5,000 by Hanson in the form of milk routes.
6. The partnership purchased the Casey Pure Milk Company for $56,500.
7. In the partnership, James Keough transferred his interest to plaintiff.
8. The partners incorporated the St. Paul Milk Company, and the partnership assets and
liabilities were turned over to it and corporate stock was issued to the partners for their
respective interests.
9. The authorized capital was $100,000 with authority to conduct business when $50,000 was
paid in. Only 597 shares of $100 par value were issued: 285 were issued to Patrick Keough,
240 to Ryan, and 72 to Hanson.
10. Ryan was selected as president of the corporation, Patrick Keough vice president, and
Hanson secretary.
11. In 1930, the corporation purchased from P.J. Keough 185 shares. Hence, the outstanding
capital stock was reduced to 41,200.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

93

12. In 1936, the authorized capital stock was increased to $300,000 through an amendment.
13. A six-to-one stock dividend was declared, and the amount necessary to cover the issued
shares (2,472 at $100 par or $247,200) was transferred from the surplus account to the
capital account.
14. This dividend increased the number of outstanding shares to 2,884, making a total capital of
$288,400.
15. From 15 December 1924, when the corporation paid its first dividend, until October 22, 1935,
$169,470 was distributed among stockholders.
16. On 31December 1936, the corporation had investments of $128,168.72.
17. The record does not disclose mortgages or liens against the corporate property; sales are on
a cash basis; merchandise inventory is small.
18. Plaintiff alleged his right to have a dividend order declared on the premise that those in
charge of corporate affairs are wrongfully withholding profits available for cash dividends.
19. Relying upon the capitalization in 1936 by Ryan and Hansons cooperation of large
percentage of the accumulated surplus without the necessity other than to keep it within the
corporation, plaintiff claim that the capitalization was to evade federal taxes.
ISSUE: Whether or not the corporation can be compelled to declare dividends
RULING: YES. The Court may compel the corporation to declare dividends because it was withheld
for unlawful purpose. The mere fact that a large corporate surplus exists is not enough to warrant
equitable intervention; the test is good faith and reasonableness of the policy of retaining the profits.
However, where dividends are withheld for an unlawful purpose, to deprive stockholders of his right to
a just proportion of the corporation's profit, the court may compel the corporation to declare dividends.
We recognize that the surplus capitalized must be regarded as capital since, having been transferred
to the capital account, it of necessity becomes a part of it and becomes characterized by its attributes.
However, this does not prevent an equitable determination of the question here presented. The stock
dividend actually accomplished a change in form and not in substance. "A stock dividend really takes
nothing from the property of the corporation, and adds nothing to the interests of the shareholders. Its
property is not diminished, and their interests are not increased."
Where profits clearly warrant payment of a dividend and the condition of the business is such that
payment would be proper, the stockholders cannot be cut off by a stock dividend when its purpose is
wrongfully to keep the profits of the business within the control of those dominating the affairs so as to
be available to them. Such action is oppressive and evinces a bad faith sufficient to justify equitable
intervention.
CASE LAW/ DOCTRINE:
General Rule: BOD has discretion whether or not to declare dividends and in what form.
Exception: Stock dividends, in which case a 2/3 vote of OCS is necessary. However, such
discretion cannot be abused and the BOD cannot accumulate surplus profits unreasonably on
the excuse that it is needed for expansion or reserves. (maximum retainable profit is 100% of
paid-up capital)
SUPER CORPO REVIEWER: The mere fact that a large corporate surplus exists is not enough to
warrant equitable intervention; the test is good faith and reasonableness of the policy of retaining the
profits. However, where dividends are withheld for an unlawful purpose to deprive a SH of his right
to a just proportion of the corporation's profit, the court may compel the corporation to declare
dividends.
DODGE v FORD MOTOR CO C 235-239
SUMMARY OF THE CASE: Plaintiff shareholders, Dodge et al., brought an action against Defendant

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

94

corporation, Ford Motor Company, to force Defendant to pay a more substantial dividend, and to
change questionable business decisions by Defendant.
This case involves an action against the Ford Motor Company to compel declaration of dividends. At
the time this complaint was made, Ford had concluded its most prosperous year of business, and the
demand for its cars at the price of the previous year continued. While it had been the practice, under
similar circumstances, to declare larger dividends, the corporation refused to declare any special
dividends. The Board justified its refusal to declare larger dividends on the expansion plans of the
company by erecting a smelting plant, but maintaining the selling price of its cars (instead of reducing
it as had been the practice in previous years). The plaintiffs contend that such a proposal would be
tantamount to the business being conducted as a semi-eleemosynary (or charitable) institution
instead of a business institution.
The court pointed out that a business corporation is organized and carried on primarily for the profit of
SHs. The discretion of the directors is to be exercised in the choice of means to attain that end and
does not extend to a change in the end itself reduction of profits or to devote profits to another
purpose. While the Court noted the capable management of the affairs of the corporation and
therefore was not convinced that the motives of the directors were prejudicial to the company's
interests, it likewise noted that the annual dividends paid were very small in relation to the profits that
the company had been making. It therefore affirmed the amount fixed by the lower court to be
distributed to the stockholders.
FACTS:
Defendant corporation was the dominant manufacturer of cars when this case was initiated. At one
point, the cars were sold for $900, but the price was slowly lowered to $440 and finally, Defendant
lowered the price to $360. The head of Defendant corporation, Henry Ford, admitted that the price
negatively impacted short-term profits, but Ford defends his decision altruistically, saying that his
ambition is to spread the benefits of the industrialized society with as many people as possible.
Further, he contends that he has paid out substantial dividends to the shareholders ensuring that they
have made a considerable profit, and should be happy with whatever return they get from this point
forward. Instead of using the money to pay dividends, Ford decided to put the money into expanding
the corporation.
ISSUE: WON Plaintiff shareholders can force Defendant to increase the cost of the product and limit
the money invested into expansion in order to pay out a larger dividend.
RULING:Plaintiffs are entitled to a more equitable-sized dividend, but the court will not interfere with
Defendants business judgments regarding the price set on the manufactured products or the decision
to expand the business. The purpose of the corporation is to make money for the shareholders, and
Defendant is arbitrarily withholding money that could go to the shareholders. Notably, Ford did not
deny himself a large salary for his position with the company in order to achieve his ambitions.
However, the court will not question whether the company is better off with a higher price per vehicle,
or if the expansion is wise, because those decisions are covered under the business judgment rule.
OBITER:The lead plaintiffs, the Dodge brothers, had a motive outside of their position as minority
shareholders. Their own business competed with Defendant, and larger dividends would have helped
finance their business while draining resources from Defendant. There could then be an argument
that Fords decision was in the best interests of Defendant corporation.
DOCTRINE:The purpose of a corporation is to make a profit for the shareholders, but a court will not
interfere with decisions that come under the business judgment of directors.
DISPOSITIVE:The Court affirmed the amount fixed by the lower court to be distributed to the
stockholders.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

95

SUPER CORPO REVIEWER:This case involves an action against the Ford Motor Company to
compel declaration of dividends. At the time this complaint was made, Ford had concluded its most
prosperous year of business, and the demand for its cars at the price of the previous year continued.
While it had been the practice, under similar circumstances, to declare larger dividends, the
corporation refused to declare any special dividends. The Board justified its refusal to declare larger
dividends on the expansion plans of the company by erecting a smelting plant, but maintaining the
selling price of its cars (instead of reducing it as had been the practice in previous years). The
plaintiffs contend that such a proposal would be tantamount to the business being conducted as a
semi-eleemosynary (or charitable) institution instead of a business institution.
The court pointed out that a business corporation is organized and carried on primarily for the profit of
SHs. The discretion of the directors is to be exercised in the choice of means to attain that end and
does not extend to a change in the end itself reduction of profits or to devote profits to another
purpose. While the Court noted the capable management of the affairs of the corporation and
therefore was not convinced that the motives of the directors were prejudicial to the company's
interests, it likewise noted that the annual dividends paid were very small in relation to the profits that
the company had been making. It therefore affirmed the amount fixed by the lower court to be
distributed to the stockholders.
Note: Prof. Jacinto is of the opinion that what happened in this case is
possible under the present Code, even without changing the AOI.
D. When right to dividends vests, rights of transferee C V2 250-251
WHEN DOES THE RIGHT TO DIVIDENDS VEST?
As soon as the BoD has declared dividends. From this time, it becomes a debt owed by the
corporation, and therefore can no longer be revoked (McLaran v. Crescent Planning).
EXCEPTION:If the declaration has not yet been announced or communicated to the stockholders.
NOTE: When no dividends are declared for 3 consecutive years, preferred SHs are given the right to
vote for directors until dividends are declared.
NOTE: The extent of the SHs share in the dividends will depend on thecapital contribution; NOT the
number of shares he has.
McLAREN v CRESCENT VESTS; RIGHTS OF TRANSFEREE C V2 250-251
FACTS:
1. Crescent Planning Mill Co. is a business corporation organized under the laws of the State of
Missouri, with a capital stock of $50,000, divided into 500 shares of the par value of $100
each.
2. Robert J. Humber, was in his lifetime, a proprietor of 57 fully paid shares of the said corporate
stock. He was a director and for many years, the president of the board of directors.
3. The corporation was solvent and possessed ample surplus funds and so on 7 February 1903,
at a regular meeting of its board of directors, unanimously adopted the following resolution:
Declare a dividend of 6% divided into 4 payments of 1% each, payable: 15 February, 1
April, 1 July, and 1 October 1903.
4. No further resolution was passed nor were there additional steps taken in any manner to set
a part a fund out of which to pay the dividend, although the company was solvent and then
had on hand, something near $10,000 undivided profits and $29,000 surplus.
5. Only the first installment of 15 February 1903 was paid. The others never followed and on 11
April 1903, at a meeting of the board of directors, it was shown that an error had been
discovered in the previous showing of the financial conditions of the company. Its assets were

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

6.

7.
8.
9.

96

actually $6,000 less than had been understood, which reduced its surplus from $29,000 to
$23,000.
Because of this circumstance, the board on that day adopted a new resolution rescinding and
recalling the dividends payable 1 April, 1 July, and 1 October. It must be noted that at the time
this resolution was made, the company was perfectly solvent and had ample funds on hand
to pay the dividend and retain a comfortable surplus of $20,000.
Robert J. Humber requested the payment of his installment of the dividend but was refused
on the ground that its declaration and allowance had been superseded and set aside by the
aforementioned new resolution.
The trial court found in favor of the plaintiff and against the corporation.
Robert J. Humber had passed away during the pendency of this appeal. He left a will, and his
counsel, Robert L. McLaran had been appointed his administrator. He is now the plaintiff in
this case.

ISSUES:
1. Whether the mere declaration of a dividend by a solvent corporation under such
circumstances as indicated, creates a debt in favor of the stockholder and against such
corporation for the amount of such dividend in the absence of further express action on the
part of the board of directors, setting aside a fund out of which to pay such dividend?
2. Is it competent for such corporation, after having declared the dividend, to pay one
installment thereon and to rescind and recall the installments thereof yet unpaid?
RULING:
1. YES. Through the efforts of counsel for Crescent Planning Mill Co., the word dividend was
defined, citing a number of authorities. One of which states:
A dividend is that portion of the profits and surplus funds of the corporation which has been
ACTUALLY SET APART by a valid resolution of the board of directors, or by the shareholders
at a corporate meeting, for distribution among the shareholders according to their respective
interests, in such a sense as to become segregated from the property of the corporation, and
to become the property of the shareholders, distributively. (2 Thompson on Corporations,
sec. 2126)
The words set apart seem to indicate that a resolution declaring a dividend is not sufficient
to create a dividend, rather, a further action on the part of the corporation setting apart a fund
out of which the dividend is to be paid, is necessary. However, this Court finds to the contrary.
When the declaration of the dividend is fairly and properly made, out of profits existing at the
time it is declared, the relation of debtor and creditor is thereby established between the
corporation and the stockholders and a debt is thereby created against the corporation and in
favor of the stockholder for the amount of the dividend due on the stock held by him.
The act of declaring a dividend from the stock and corpus of the corporate property and
estate, is ipso facto, in and of itself, he setting apart, setting aside, and segregating such
dividends in the sense that it creates an immediate right of the stockholder to demand and
recover the same when due, inasmuch as thereby it is actually severed and segregated from
the other property.
2. NO. A cash dividend, properly and fairly declared, cannot be revoked by the subsequent
action of the corporation. The debtor cannot revoke, recall, or rescind the debt or otherwise
absolve itself from its payment by any action on its part against or without the consent of the
creditor.
DOCTRINE:The doctrine is that by mere declaration, the dividend becomes immediately fixed and
absolute in the stockholder and from henceforth the right of each individual stockholder is changed by
the act of declaration from that of partner and part owner of the corporate property to a status
absolute, adverse to every other stockholder and to the corporation itself, in so far as his pro rata
proportion of the dividend is concerned.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

97

DISPOSITIVE: McLaran won and was declared entitled to the dividends by virtue of a creditor-debtor
relationship. Judgment of the trial court affirmed.
SUPER CORPO REVIEWER: CPM Corp., having a surplus of $29,000, declared a 6% cash dividend
payable in four installments. The first installment was paid by the Board after which an error was
discovered in the computation of the assets: from the initial recognized surplus of $29,000 to $6,000.
Mainly for this reason, the Board adopted a resolution rescinding the dividends payable on the three
other installments despite the solvency of the corp and the existence of ample funds to pay said
dividends. The original P was Humber, a SH, and was substituted by McLaran, the administrator of
his estate when he died. The defendant corp maintained that there was no valid declaration of
dividends because the corporation failed to set aside funds to pay for the same.
A cash dividend, properly declared, cannot be revoked by the subsequent action of the corp. for by its
declaration, the corp had become the debtor of the SH and it goes without saying that the debtor
cannot revoke, recall or rescind the debt or otherwise absolve itself from its payment by a unilateral
action or without the consent of the creditor. Thus, the rescission by the BOD of the subsequent
installments was of no force.
Dividends are defined as portions of profits/surplus funds of the corp. which have been actually set
apart by a valid board resolution or by the SH at a corp. mtg. for distribution among SH according to
their respective interests. The mere declaration of the dividend, without more, by competent authority
under proper circumstances, creates a debt against the corporation in favor of the stockholders the
same as any other general creditor of the corporation. By the mere declaration, the dividend becomes
immediately fixed and absolute in the stockholder and from henceforth the right of each individual
stockholder is changed by the act of declaration from that of partner and part owner of the corporate
property to a status absolutely, adverse to every other stockholder and to the corporation itself,
insofar as hispro rataproportion of the dividend is concerned.
E. Liability for illegal dividends C V2 256-258
WHAT ARE ILLEGAL DIVIDENDS?
Illegal dividends are dividends declared in violation of law.
WHAT ARE THE EFFECTS OF THE ILLEGAL DECLARATION OF DIVIDENDS?
(1)If the directors acted wilfully, or with negligence or in bad faith, they will be liable to the corporation.
If the corporation has become insolvent, they are liable to the corporation's creditors for the amount of
dividends based out of capital. (Based on Sec. 31)
(2)If the directors cannot be held liable because they acted with due diligence and in good faith, in the
absence of an express provision of law, aninnocentstockholder is not liable to return the dividends
received by him out of capital, unless the corporation
F. Purchase by corporation of its own shares Sec 41, C V 2 258-261; review treasury shares in this
outline
Section 41. Power to acquire own shares. A stock corporation shall have the power to purchase or
acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the
following cases: Provided, That the corporation has unrestricted retained earnings in its books to
cover the shares to be purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in
a delinquency sale, and to purchase delinquent shares sold during said sale; and

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

98

3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the
provisions of this Code.
WHAT ARE THE REQUISITES FOR ACQUISITION BY THE CORPORATION OF ITS OWN
SHARES? (Sec. 41)
1.unrestricted retained earnings to cover the shares to be acquired;
2.legitimate corporate purpose
FOR WHAT PURPOSES CAN A CORPORATION ACQUIRE ITS OWN SHARES? (Sec. 41)
1.To eliminate fractional shares arising out of stock dividends;
2.To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent shares sold during said sale;
3.To pay dissenting or withdrawing stockholders entitled to payment for their shares under the
Corporation Code(Appraisal Right).
XIV.

Amendments of charter
Campos V2 262-299, Sec 145, 16, 36, 37, 38, 11, 17, 81
Section 145. Amendment or repeal. No right or remedy in favor of or against any corporation, its
stockholders, members, directors, trustees, or officers, nor any liability incurred by any such corporation,
stockholders, members, directors, trustees, or officers, shall be removed or impaired either by the subsequent
dissolution of said corporation or by any subsequent amendment or repeal of this Code or of any part thereof.
Section 16. Amendment of Articles of Incorporation. Unless otherwise prescribed by this Code or by special
law, and for legitimate purposes, any provision or matter stated in the articles of incorporation may be
amended by a majority vote of the board of directors or trustees and the vote or written assent of the
stockholders representing at least two-thirds (2/3) of the outstanding capital stock, without prejudice to the
appraisal right of dissenting stockholders in accordance with the provisions of this Code, or the vote or written
assent of at least two-thirds (2/3) of the members if it be a non-stock corporation.
The original and amended articles together shall contain all provisions required by law to be set out in the
articles of incorporation. Such articles, as amended shall be indicated by underscoring the change or changes
made, and a copy thereof duly certified under oath by the corporate secretary and a majority of the directors
or trustees stating the fact that said amendment or amendments have been duly approved by the required
vote of the stockholders or members, shall be submitted to the Securities and Exchange Commission.
The amendments shall take effect upon their approval by the Securities and Exchange Commission or from
the date of filing with the said Commission if not acted upon within six (6) months from the date of filing for a
cause not attributable to the corporation.
Section 36. Corporate powers and capacity. Every corporation incorporated under this Code has the power
and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the articles of incorporation and the
certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in
accordance with this Code;

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

99

6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to subscribers and to
sell treasury stocks in accordance with the provisions of this Code; and to admit members to the corporation if
it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with
such real and personal property, including securities and bonds of other corporations, as the transaction of
the lawful business of the corporation may reasonably and necessarily require, subject to the limitations
prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations as provided in this Code;
9. To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural,
scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign, shall give donations in
aid of any political party or candidate or for purposes of partisan political activity;
10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and
employees; and
11. To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as
stated in the articles of incorporation. (13a)
Section 37. Power to extend or shorten corporate term. A private corporation may extend or shorten its
term as stated in the articles of incorporation when approved by a majority vote of the board of directors or
trustees and ratified at a meeting by the stockholders representing at least two-thirds (2/3) of the outstanding
capital stock or by at least two-thirds (2/3) of the members in case of non-stock corporations. Written notice of
the proposed action and of the time and place of the meeting shall be addressed to each stockholder or
member at his place of residence as shown on the books of the corporation and deposited to the addressee
in the post office with postage prepaid, or served personally: Provided, That in case of extension of corporate
term, any dissenting stockholder may exercise his appraisal right under the conditions provided in this code
Section 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness.
No corporation shall increase or decrease its capital stock or incur, create or increase any bonded
indebtedness unless approved by a majority vote of the board of directors and, at a stockholders meeting
duly called for the purpose, two-thirds (2/3) of the outstanding capital stock shall favor the increase or
diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Written
notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or increasing of
any bonded indebtedness and of the time and place of the stockholders meeting at which the proposed
increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be
considered, must be addressed to each stockholder at his place of residence as shown on the books of the
corporation and deposited to the addressee in the post office with postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by
the chairman and the secretary of the stockholders meeting, setting forth:
(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof
actually subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital
stock or number of no-par stock subscribed by each, and the amount paid by each on his subscription in cash
or property, or the amount of capital stock or number of shares of no-par stock allotted to each stock-holder if
such increase is for the purpose of making effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the meeting;
(6) The amount of stock represented at the meeting; and

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

100

(7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing
of any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded
indebtedness shall require prior approval of the Securities and Exchange Commission.
One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed
with the Securities and Exchange Commission and attached to the original articles of incorporation. From and
after approval by the Securities and Exchange Commission and the issuance by the Commission of its
certificate of filing, the capital stock shall stand increased or decreased and the incurring, creating or
increasing of any bonded indebtedness authorized, as the certificate of filing may declare: Provided, That the
Securities and Exchange Commission shall not accept for filing any certificate of increase of capital stock
unless accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the
time of the filing of the certificate, showing that at least twenty-five (25%) percent of such increased capital
stock has been subscribed and that at least twenty-five (25%) percent of the amount subscribed has been
paid either in actual cash to the corporation or that there has been transferred to the corporation property the
valuation of which is equal to twenty-five (25%) percent of the subscription: Provided, further, That no
decrease of the capital stock shall be approved by the Commission if its effect shall prejudice the rights of
corporate creditors.
Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by
a majority vote of the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly called
for the purpose.
Bonds issued by a corporation shall be registered with the Securities and Exchange Commission, which shall
have the authority to determine the sufficiency of the terms thereof.
Section 11. Corporate term. A corporation shall exist for a period not exceeding fifty (50) years from the
date of incorporation unless sooner dissolved or unless said period is extended. The corporate term as
originally stated in the articles of incorporation may be extended for periods not exceeding fifty (50) years in
any single instance by an amendment of the articles of incorporation, in accordance with this Code; Provided,
That no extension can be made earlier than five (5) years prior to the original or subsequent expiry date(s)
unless there are justifiable reasons for an earlier extension as may be determined by the Securities and
Exchange Commission
Section 17. Grounds when articles of incorporation or amendment may be rejected or disapproved. The
Securities and Exchange Commission may reject the articles of incorporation or disapprove any amendment
thereto if the same is not in compliance with the requirements of this Code: Provided, That the Commission
shall give the incorporators a reasonable time within which to correct or modify the objectionable portions of
the articles or amendment. The following are grounds for such rejection or disapproval:
1. That the articles of incorporation or any amendment thereto is not substantially in accordance with the form
prescribed herein;
2. That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary
to government rules and regulations;
3. That the Treasurers Affidavit concerning the amount of capital stock subscribed and/or paid is false;
4. That the percentage of ownership of the capital stock to be owned by citizens of the Philippines has not
been complied with as required by existing laws or the Constitution.
Section 81. Instances of appraisal right. Any stockholder of a corporation shall have the right to dissent and
demand payment of the fair value of his shares in the following instances:
1. In case any amendment to the articles of incorporation has the effect of changing or restricting the rights of
any stockholder or class of shares, or of authorizing preferences in any respect superior to those of
outstanding shares of any class, or of extending or shortening the term of corporate existence;

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

101

2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of
the corporate property and assets as provided in the Code; and
3. In case of merger or consolidation
A. Power of shareholders to amend articles of incorporation
AMENDMENT BY LEGISLATURE
Subject to the limitation that no accrued rights or liabilities be impaired, the legislature has the power
to make changes in existing corporations through an amendment to the Corporation Code.
AMENDMENT BY STOCKHOLDERS
One of the powers expressly granted by law to all corporations is the power to amend its articles of
incorporation. This, in effect, is a grant of power to owners of 2/3 of the outstanding stocks to change
the basic agreement between the corporation and its stockholders, making such change binding on
all the stockholders, subject only to the right of appraisal, if proper.
B. Limitations on power; grounds for rejection by SEC
WHAT ARE THE LIMITATIONS ON THE POWER TO AMEND?
PURPOSE: must be legitimate
VOTE: 2/3 of OCS / membership
(1)The appraisal right must be recognized in case the amendment has the effect of changing rights of
any stockholder or class of shares, or of authorizing preferences in any respect superior to those of
outstanding shares of any class, or extending or shortening the term of corporate existence.
(2)Extension of corporate term cannot exceed 50 yrs. in any one instance
(3)A copy of the amended articles should be filed with the SEC, and with the proper governmental
agencies, as appropriate (e.g., in the case of banks, public utilities, etc.)
(4)Original and amended articles should contain all matters required by law to be set out in said
articles.
(5)An amendment to increase/decrease capital stock as well as to extend/shorten corporate term
cannot be made under Sec. 16, but must be made under Sec. 37-38, respectively, both of which
require a meeting; and
(6)Amendment must be in the form prescribed by the Code
ON WHAT GROUNDS CAN THE SEC DISAPPROVE THE PROPOSED AMENDMENTS?
The same grounds as for the disapproval of the original articles (Sec. 17):
Not substantially in accordance with the form prescribed by the Code;
Purpose(s) patently unconstitutional, illegal, immoral, or contrary to government rules and
regulations;
Treasurers Affidavit concerning amount of capital stock subscribed/paid is false;
Required percentage of ownership of capital stock to be owned by citizens of the Phils. has not been
complied with as required by the Constitution or existing laws;

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

102

Absence of a favorable recommendation from the appropriate government agency.


Amendment changing stockholders rights
The law expressly allows amendments which would change or restrict existing rights of stockholders
or any class of shares. (Sec. 81)
C. Effectivity of amendment
Amendments take effect only from the approval by the SEC. However, such approval or rejection
must be made within six months of filing of amendment; otherwise it shall take effect even w/o such
approval (as of the date of filing), unless cause of delay is attributable to the corporation. (Sec. 16)
D. Special amendments
1. Increase or decrease of capital stock Sec. 38, 122
Section 38. Power to increase or decrease capital stock; incur, create or increase bonded
indebtedness. No corporation shall increase or decrease its capital stock or incur, create
or increase any bonded indebtedness unless approved by a majority vote of the board of
directors and, at a stockholders meeting duly called for the purpose, two-thirds (2/3) of the
outstanding capital stock shall favor the increase or diminution of the capital stock, or the
incurring, creating or increasing of any bonded indebtedness. Written notice of the
proposed increase or diminution of the capital stock or of the incurring, creating, or
increasing of any bonded indebtedness and of the time and place of the stockholders
meeting at which the proposed increase or diminution of the capital stock or the incurring or
increasing of any bonded indebtedness is to be considered, must be addressed to each
stockholder at his place of residence as shown on the books of the corporation and
deposited to the addressee in the post office with postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of the directors of the corporation and
countersigned by the chairman and the secretary of the stockholders meeting, setting forth:
(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or number of shares of
no-par stock thereof actually subscribed, the names, nationalities and residences of the
persons subscribing, the amount of capital stock or number of no-par stock subscribed by
each, and the amount paid by each on his subscription in cash or property, or the amount of
capital stock or number of shares of no-par stock allotted to each stock-holder if such
increase is for the purpose of making effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital stock, or the incurring,
creating or increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or increasing of any
bonded indebtedness shall require prior approval of the Securities and Exchange
Commission.
One of the duplicate certificates shall be kept on file in the office of the corporation and the
other shall be filed with the Securities and Exchange Commission and attached to the
original articles of incorporation. From and after approval by the Securities and Exchange
Commission and the issuance by the Commission of its certificate of filing, the capital stock

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

103

shall stand increased or decreased and the incurring, creating or increasing of any bonded
indebtedness authorized, as the certificate of filing may declare: Provided, That the
Securities and Exchange Commission shall not accept for filing any certificate of increase
of capital stock unless accompanied by the sworn statement of the treasurer of the
corporation lawfully holding office at the time of the filing of the certificate, showing that at
least twenty-five (25%) percent of such increased capital stock has been subscribed and
that at least twenty-five (25%) percent of the amount subscribed has been paid either in
actual cash to the corporation or that there has been transferred to the corporation property
the valuation of which is equal to twenty-five (25%) percent of the subscription: Provided,
further, That no decrease of the capital stock shall be approved by the Commission if its
effect shall prejudice the rights of corporate creditors.
Non-stock corporations may incur or create bonded indebtedness, or increase the same,
with the approval by a majority vote of the board of trustees and of at least two-thirds (2/3)
of the members in a meeting duly called for the purpose.
Bonds issued by a corporation shall be registered with the Securities and Exchange
Commission, which shall have the authority to determine the sufficiency of the terms
thereof.
Section 122. Corporate liquidation. Every corporation whose charter expires by its own
limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other
purposes is terminated in any other manner, shall nevertheless be continued as a body
corporate for three (3) years after the time when it would have been so dissolved, for the
purpose of prosecuting and defending suits by or against it and enabling it to settle and
close its affairs, to dispose of and convey its property and to distribute its assets, but not for
the purpose of continuing the business for which it was established.
At any time during said three (3) years, the corporation is authorized and empowered to
convey all of its property to trustees for the benefit of stockholders, members, creditors, and
other persons in interest. From and after any such conveyance by the corporation of its
property in trust for the benefit of its stockholders, members, creditors and others in
interest, all interest which the corporation had in the property terminates, the legal interest
vests in the trustees, and the beneficial interest in the stockholders, members, creditors or
other persons in interest.
Upon the winding up of the corporate affairs, any asset distributable to any creditor or
stockholder or member who is unknown or cannot be found shall be escheated to the city
or municipality where such assets are located.
Except by decrease of capital stock and as otherwise allowed by this Code, no corporation
shall distribute any of its assets or property except upon lawful dissolution and after
payment of all its debts and liabilities
SUPER CORPO REVIEWER: After the authorized capital stock has been fully subscribed
and the corporation needs to increase its capital, it will have to amend its articles to
increase its capital stock. A corporation does not have the implied power to increase capital
stock; such a power can only be granted by law.
The power to increase or decrease capital stock must be exercised in accordance with the
provisions of Sec. 38 of the Code.
Amendment changing stockholders rights
The law expressly allows amendments which would change or restrict existing rights of
stockholders or any class of shares. (Sec. 81)

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

104

PHILIPPINE TRUST Co v RIVERA


FACTS:
Cooperativa Naval Filipina was duly incorporated under the laws of the Philippine Islands,
with a capital of P100,000, divided into 1,000 shares of a par value of P100 each. Among
the incorporators of this company was the defendant Mariano Rivera, who subscribed for
450 shares representing a value of P45,000, the remainder of the stock being taken by
other persons. The articles of incorporation were duly registered in the Bureau of
Commerce and Industry.
The company became insolvent and went into the hands of the Philippine Trust Company,
as assignee in bankruptcy; and by it this action was instituted to recover 1/2 of the stock
subscription of the Rivera, which admittedly has never been paid.
Rivera contends that he never paid because a meeting of its stockholders of Naval
occurred, at which a resolution was adopted to the effect that the capital should be reduced
by 50 per centum and the subscribers released from the obligation to pay any unpaid
balance of their subscription in excess of 50 per centum of the same. As a result of this
resolution it seems to have been supposed that the subscription of the various
shareholders had been cancelled to the extent stated; and fully paid certificate were issued
to each shareholders for 1/2 of his subscription.
ISSUE: WON the decrease in the capital stock is valid
RULING: NO.It is established doctrine that subscription to the capital of a corporation
constitute a find to which creditors have a right to look for satisfaction of their claims and
that the assignee in insolvency can maintain an action upon any unpaid stock subscription
in order to realize assets for the payment of its debts.
A corporation has no power to release an original subscriber to its capital stock from the
obligation of paying for his shares, without a valuable consideration for such release; and
as against creditors a reduction of the capital stock can take place only in the manner an
under the conditions prescribed by the statute or the charter or the articles of incorporation.
Moreover, strict compliance with the statutory regulations is necessary.
In the case before us the resolution releasing the shareholders from their obligation to pay
50 per centum of their respective subscriptions was an attempted withdrawal of so much
capital from the fund upon which the company's creditors were entitled ultimately to rely
and, having been effected without compliance with the statutory requirements, was wholly
ineffectual.
SUPER CORPO REVIEWER: It is established doctrine that subscriptions to the capital of a
corporation constitute a fund to which creditors have a right to look for satisfaction of their
claims and that the assignee in insolvency can maintain an action upon any unpaid stock
subscription in order to realize assets for the payment of its debts
A corporation has no power to release an original subscriber to its capital stock from the
obligation of paying for his shares, without valuable consideration for such release; and as
against creditors a reduction of the capital stock can take place only in the manner and
under the conditions prescribed by the statute or charter or the articles of incorporation.
HARTFORD ACCIDENT & INDEMNITY CO v W.S DICKEY CLAY MFG
FACTS:

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

105

1. Complainant sought to enjoin the consummation of an amendment to the charter


W.S Dickey Clay MFG CO (WS), who recommend the adoption of an amendment
to the corporate charter, such had the effect of increasing the number of authorized
shares of a class of stock.
2. Nov 17, 1939- WS directors recommended adoption of an amendment, increasing
the corporate charter by the number of class shares - such was to be discussed in
a meeting held on Jan 10, 1940
3. The authorized capital stock then of WS:
260,000 shares of no par value preferred stock entitled to non-cumulative dividend
of $1.00 a year out of the net profits
Subject to redemption of $17.5 a share plus declared and unpaid dividends
thereon, and on liquidation, entitled to $15 a share
4. Hartford Accident& Indemnity Co had:
-500, 000 shares of Class A stock of $1 par value, entitled to annual 6% cumulative
dividend, redeemable at par plus all accrued and unpaid dividends, but subject to
prior rights of the preferred stock.
-19,500 shares of no par value common stock, entitled to receive no dividends until
preferred stock had received $1 a share for 2 consecutive years, and not until
Class A had been retired.
5. January 10, 1940- outstanding 211,775 shares of preferred stock; 422, 995 shares
of Class A stock and 51, 806 common stock were issued
6. Of those issued, 25 shares of the preferred, 20 shares of the Class A and 35,890
shares of the common were owned by Hartford Accident & indemnity Co.
7. Under appellee's charter, voting rights were vested exclusively by preferred and
common shares, except upon specified dividend defaults
8. Notice was sent the agenda stated: election of directors and proposed amendment,
with a long letter setting out the financial position and the reasons why it would be
advantageous to vote for the proposed amendment.
9. Stockholders were asked to approve the doubling of the number of Class A shares,
they were divided into 2 classes: The Class A stock, whose majority voted for it
and; The Preferred & Common Stock, whose majority voted against it because the
common stockholders would suffer from the large increase in the number of the
senior securities entitled to dividend and liquidation priorities.
ISSUE: WON the law allows the amendments recommended
RULING: YES. Amendments to certificates of incorporation are authorized by Section 26 of
the General Corporation Law. Corporate powers and purposes may be increased or
diminished, substitutions of powers and purposes may be accomplished, the corporate title
may be changed, and other desired change or alteration may be made. Specifically,
authorized capital stock may be increased, decreased or reclassified by changing the
number, par value, etc.
The mechanics of amendments are provided, and the several required steps having been
taken, it declared that the certificate of incorporation shall be deemed to be amend,
provided however, that if any such proposed amendment would alter or change the
preferences, special rights of power given to any one or more classes of stock, so as to
affect such class or classes of stock adverse, or would increase or decrease the par value
thereof, then the holders of the stock of each class of stock so affected by the amendment
shall be entitled to vote a class upon such amendment; and the affirmative vote of the
majority in interest of each class of stock shall be necessary to the adoption.
The affirmative vote was obtained, and was all that was necessary.
Affirmative vote is always necessary to the adoption of amendments. Protection afforded by
the class vote is however restricted in 3 situations:

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

106

1. Where proposed amendment would alter or change preferences or special rights or


powers given to a class, so as to affect adversely the class, class vote is required
and majority must vote in the affirmative.
2. Where proposed amendment would increase or decrease the amount of the
authorized stock of a class, class vote is required and a majority must consent.
3. Where proposed amendment would increase or decrease the par value of a class
of shares, , class vote is required and majority must vote in the affirmative
The contract rights of the shareholders do not rest upon an unchangeable base, but are
subject to alteration under the amendatory provisions of the General Law. The increase in
the Class A stock did not have an adverse effect on the common stock as a class, even if it
did have an adverse effect on them. If the legislature sought broader protection, it could
have used a different language in requiring a class vote of shares in all cases. Such a
change is a matter of policy for the legislature, not the courts.
DISPOSITIVE: The amendment was sustained by the court.
DOCTRINE: Where proposed amendment would alter or change the preferences, special
rights of power given to any one or more classes of stock, so as to affect such class or
classes of stock adverse, or would increase or decrease the par value thereof, then the
holders of the stock of each class of stock so affected by the amendment shall be entitled
to vote a class upon such amendment; and the affirmative vote of the majority in interest of
each class of stock shall be necessary to the adoption.
MARCUS v RH MACY & CO
FACTS:
Since May 19, 1943, appellant Marcus has been the registered owner of 50 shares of
common stock of respondent, R.H. MACY & Co. Inc. On Sept. 28, 1945, Respondent gave
formal notice to its stockholders that in the annual meeting to be held on Oct. 30, 1945, the
board of directors proposed that its certificate of incorporation be amended to add to the
rights of preferred stockholders voting rights, equal share for share, to those to which the
common stock holders are entitled.
Oct. 17, 1945, Appellant Marcus, through registered mail, sent a written notice that as
common stockholder, she objects to the proposed amendment and to adoption of any
resolution designed to effect adding rights to owners of preferred stocks voting rights to
equal voting rights of common stockholders. She also demanded payment for her common
stocks.
At the annual meeting, the said proposal was approved by the stockholders. Thus Marcus,
as a non consenting common stockholder, instituted the present proceeding to determine
the value of her stock as a basis of enforcement of payment. At Special Term her
application for the appointment of appraisers to evaluate her stock was denied and her
petition was dismissed. Appellate Court affirmed order of Special term.
Respondent does not deny Appellants objection. It also appears that prior to the annual
stockholders meeting, Respondents certificate of incorporation gave to the holders of the
preferred stock no voting rights except in the event of specified contingencies. Corporation
had an Authorized Capitalization of 500,000 shares of cumulative preferred stock ($100 par
value) and 2,500,000 shares of common stock (without par value) 165,600 issued shares of
authorised preferred stock and 1656,600 shares of common stock.
ISSUE:WON Appellant Marcus, due to the amendment of the certificate of incorporation,
which she dissent, may invoke Sec 38 par. 9 (d) of Stock Corporation Law, to accomplish
appraisal of her stock and to enforce payment thereof.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

107

RULING: YES. The grant of additional voting rights to preferred stock increase their
privileged equal to the holders of common stock. The voting power of each common share
outstanding was altered or limited by resulting pro rata diminution of its potential worth as a
factor in the management of the corporations affairs.
Such alteration or limitation in the voting power of the common shares held by Appellant,
considering that she gave a formal written notice of her objection to the proposed
amendment to the corporations charter with a demand for payment for her stock. It was
sufficient to qualify her to invoke the statutory procedure.
Sec 38 par. 9 (d) of Stock Corporation Law: If certificate- abolished any voting right of the
holders of the shares of any class or limits their voting rights, except as the same may be
limited by the voting rights given to new shares of any class authorised by the certificate;
any holder of any such shares not in favour of such action object to such action and
demand payment for his stock, and thereupon such stockholder or the corporation shall
have the right to have such stock appraised and paid for Provided such objection any
demand must be in writing and filed with the corporation.
By limiting the voting power of the appellants common shares to a proportionate extent
measured at a given time by the number of preferred shares then issued and outstanding,
the corporate action to which appellant objected was of such character to afford her a legal
basis to invoke the procedure prescribed by Sec 38 par. 9 (d) of Stock Corporation Law, as
a means to accomplish the appraisal right of her stock and payment therefor.
DOCTRINE: No legislative declaration of a minimum percentage or value of stock which
must be owned by a non consenting stockholder to qualify him to invoke the prescribed
statutory procedure.
DISPOSITIVE: Orders should be reserved and the matter remitted to Special Term for
further proceedings not inconsistent with this opinion.
SUPER CORPO REVIEWER: The Board of Directors gave notice to SH that among the
matters to be acted upon in its annual meeting would be a proposal to amend certificate of
incorporation to add to the rights of preferred stockholders, voting rights equal to those of
common stockholders. Marcus, objected and demanded payment for the common stock
owned by her.
The Court held that Marcus may invoke her appraisal right. The aggregate number of
shares having voting rights equal to those of common shares was substantially increased
and thereby the voting power of each common share outstanding prior to the meeting was
altered or limited by the resultingpro ratadiminution of its potential worth as a factor in the
management of the corporate affairs. Considering that she held diminished voting power;
that she notified the corpo of her objection; that her shares were voted against the
amendmentthese were sufficient to qualify her to invoke her statutory appraisal right.
KELLER v WILSON & CO
FACTS
This is a complaint filed by the stockholders praying that the Court decree
(1) the amendment to the charter to be null and void in so far as it purported to convert
the complainants' Class A Stock and the accumulated dividends thereon into
common stock without paying the accumulated dividends, and
(2) that it be decreed that the complainants were entitled to be paid all accumulated
and unpaid dividends on this Class A Stock.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

108

The defendant company demurred. The sole ground presented by defendant corporation
was, that under Section 26 of the General Corporation Law, the Respondent had the power
to adopt the amendment complained of, and that it is in all respects valid and effective.
ISSUE: WON the dividends accrued by lapse of time on the stock must be paid despite the
subsequent amendment to charter on the ground that the ground that such right to
dividends have already vested.
RULING: YES. Section 26 of the General Corporation Law is the section authorizing
amendments of corporate charters. It authorizes nothing more than it purports to authorize,
the amendment of charters. The cancellation of cumulative dividends already accrued
through passage of time is not an amendment of a charter. It is the destruction of a right in
the nature of a debt, a matter not within the purview of the section. The cancellation of the
right to such dividends is foreign to the design and purpose of the section. The effect of the
charter amendment, in so far as is concerns the status of the shares and the rights of the
owners, speaking from the time of its accomplishment, is not denied by the complainants;
but there is nothing in the language of the section, as amended, which compels a
retrospective operation. The rights of cumulative preferred shareholders to the stipulated
dividends accrue to them by virtue of the contract. That right exists and persists. When the
necessary corporate action, under the amended statute conferring the power is taken, the
status of the shares may be changed, and the right thereafter to claim the dividends as
originally stipulated may be cancelled, but the amended statute under the general rule of
construction, ought not to have a retroactive effect.
DOCTRINE: The Corporation has to amend its charter, but the amendment under the
general rule of construction, ought not to have a retroactive effect.
DISPOSITIVE: Stockholders won. The cause is remanded to the Court of Chancery for
such further proceedings and orders which, in conformity herewith, may be necessary.
2. Corporate term 11, 37, 81
Section 11. Corporate term. A corporation shall exist for a period not exceeding fifty (50)
years from the date of incorporation unless sooner dissolved or unless said period is
extended. The corporate term as originally stated in the articles of incorporation may be
extended for periods not exceeding fifty (50) years in any single instance by an amendment
of the articles of incorporation, in accordance with this Code; Provided, That no extension
can be made earlier than five (5) years prior to the original or subsequent expiry date(s)
unless there are justifiable reasons for an earlier extension as may be determined by the
Securities and Exchange Commission
Section 37. Power to extend or shorten corporate term. A private corporation may extend
or shorten its term as stated in the articles of incorporation when approved by a majority
vote of the board of directors or trustees and ratified at a meeting by the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock or by at least twothirds (2/3) of the members in case of non-stock corporations. Written notice of the
proposed action and of the time and place of the meeting shall be addressed to each
stockholder or member at his place of residence as shown on the books of the corporation
and deposited to the addressee in the post office with postage prepaid, or served
personally: Provided, That in case of extension of corporate term, any dissenting
stockholder may exercise his appraisal right under the conditions provided in this code
Section 81. Instances of appraisal right. Any stockholder of a corporation shall have the
right to dissent and demand payment of the fair value of his shares in the following
instances:

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

109

1. In case any amendment to the articles of incorporation has the effect of changing or
restricting the rights of any stockholder or class of shares, or of authorizing preferences in
any respect superior to those of outstanding shares of any class, or of extending or
shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets as provided in the Code; and
3. In case of merger or consolidation
SUPER CORPO REVIEWER: The Code allows a corporation not only to extend but also to
shorten its term of existence. As in the case of increase/decrease of capital stock, change
must be approved at a members/stockholders meeting by 2/3 of the members/outstanding
capital stock.
ALHAMBRA CIGAR v SEC
FACTS:
Petitioner Alhambra Cigar and Cigarette Manufacturing Company, Inc. was duly
incorporated under Philippine laws on January 15, 1912. By its corporate articles it was to
exist for fifty (50) years from incorporation. Its term of existence expired on January 15,
1962. On that date, it ceased transacting business, entered into a state of liquidation.
Thereafter, a new corporation. Alhambra Industries, Inc. was formed to carry on the
business of Alhambra.
On June 20, 1963 within Alhambra's three-year statutory period for liquidation - Republic
Act 3531 was enacted into law. It amended Section 18 of the Corporation Law; it
empowered domestic private corporations to extend their corporate life beyond the period
fixed by the articles of incorporation for a term not to exceed fifty years in any one instance.
Previous to Republic Act 3531, the maximum non-extendible term of such corporations was
fifty years.
On July 15, 1963, at a special meeting, Alhambra's board of directors resolved to amend
paragraph "Fourth" of its articles of incorporation to extend its corporate life for an
additional fifty years, or a total of 100 years from its incorporation. FOURTH. That the term
for which said corporation is to exist is fifty (50) years from and after the date of
incorporation, and for an additional period of fifty (50) years thereafter.On October 28,
1963, Alhambra's articles of incorporation as so amended certified correct by its president
and secretary and a majority of its board of directors, were filed with respondent Securities
and Exchange Commission (SEC).
ISSUE: Whether or not the corporation can still extend its corporate term within the threeyear statutory period for liquidation.
RULING: NO. A corporation cannot extend its life by amendment of its articles of
incorporation effected during the three-year period for liquidation when its original term of
existence had already expired. Since the privilege of extension is purely statutory, all of the
statutory conditions precedent must be complied with in order that the extension may be
effectuated. And, generally these conditions must be complied with, and the steps
necessary to effect the extension must be taken, during the life of the corporation, and
before the expiration of the term of existence as original fixed by its charter or the general
law, since, as a rule, the corporation is ipso facto dissolved as soon as that time expires. So
where the extension is by amendment of the articles of incorporation, the amendment must
be adopted before that time.
And, similarly, the filing and recording of a certificate of extension after that time cannot
relate back to the date of the passage of a resolution by the stockholders in favor of the
extension so as to save the life of the corporation. The contrary is true, however, and the
doctrine of relation will apply, where the delay is due to the neglect of the officer with whom

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

110

the certificate is required to be filed, or to a wrongful refusal on his part to receive it. And
statutes in some states specifically provide that a renewal may be had within a specified
time before or after the time fixed for the termination of the corporate existence.
DOCTRINE: A corporation cannot extend its life when its term of existence had already
expired. (Once dead, always dead)
DISPOSITIVE: FOR THE REASONS GIVEN, the ruling of the Securities and Exchange
Commission of November 18, 1963, and its order of September 8, 1964, both here under
review, are hereby affirmed.
3. Close Corporations - 16, 17, 37, 38, 103
Section 16. Amendment of Articles of Incorporation. Unless otherwise prescribed by this
Code or by special law, and for legitimate purposes, any provision or matter stated in the
articles of incorporation may be amended by a majority vote of the board of directors or trustees
and the vote or written assent of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders in
accordance with the provisions of this Code, or the vote or written assent of at least two-thirds
(2/3) of the members if it be a non-stock corporation.
The original and amended articles together shall contain all provisions required by law to be set
out in the articles of incorporation. Such articles, as amended shall be indicated by
underscoring the change or changes made, and a copy thereof duly certified under oath by the
corporate secretary and a majority of the directors or trustees stating the fact that said
amendment or amendments have been duly approved by the required vote of the stockholders
or members, shall be submitted to the Securities and Exchange Commission.
The amendments shall take effect upon their approval by the Securities and Exchange
Commission or from the date of filing with the said Commission if not acted upon within six (6)
months from the date of filing for a cause not attributable to the corporation.
Section 17. Grounds when articles of incorporation or amendment may be rejected or
disapproved. The Securities and Exchange Commission may reject the articles of
incorporation or disapprove any amendment thereto if the same is not in compliance with the
requirements of this Code: Provided, That the Commission shall give the incorporators a
reasonable time within which to correct or modify the objectionable portions of the articles or
amendment. The following are grounds for such rejection or disapproval:
1. That the articles of incorporation or any amendment thereto is not substantially in
accordance with the form prescribed herein;
2. That the purpose or purposes of the corporation are patently unconstitutional, illegal,
immoral, or contrary to government rules and regulations;
3. That the Treasurers Affidavit concerning the amount of capital stock subscribed and/or paid
is false;
4. That the percentage of ownership of the capital stock to be owned by citizens of the
Philippines has not been complied with as required by existing laws or the Constitution.
Section 37. Power to extend or shorten corporate term. A private corporation may extend or
shorten its term as stated in the articles of incorporation when approved by a majority vote of

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

111

the board of directors or trustees and ratified at a meeting by the stockholders representing at
least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the
members in case of non-stock corporations. Written notice of the proposed action and of the
time and place of the meeting shall be addressed to each stockholder or member at his place of
residence as shown on the books of the corporation and deposited to the addressee in the post
office with postage prepaid, or served personally: Provided, That in case of extension of
corporate term, any dissenting stockholder may exercise his appraisal right under the
conditions provided in this code. (n)
Section 38. Power to increase or decrease capital stock; incur, create or increase bonded
indebtedness. No corporation shall increase or decrease its capital stock or incur, create or
increase any bonded indebtedness unless approved by a majority vote of the board of directors
and, at a stockholders meeting duly called for the purpose, two-thirds (2/3) of the outstanding
capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating
or increasing of any bonded indebtedness. Written notice of the proposed increase or
diminution of the capital stock or of the incurring, creating, or increasing of any bonded
indebtedness and of the time and place of the stockholders meeting at which the proposed
increase or diminution of the capital stock or the incurring or increasing of any bonded
indebtedness is to be considered, must be addressed to each stockholder at his place of
residence as shown on the books of the corporation and deposited to the addressee in the post
office with postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of the directors of the corporation and
countersigned by the chairman and the secretary of the stockholders meeting, setting forth:
(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or number of shares of no-par
stock thereof actually subscribed, the names, nationalities and residences of the persons
subscribing, the amount of capital stock or number of no-par stock subscribed by each, and the
amount paid by each on his subscription in cash or property, or the amount of capital stock or
number of shares of no-par stock allotted to each stock-holder if such increase is for the
purpose of making effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating
or increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or increasing of any
bonded indebtedness shall require prior approval of the Securities and Exchange Commission.
One of the duplicate certificates shall be kept on file in the office of the corporation and the
other shall be filed with the Securities and Exchange Commission and attached to the original
articles of incorporation. From and after approval by the Securities and Exchange Commission
and the issuance by the Commission of its certificate of filing, the capital stock shall stand
increased or decreased and the incurring, creating or increasing of any bonded indebtedness

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

112

authorized, as the certificate of filing may declare: Provided, That the Securities and Exchange
Commission shall not accept for filing any certificate of increase of capital stock unless
accompanied by the sworn statement of the treasurer of the corporation lawfully holding office
at the time of the filing of the certificate, showing that at least twenty-five (25%) percent of such
increased capital stock has been subscribed and that at least twenty-five (25%) percent of the
amount subscribed has been paid either in actual cash to the corporation or that there has been
transferred to the corporation property the valuation of which is equal to twenty-five (25%)
percent of the subscription: Provided, further, That no decrease of the capital stock shall be
approved by the Commission if its effect shall prejudice the rights of corporate creditors.
Non-stock corporations may incur or create bonded indebtedness, or increase the same, with
the approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of the
members in a meeting duly called for the purpose.
Bonds issued by a corporation shall be registered with the Securities and Exchange
Commission, which shall have the authority to determine the sufficiency of the terms thereof.
Section 103. Amendment of articles of incorporation. Any amendment to the articles of
incorporation which seeks to delete or remove any provision required by this Title to be
contained in the articles of incorporation or to reduce a quorum or voting requirement stated in
said articles of incorporation shall not be valid or effective unless approved by the affirmative
vote of at least two-thirds (2/3) of the outstanding capital stock, whether with or without voting
rights, or of such greater proportion of shares as may be specifically provided in the articles of
incorporation for amending, deleting or removing any of the aforesaid provisions, at a meeting
duly called for the purpose.

Amendments in close corporations


To recall, the provisions required to be contained in the AOI of a close corporation:
(1)All issued stock of all classes should be held by not more than 20;
(2)All issued stock shall be subject to one or more specified restrictions on transfer permitted by
law;
(3)Corporation should not be listed in the stock exchange or make any public offering of its
stock.
If any of these are deleted, then the corporation will cease to be a close corporation and will
lose the special privileges of such corporations. Thereafter, it will be governed by the general
provisions of the Code. Since such amendment involves a change in the nature of the
corporation, even non-voting stocks are given a voice in the decision. A stockholders meeting
is required and a 2/3 vote must approve the amendment, unless otherwise provided by the
articles of incorporation
XV.

Transfer of shares Sec 64, 71; C V2 300-366


Section 64. Issuance of stock certificates. No certificate of stock shall be issued to a subscriber until the full
amount of his subscription together with interest and expenses (in case of delinquent shares), if any is due,
has been paid.
Section 71. Effect of delinquency. No delinquent stock shall be voted for or be entitled to vote or to
representation at any stockholders meeting, nor shall the holder thereof be entitled to any of the rights of a
stockholder except the right to dividends in accordance with the provisions of this Code, until and unless he

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

113

pays the amount due on his subscription with accrued interest, and the costs and expenses of advertisement,
if any.
HOW ARE SHARES OF STOCK TRANSFERRED?
By delivery of the certificate/s indorsed by the owner or his attorney-in-fact or other person legally authorized
to make the transfer. (Sec. 63)
WHAT ARE THE REQUISITES FOR A VALID TRANSFER?
1. Delivery;
2. Indorsement by the owner or his attorney-in-fact or other persons legally authorized to make the
transfer Indorsement of the certificate of stock is a mandatory requirement of law for an effective
transfer of a certificate of stock. (Razon v. CA, 207 SCRA 234)
3. Recording of the transfer in the books of the corporation (so as to make the transfer valid as against
third parties)
Until registration is accomplished, the transfer, though valid between the parties, cannot be effective as
against the corporation. Thus, the unrecorded transferee cannot enjoy the status of a SH: he cannot vote nor
be voted for, and he will not be entitled to dividends.
No registration of transfer of unpaid share: No shares of stock against which the corporation holds any
unpaid claim shall be transferable in the books of the corporation. (Sec. 63)
Remedy if registration refused: The proper remedy is a petition for a writ of mandamus to compel the
corporation to record the transfer or issue a new certificate in favor of the transferee, as the case may be. The
writ will be granted provided it is shown that he transferee has no other plain, speedy and adequate remedy
and that there are no unpaid claims against the stocks whose transfer is sought to be recorded. It must be
noted that unless the latter fact is alleged, mandamus will be denied due to failure to state a cause of action.
(Campos & Campos)
A. Manner and effectivity of transfer C V2 300-321
1. Indorsement of stock certificate; registration in corporate books
2. Effect of lack of registration
3. Unpaid shares cannot be transferred; assignment of subscription
4. Remedy if registration refused
USON v DIOSOMITO
FACTS:
Vicente Diosomito was the original owner of seventy-five shares of stock of North Electric
Company, Inc., (NECI) having a par value of P7,500. On February 3, 1931, he sold said
shares to Emeterio Barcelon and delivered to the latter the corresponding certificates.
Barcelon did not present these certificates NECI for registration until September 16, 1932,
when the certificates were cancelled and a new certificate was issued in favor of Barcelon.
Barcelon transferred the new certificates to H.P.L. Jollye and another new certificate was
issued to Jollye.
Meanwhile, Toribia Uson filed a civil action for debt against Vicente Diosomito. On January
18, 1932, an attachment was duly issued and levied upon the properties of Diosomito,
including the seventy-five shares of the North Electric Co., Inc., which stood in his name on
the books of the company. Subsequently, on June 23, 1932, Uson obtained a judgment
against Diosomito for the sum of P2,300 with interest and costs. To satisfy said judgment,
the sheriff sold the 75 shares at a public auction. Uson was the highest bidder and the
shares were adjudicated to her.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

114

In the present action, H.P.L. Jollye claims to be the owner of said 75 shares of the North
Electric Co.,Inc., and presents a certificate of stock issued to him by the company. It will be
seen, therefore, that the transfer of said shares by Vicente Diosomito, the judgment debtor
to Barcelon was not registered and noted on the books of the corporation until some nine
months after the attachment had been levied on said shares
ISSUE/S:
(1) Whether or not there was a bona fide transfer of the shares to Barcelon even
thought it was not registered or noted on the books of the corporation;
(2) Whether or not such transfer is valid as against a subsequent lawful attachment of
said shares, regardless of whether the attaching creditor had actual notice of said
transfer or not.
RULING: NO TO BOTH CASES.
The transfer is not valid. The true meaning of the language is, and the obvious intention of
the legislature in using it was, that all transfers of shares should be entered, as required, on
the books of the corporation. And it is equally clear that all transfers of shares not so
entered are invalid as to attaching or execution creditors of the assignors, as well as to the
corporation and to subsequent purchasers in good faith, and indeed, as to all persons
interested, except the parties to such transfers. All transfers not so entered on the books of
the corporation are absolutely void; not because they are without notice or fraudulent in law
or fact, but because they are made so void by statute.
Therefore, the transfer of the 75 shares in the North Electric Company, Inc., made by the
Diosomito to Barcelon was not valid as to Uson on the date on which she obtained her
attachment lien on said shares of stock which still stood in the name of Diosomito on the
books of the corporation.
DISPOSITIVE: Uson won.
DOCTRINE: The right of the owner of the shares of stock of a Philippine corporation to
transfer the same by delivery of the certificate is limited and restricted by the express
provision that "no transfer, however, shall be valid, except as between the parties, until the
transfer is entered and noted upon the books of the corporation."
SUPER CORPO REVIEWER: Toribia Uson filed a civil action for debt against Vicente
Dioisomito. Upon institution of said action, an attachment was duly issued and D's property
was levied upon, including 75 shares of the North Electric Co., which stood in his name on
the books of the company when the attachment was levied on 18 January 1932. The sheriff
sold said shares at a public auction with Uson being the highest bidder. Jollye claims to be
the owner of said certificate of sock issued to him by the co. on 13 February 1933.
There is no dispute that Diosomito was the original owner of said shares, which he sold to
Barcelon. However, Barcelon did not present these certificates to the corporation for
registration until 19 months after the delivery thereof by Barcelon, and 9 months after the
attachment and levy on said shares. The transfer to Jollye was made 5 months after the
issuance of a certificate of stock in Barcelon's name.
Is a bona fide transfer of the shares of corp., not registered or noted on the books of the
corp., valid as against a subsequent lawful attachment of said shares, regardless of
whether the attaching creditor had actual notice of said transfer or not.
NO, it is not valid. The transfer of the 75 shares in the North Electric Co., Inc made by the
defendant Diosomito as to the defendant Barcelon was not valid as to the plaintiff. Toribia
Uson, on 18 Jan. 1932, the date on which she obtained her attachment lien on said shares

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

115

of stock which still stood in the name of Diosomito on the books of the corp. Sec. 35 says
that No transfer, however, is valid, except as between the parties, until the transfer is
entered and noted upon the books of the corporation so as to show the names of the
parties to the transaction, the date of the transfer, the number of the certificate, and the
number of shares transferred.
All transfers of shares not so entered are invalid as to attaching or execution creditors of
the assignors, as well as to the corporation and to subsequent purchasers in good faith,
and indeed, as to all persons interested, except the parties to such transfers.
MONTSERRAT v CERON
FACTS:
Petitioner, Monserrat, was president and manager of the Manila YellowTaxicab Company
Inc., and the owner of P1,200 common shares of stock of the company. He assigned the
usufruct (right in a property owned by another for a limited time or until death) of half of his
common shares of stock to Carlos Ceron (defendant).
The assignment included the right to enjoy the profits from the shares, prohibiting Ceron
from selling, mortgaging, encumbering, or exercising any act implying absolute ownership.
Ceron mortgaged some of the shares of stock of Manila Yellow Taxicab,including the 600
common shares assigned to him by Monserrat to EduardoMatute, President to Erma, Inc
as payment of his debt.
Matute was not informed of the document that contained Cerons rights and prohibitions
with regard to the 600 common shares of stock from Monserrat.
The CFI Manila rendered judgment in favor of the plaintiff declaring the plaintiff the owner of
the 600 shares of stock; and declaring the mortgage constituted on the ownership of the
shares of stock null and void and without force and effect, although the mortgage on the
usufruct enjoyed by the mortgage debtor Ceron in the said 600 shares of stock is hereby
declared valid; with costs against the defendants.
Erma Inc. and the Sheriff of Manila, the defendants therein, appealed from the decision.
ISSUES
1. Whether it is necessary to enter upon the books of the corporation a mortgage
constituted on common shares of stock in order that such mortgage may be valid
and may have force and effect as against third persons.
2. Whether or not the defendant entity Erma Inc., had knowledge of the document that
states that the transfer of the 600 shares of common stock from Monseratt to Ceron
was only for the usufruct of the share and that Ceron bound himself not to alienate
nor encumber them.
RULING:
1. NO, Section 35 of the Corporation Law provides the following: The capital stock of stock
corporations shall be divided into shares for which certificates signed by the president or
the vice-president, counter signed by the secretary or clerk and sealed with the seal of the
corporation, shall be issued in accordance with the by-laws.
Shares of stock so issued are personal property and may be transferred by delivery of the
certificate indorsed by the owner or his attorney in factor other person legally authorized to
make the transfer.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

116

No transfer, however, shall be valid, except as between the parties, until the transfer is
entered and noted upon the books of the corporation so as to show the names of the
parties to the transaction, the date of the transfer the number of the certificate, and the
number of shares transferred.
Section 35 of the Corporation Law does not require any entry except of transfers of shares
of stock in order that such transfers may be valid as against third persons.
Section 3 of Act No. 1508, as amended by Act No. 2496, defines the phase (chattel
mortgage) as a conditional sale of personal property as security for the payment of a debt.
the condition being that the sale shall be avoided upon the seller paying to the purchaser a
sum of money or doing some other act named. if the condition is performed according to its
terms the mortgage and sale immediately become void and the mortgage is herby divested
of his title.
The chattel mortgage is not the transfer referred to in section 35 of the Corporation Law,
which transfer should be entered and noted upon the books of corporation in order to be
valid, and which , means the absolute and unconditional conveyance of the title and
ownership of a share of stock. In as much as a chattel mortgage of the aforesaid title is not
a complete and absolute alienation of the dominion and ownership thereof, its entry and
notation upon the books of the corporation is not necessary requisite to it validity
2. NO, the evidence shows that when Matute went to the office of the manila Yellow Taxicab
Co. Inc to examine the stock and transfer book of the said corporation for the purpose of
ascertaining the actual status of Carlos G Ceron's shares of stock. Matute found nothing
but that the shares in question were recorded therein in the name of said Carlos G Ceron
free from all liens and encumbrances.
The notation of liens and encumbrances was placed there only on may 5,1931 the same
date on which the 600 common shares were to have been sold at the public auction in view
of Carlos G Ceron's default in the payment of loan secured by them. Therefore defendant
entity Erma Inc. as a conditional purchaser of the 600 shares of stock, acquired, in good
faith, Ceron's right and title to the shares of stock.
SC holds that since section 35 of the Corporation Code does not require the notation upon
the books of the corporation of transactions relating to its Shares, except the transfer of
possession and ownership thereof, as a necessary requisite to the validity of such transfer.
The notation upon the aforesaid books of the corporation of a chattel mortgage constituted
on the shares of stock in question is not necessary to its validity.
EMBASSY FARMS v CA
FACTS:
It appears on record that sometime on August 2, 1984, Alexander G. Asuncion (AGA for
short) and Eduardo B. Evangelists (EBE for short), President of the Embassy Farms,
entered into a Memorandum of Agreement (MOA for short). Under said agreement EBE
obligated himself:
To transfer to AGA 19 parcels of agricultural land registered in his name with an
aggregate area of 104,447 square meters located in Loma de Gato, Marilao,
Bulacan, together with the stocks, equipment and facilities of a piggery farm owned
by Embassy Farms, Inc., a registered corporation wherein ninety (90) per cent of its
shares of stock is owned by EBE.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

117

To cede, transfer and convey "in a manner absolute and irrevocable any and all of
his shares of stocks" in Embassy Farins Inc. to AGA or his nominees "until the total
of said shares of stock so transferred shall constitute 90% of the paid-in-equity of
said corporation" within a reasonable time from signing of the document.
To turnover to AGA the effective control and management of the piggery upon the
signing of the agreement.

On the other hand, AGA obligated himself, upon signing of the agreement:
To pay to EBE the total sum of close to
To organize and register a new corporation with an authorized capital stock of
P10,000,000.00 which upon registration will take over all the rights and liabilities of
AGA, within reasonable time from signing the agreement.
EBE also endorsed in blank all his share of stock including that of his wife and three
nominees. However, despite the indorsement, EBE retained possession of said shares and
opted to deliver to AGA only upon full compliance of the latter of his obligations under the
MOA. Notwithstanding the non-delivery of the shares of stocks, AGA transferred a total of
8,602 shares to several persons in a Deed of Transfer of Shares of Stock.
ISSUE: Whether or not there has been an effective transfer of shares of stock from AGA to
other persons.
RULING: NO. There being no delivery of the indorsed shares of stock, AGA cannot
therefore effectively transfer to other person or his nominees the undelivered shares of
stock. For an effective transfer of shares of stock the mode and manner of transfer as
prescribed by law must be followed (Navea v. Peers Marketing Corp).
As provided under Section 3 of BP 68, shares of stock may be transferred by delivery to the
transferree of the certificate properly indorsed. Title may be vested in the transferree by the
delivery of the duly indorsed certificate of stock (Rivera v. Florendo). However, no transfer
shall be valid, except as between the parties until the transfer is properly recorded in the
books of the corporation.
In the case at bar, the indorsed certificate of stock was not actually delivered to AGA so that
EBE is still the controlling stockholder of Embassy Farms despite the execution of the
memorandum of agreement and the turn over of control and management of the Embassy
Farms to AGA on August 2, 1984.
When AGA filed on April 10, 1986 an action for the rescission of contracts with damages
the Pasig Court merely restored and established the status quo prior to the execution of the
memorandum of agreement by the issuance of a restraining order on July 10, 1987 and the
writ of preliminary injunction on July 30, 1987. It would be unjust and unfair to allow AGA
and his nominees to control and manage the Embassy Farms despite the fact that AGA
who is the source of their supposed shares of stock in the corporation is not asking for the
delivery of the indorsed certificate of stock but for the rescission of the memorandum of
agreement. Rescission would result in mutual restitution (Magdalena Estate v. Myrick) so it
is but proper to allow EBE to manage the farm.
DOCTRINE:A corporation, for a justifiable reason, can withhold the delivery of the indorsed
certificate of stocks so that the supposed transfer (in this case, by virtue of the MOA) could
not be properly recorded in the book of the corporation. The supposed transferee,
therefore, (in this case, AGA or his nominees) are not the lawful stockholders (of the
Embassy Farms).
DISPOSITIVE: Petition is denied for lack of merit.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

118

RAZON v IAC
FACTS:
1. E. Razon, Inc. was organized in 1962 by petitioner Enrique Razon for the purpose
of participating in the bidding for the arrastre services in South Harbor, Manila. The
incorporators were Enrique Razon, Enrique Valles, Luisa M. de Razon, Jose
Tuazon, Jr., Victor Lim, Jose F. Castro, and Salvador Perez de Tagle. The
business, however, did not start operations until 1966.
2. According to the petitioner Razon, some of the incorporators withdrew from the
said corporation. Razon then distributed the stocks previously placed in the names
of the withdrawing nominal incorporators to some friends, among them the late
Juan T. Chuidian, to whom he gave 1,500 shares of stock.
3. The shares of stock were registered in the name of Chuidian only as a nominal
stockholder and with the agreement that the said shares of stock were owned and
held by Razon but Chuidian was given the option to buy the same.
4. In view of this arrangement, Chuidian in 1966 delivered to Razon the stock
certificate covering 1,500 shares of stock of E. Razon, Inc. Since then Razon had
in his possession the certificate of stock until the time, he delivered it for deposit
with the Philippine Bank of Commerce under the parties joint custody pursuant to
their agreement as embodied in the trial courts order.
5. Now, the main issue in these consolidated petitions center on the ownership of the
aforementioned 1,500 shares of stock in E. Razon, Inc. covered by Stock
Certificate no. 003 issued on 23 April 1966 and registered under the name of Juan
T. Chuidian.
6. Two antecedent cases are involved in this case:
G.R. No. 74306:
- The CFI of Manila declared Enrique Razon as the owner of the said shares
of stock.
G.R. No. 74315:
- The Intermediate Appellate Court (now Court of Appeals), however
reversed the tria courts decision and ruled that Juan T. Chuidian, the
deceased father of petitioner Vicente B. Chuidian, is the owner of the
shares of stock.
7. Both parties filed separate motions for reconsideration. Razon wanted a reversion
to the trial court decision, while Chuidian asked that all cash and stock dividends
and all the pre-emptive rights accruing to the 1,500 shares of stock be ordered
delivered to him.
ISSUE: Is Enrique Razon the true owner of the 1,500 shares of stock placed under the
name of the late Juan T. Chuidian?
RULING: NO. In the instant case, there is no dispute that the questioned 1,500 shares of
stock of E. Razon, Inc. are in the name of the late Juan Chuidian in the books of the
corporation. Moreover, the records show that during his lifetime, Chuidian was elected
member of the Board of Directors of the corporation, which clearly shows that he was a
stockholder of the corporation. From the point of view of the corporation, therefore,
Chuidian was the owner of the 1,500 shares of stock. In such a case, the petitioner who
claims ownership over the questioned shares of stock must show that the same were
transmitted to him by proving that all the requirements for the effective transfer of shares of
stock in accordance with the corporations by-laws, if any, were followed, or in accordance
with the provisions of law.
The petitioner failed in both instances. The petitioner did not present any by-laws, which
could show that the 1,500 shares of stock were effectively transferred to him. In the

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

119

absence of the corporations by-laws or rules governing effective transfer of shares of


stock, the provisions of the Corporation Law are made applicable to the instant case.
The law is clear that in order for a transfer of stock certificate to be effective, the certificate
must be properly indorsed and that the title to such certificate of stock is vested in the
transferee by the delivery of the duly indorsed certificate of stock. Since the certificate of
stock covering the questioned 1,500 shares of stock registered in the name of the late Juan
Chuidian was never indorsed to Razon, the inevitable conclusion is that the questioned
shares of stock belong to Chuidian.
DOCTRINE: For an effective transfer of shares of stock, the mode and manner of transfer
as prescribed by law must be followed. (Navea v. Peers Marketing Corp., 74 SCRA 65)
As provided under Section 3 of Batas Pambansa Bilang 68, otherwise known as the
Corporation Code of the Philippines, shares of stock may be transferred by delivery to the
transferee of the certificate properly indorsed. Title may be vested in the transferee by the
delivery of the duty-indorsed certificate of stock. (18 C.J.S. 928, cited in Rivera v. Florendo,
144 SCRA 643)
However, no transfer shall be valid, except as between the parties until the transfer is
properly recorded in the books of the corporation. (Section 63, Corporation Code of the
Philippines; Section 35 of the Corporation Law)
DISPOSITIVE:
WHEREFORE, judgment is rendered as follows:
a.) G.R. No. 74306:
The petition is dismissed. The decision of the Intermediate Appellate Court
declaring Juan T. Chuidian as the owner of the subject shares of stock is
affirmed.
b.) G.R. No. 74315:
The petition is granted. The decision of the intermediate Appellate Court is
reversed and set aside. Such decision is modified in that all cash and stock
dividends as, well as all pre-emptive rights that have accrued and attached to
the 1,500 shares in E. Razon Inc., since 1966 are declared to belong to the
estate of Juan T. Chuidian.
RURAL BANK of SALINAS v CA
FACTS:
Clemente G. Guerrero, President of the Rural Bank of Salinas, Inc., executed a Special
Power of Attorney in favor of his wife, private respondent Melania Guerrero, giving and
granting the latter full power and authority to sell or otherwise dispose of and/or mortgage
473 shares of stock of the Bank registered in his name, to execute the proper documents
therefor, and to receive and sign receipts for the dispositions.
Melania executed a Deed of Assignment for 472 shares out of the 473 shares, in favor of
private respondents Luz Andico (457), Wilhelmina Rosales (10) and Francisco Guerrero, Jr.
(5).
Before the death of Clemente, Melania, pursuant to the same Special Power of Attorney,
executed a Deed of Assignment for the remaining one (1) share of stock in favor of
Francisco Guerrero, Sr.
Melania presented to petitioner Rural Bank of Salinas the 2 Deeds of Assignment for
registration with a request for the transfer in the Bank's stock and transfer book of the 473
shares of stock, the cancellation of stock certificates in the name of Clemente, and the
issuance of new stock certificates covering the transferred shares of stocks in the name of
the new owners thereof.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

120

Petitioner Bank denied the request of respondent Melania.


Melania filed with the SEC an action for mandamus against petitioners Rural Bank of
Salinas, its President and Corporate Secretary.
The SEC Hearing Officer rendered a Decision granting the writ of Mandamus prayed for by
the private respondents and directing petitioners to cancel stock certificates nos. 26, 49 and
65 of the Bank, all in the name of Clemente G. Guerrero, and to issue new certificates in
the names of private respondents, except Melania Guerrero.
ISSUE:
WON SEC can compel the Rural Bank of Salinas by mandamus to register its stock and
transfer book the transfer of 473 shares of stock to private respondents
RULING: YES. Section 5 (b) of P.D. No. 902-A grants to the SEC the original and exclusive
jurisdiction to hear and decide cases involving intracorporate controversies. An
intracorporate controversy has been defined as one which arises between a stockholder
and the corporation. There is no distinction, qualification, nor any exception whatsoever.
The case at bar involves shares of stock, their registration, cancellation and issuances
thereof by petitioner Rural Bank of Salinas. It is therefore within the power of respondent
SEC to adjudicate.
The only limitation imposed by Section 63 of the Corporation Code is when the corporation
holds any unpaid claim against the shares intended to be transferred, which is absent here.
A corporation, either by its board, its by-laws, or the act of its officers, cannot create
restrictions in stock transfers. The right of a transferee/assignee to have stocks transferred
to his name is an inherent right flowing from his ownership of the stocks.
The corporation's obligation to register is ministerial. In transferring stock, the secretary of a
corporation acts in purely ministerial capacity, and does not try to decide the question of
ownership. The duty of the corporation to transfer is a ministerial one and if it refuses to
make such transaction without good cause, it may be compelled to do so by mandamus.
For the petitioner Rural Bank of Salinas to refuse registration of the transferred shares in its
stock and transfer book, which duty is ministerial on its part, is to render nugatory and
ineffectual the spirit and intent of Section 63 of the Corporation Code.
DOCTRINE: A corporation, either by its board, its by-laws, or the act of its officers, cannot
create restrictions in stock transfers. The right of a transferee/assignee to have stocks
transferred to his name is an inherent right flowing from his ownership of the stocks.
SUPER CORPO REVIEWER: A corporation, either by its board, its by-laws or the act of its
officers, cannot create restrictions in stock transfers.
The right of a transferee/assignee to have stocks transferred to his name is an inherent
right flowing from his ownership of the stocks. Thus, whenever a corporation refuses to
transfer and register stock, mandamus will lie to compel the officers of the corporation to
transfer said stock in the books of the corporation. This is because the corporation's
obligation to register is ministerial. (Note, however, that in such cases, the person
requesting the registration must be the prima facie owner of the shares. Cf. Lim Tay v. CA,
293 SCRA 634)

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

121

RURAL BANK of LIPA v CA


FACTS:
1. Controversy between Rural Bank of Lipa and its stockholders.
2. Reynaldo Villanueva, Sr., a stockholder of the Rural Bank of Lipa City, executed a
Deed of Assignment wherein he assigned his shares, as well as those of eight (8)
other shareholders under his control with a total of 10,467 shares, in favor of the
stockholders of the Bank represented by its directors Bautista, Custodio and
Katigbak.
3. Villanueva and wife, then executed agreement wherein they acknowledged their
indebtedness of P4M to bank and stipulated that said debt will be paid out of the
proceeds of the sale of their real property.
4. BOD meeting of the stockholders of the bank- Villanueva spouses assured the
Board that their debt would be paid on or before December 31 of that same year;
otherwise, the Bank would be entitled to liquidate their shareholdings, including
those under their control. In such an event, should the proceeds of the sale of said
shares fail to satisfy in full the obligation, the unpaid balance shall be secured by
other collateral sufficient therefor.
5. Sps. Villanueva failed to settle their obligations, the bank then sent them a letter
demanding: 1) the surrender of all the stock certificates issued to them; and (2) the
delivery of sufficient collateral to secure the balance of their debt amounting to
P3,346,898.54, which the spouses ignored.
6. The bank then converted their shares to Treasury shares.
7. Sps. Villanueva then questioned the legality of the shares' conversion.
8. The bank then held a stockholders' meeting to elect board of directors, Sps.
Villanueva were not informed.
9. The counsel for the Spouses then questioned the legality of the said stockholders
meeting and the validity of all the proceedings therein, to which the stockholders
replied that the spouses were no longer entitled to notice of the said meeting since
they had relinquished their rights as stockholders in favor of the Bank.
10. Sps. Villanueva then filed a petition for annulment of the stockholders meeting and
election of directors and officers with the SEC. Their main contentions were:
a. they were conducted in violation of the by-laws of the Rural Bank;
b. they were not given due notice of said meeting and election
notwithstanding the fact that they had not waived their right to notice;
c. they were deprived of their right to vote despite their being holders of
common stock with corresponding voting rights;
d. their names were irregularly excluded from the list of stockholders
11. The respondents replied answering:
a. The petitioners have no legal capacity to sue;
b. The petition states no cause of action;
c. The complaint is insufficient;
d. The petitioners claims had already been paid, waived, abandoned, or
otherwise extinguished;
e. The petitioners are estopped from challenging the conversion of their
shares.
12. The SEC initially dismissed the ground for lack of sufficient bases, but upon finding
that since the Villanuevas have not disposed of their shares, whether voluntarily or
involuntarily, they were still stockholders entitled to notice of the annual
stockholders meeting was then sustained by the SEC in the Motion for
Reconsideration.
13. Certiorari and Annulment with Damages was filed by the Rural Bank, its directors
and officers before the SEC en banc alleging that there was grave abuse on the
part of SEC for issuing orders.
14. CA dismissed for lack of merit

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

122

ISSUE: WON there was an effective transfer of stock from the Sps. Villanueva to the bank
RULING: None. SECTION 63. Certificate of stock and transfer of shares. The capital
stock of stock corporations shall be divided into shares for which certificates signed by the
president or vice president, countersigned by the secretary or assistant secretary, and
sealed with the seal of the corporation shall be issued in accordance with the by-laws.
Shares of stocks so issued are personal property and may be transferred by delivery of the
certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally
authorized to make the transfer. No transfer, however, shall be valid, except as between the
parties, until the transfer is recorded in the books of the corporation so as to show the
names of the parties to the transaction, the date of the transfer, the number of the
certificate
or
certificates
and
the
number
of
shares
transferred.
Petitioners argue that by virtue of the Deed of Assignment, the spouses had relinquished to
all the rights they may have had as stockholders of the Bank. Yes, there was an
assignment of shares to the petitioners, but said assignment was not sufficient to effect the
transfer of shares since there was no endorsement of the certificates of stock by the
owners, or any other person legally authorized to make the transfer. Also, petitioners admit
that the assignment of shares was not coupled with delivery, the absence of which is a fatal
defect. The rule is that the delivery of the stock certificate duly endorsed by the owner is the
operative act of transfer of shares from the lawful owner to the transferee. Thus, title may
be vested in the transferee only by delivery of the duly indorsed certificate of stock.
While the assignment may be valid and binding on the petitioners and private respondents,
it does not necessarily make the transfer effective. Consequently, the petitioners, as mere
assignees, cannot enjoy the status of a stockholder until the issue on the ownership and
transfer
of
shares
is
resolved
with
finality.
DISPOSITIVE:

Sps.

Villanueva

won.

Cerrtiorari

denied.

CA

affirmed.

DOCTRINE: For a valid transfer of stocks, there must be strict compliance with the mode of
transfer
prescribed
by
law.
The
requirements
are:
(a)
There
must
be
delivery
of
the
stock
certificate;
(b) The certificate must be endorsed by the owner or his attorney-in-fact or other persons
legally
authorized
to
make
the
transfer;
and
(c) To be valid against third parties, the transfer must be recorded in the books of the
corporation. As it is, compliance with any of these requisites has not been clearly and
sufficiently shown.
TAN v SEC
FACTS:
Petitioner filed a petition for certiorari against SEC and its co-respondents, after the former
in an en banc Order, overturned with modification, the decision of its Cebu SEC Extension.
Respondent Visayan Corp. was registered on October 1, 1979. As incorporator, Petitioner
Alfonso Tan had 400 shares of the capital stock standing in his name at the PV
of P100.00/share, evidenced by Certificate of Stock No. 2. Alfonso Tan was elected
President and subsequently reelected, holding the position as such until 1982 but remained
in the BoD until April 19, 1983 as director.
January 31, 1981, while he was still the president of the respondent corporation, 2 other
incorporators, (Antonia Y. Young and Teresita Y. Ong), assigned to the corporation their
shares, represented by certificate of stock No. 4 and 5 after which, they were paid

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

123

the corresponding 40% corporate stock-in-trade. Due to the withdrawal of the 2


incorporators and to complete the membership of the 5 directors of the board, petitioner
sold 50 shares out of his 400 shares of capital stock to his brother Angel S. Tan. Another
incorporator, Alfredo B. Uy, also sold 50 of his 400 shares of capital stock to Teodora S. Tan
and both new stockholders attended the special meeting, Angel Tan was elected director
and the minutes of meeting was filed with SEC. As a result of the sale of 50 shares to Angel
S. Tan, Certificate of Stock No. 2 was cancelled and corresponding Certificates Nos. 6 (for
50 shares in the name of Angel Tan) and 8 (for remaining 350 shares in the name of
Alfonso Tan) were issued, signed by the newly elected fifth member of the Board, Angel S.
Tan as Vice-president, upon instruction of Alfonso S. Tan who was then the president of the
Corporation. Petitioner's certificate of stock No. 2 was cancelled by the corporate secretary
and respondent Patricia Aguilar by virtue of Resolution No. 1981 (b), which was passed
and approved while petitioner was still a member of the Board of Directors of the
respondent corporation.
Mr. Buzon, submitted an Affidavit alleging that he was personally requested by Mr. Tan Su
Ching to request Mr. Alfonso Tan to make proper endorsement in the cancelled Certificate
of Stock No. 2 and Certificate No. 8, but he did not endorse, instead he kept the cancelled
(1981) Certificate of Stock No. 2 and returned only to me Certificate of Stock No. 8, which
he delivered to Tan Su Ching. When petitioner was dislodged from his position as
president, he withdrew from the corporation on February 27, 1983, on condition that he be
paid with stocks-in-trade equivalent to 33.3% in lieu of the stock value of his shares in the
amount of P35,000.00. After withdrawal of the stocks, the board of the respondent
corporation held a meeting on April 19, 1983, effecting the cancellation of Stock Certificate
Nos. 2 and 8 in the corporate stock and transfer book 1 and submitted the minutes thereof
to the SEC on May 18, 1983.
5 years and 9 months after the transfer of 50 shares to Angel S. Tan and 3 years and 7
months after effecting the transfer of Stock Certificate Nos. 2 and 8 from the original owner
(Alfonso Tan) in the stock and transfer book of the corporation, the Alfonso Tan filed the
case before the Cebu SEC Extension Office questioning for the first time, the cancellation
of his Stock Certificates Nos. 2 and 8. SEC Extension Office Hearing Officer ruled in favor
of petitioner Tan stating that the cancellation of Tans shares of stock is null any void.
Private respondent in the original complaint went to the SEC on appeal. The SEC ruled in
favour of Private Respondent, SEC unanimously overturned the Decision of CEBU SEC.
ISSUES:
(1) WON there is a valid transfer of shares of stock by the Petitioner to the corporation.
(2) WON Section 63 of the Corporation Code of the Philippines is "mandatory in nature",
meaning that without the actual delivery and endorsement of the certificate in question,
there can be no transfer, or that such transfer is null and void.
RULING:
(1) YES. There is no doubt that there was delivery of Stock Certificate No. 2 made by the
petitioner to the Corporation before its replacement with the Stock Certificate No. 6 for 50
shares to Angel S. Tan and Stock Certificate No. 8 for 350 shares to the petitioner, on
March 16, 1981. The problem arose when petitioner was given back Stock Certificate No. 2
for him to endorse and he deliberately witheld it for reasons of his own. The proof that
Stock Certificate No. 2 was split into two (2) consisting of Stock Certificate No. 6 for 50
shares and Stock Certificate No. 8 for 350 shares, is the fact that petitioner surrendered the
latter stock (No. 8) in lieu of P2 million pesos worth of stocks, which the board passed in a
resolution in its meeting on April 19, 1983. Thus, on February 27, 1983, petitioner indicated
he was withdrawing from the corporation on condition that he be paid with stock-in-trade
corresponding to 33.3%, which had only a PV of P35,000.00. The transfer of
Stock Certificate Nos. 2 and 8 was also ordered to be recorded in the corporate stock and

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

124

transfer book and the minutes of said meeting was submitted to SEC on May 18, 1983. It is
also doubtless that Stock Certificate No. 8 was exchanged by petitioner for stocks-in-trade
since
he was operating his own
enterprise engaged in the same business, otherwise, why would a
businessman
be
interested in acquiring P2,000,000.00 worth of goods which could possibly at that time, fill
up warehouse. He even padlocked the warehouse of the respondent corporation,
after withdrawing the 33 1/3% stocks. Accordingly, the MOA prepared by the respondents'
counsel, Atty. Ramirez evidencing the transaction, was also presented to petitioner for his
signature, however, this document was never returned by him to the
corporate officer for the signature of the other officers concerned.
(2) NO. It is safe to infer from the facts that there was already delivery of the unendorsed
Stock Certificate No. 2, which is essential to the issuance of StockCertificate Nos. 6 and 8
to angel S. Tan and petitioner Alfonso S. Tan, respectively. What led to the problem was the
return of the cancelled certificate (No. 2) to Alfonso S. Tan for his endorsement and his
deliberate non-endorsement.
Since this was already cancelled which cancellation was also reported to the respondent
SEC, there was no necessity for the same certificate to be endorsed by the petitioner. All
the acts required for the transferee to exercise its rights over the
acquired stocks were attendant and even the corporation was protected from
other parties, considering that said transfer was earlier recorded or registered in the
corporate stock and transfer book.
To follow the argument of petitioner which was upheld by the Cebu SEC Extension Office
Hearing Officer, Felix Chan, that the cancellation of Stock Certificate Nos. 2 and 8 was
null and
void
for lack of
delivery
of the cancelled "mother" Certificate No
2 whose endorsement was deliberately withheld by petitioner, is to prescribe certain
restrictions on the transfer of stock in violation of the corporation law itself as the only law
governing transfer of stocks. While Section 47(s) grants a stock corporations the authority
to determine in the by-laws "the manner of issuing certificates" of shares of stock,
however, the power to regulate is not the power to prohibit, or to impose unreasonable
restrictions of the right of stockholders to transfer their shares.
DOCTRINE: A certificate of stock is the paper representative or tangible evidence of the
stock itself and of the various interests therein. The certificate is not stock in the corporation
but is merely evidence of the holder's interest and status in the corporation, his ownership
of the share represented thereby, but is not in law the equivalent of such ownership. The
meaning of shares of stock are personal property and may be transferred by delivery of the
certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally
authorized to make the transfer. All the acts required for the transferee to exercise its rights
over
the
acquired stocks were attendant and even
the corporation was protected from other parties, considering that said transfer was earlier
recorded or registered in the corporate stock and transfer book.
DISPOSITIVE: Court Ruled in favor of Respondents. Order of the Commission under SECAC No. 263 dated October 10, 1990 is hereby AFFIRMED.
SUPER CORPO REVIEWER: A by-law which prohibits a transfer of stock without the
consent or approval of all the SHs or of the President or Board of Directors is illegal as
constituting undue limitation on the right of ownership and in restraint of trade (citing
Fleisher v. Botica Nolasco Co., Inc., 47 Phil. 583)
While Sec. 47 (9) of the Corporation Code grants to stock corporations the authority to
determine in the by-laws the "manner of issuing certificates" of shares of stock, however,

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

125

the power to regulate is not the power to prohibit, or to impose unreasonable restrictions of
the right of SHs to transfer their shares. To uphold the cancellation of a stock certification as
null and void for lack of delivery of the cancelled "mother" certificate whose endorsement
was deliberately withheld by petitioner, is to prescribe certain restrictions on the transfer of
stock in violation of the Corporation Code as the only law governing transfer of stocks.
TAY v CA
FACTS
In 1980, Sy Guiok secured a loan from the petitioner Tay payable in 6 months. To secure
the payment of loan and interest thereon, Respondent Guiok executed a Contract of
Pledge in favor of the petitioner whereby he pledged his 300 shares of stock in the Go Fay
& Company.
On the same date, Alfonso Lim secured a loan from the petitioner payable in 6 months. To
secure the payment of his loan, Sy Lim executed a Contract of Pledge covering his 300
shares of stock in Go Fay & Company.
Respondent Guiok and Sy Lim endorsed their respective shares of stock in blank and
delivered the same to the petitioner. However, Respondent Guiok and Sy Lim failed to pay
their respective loans and the accrued interests thereon to the [p]etitioner. Hence,
petitioner Lim Tay prays for the issuance of a writ of mandamus, directing the corporate
secretary of Go Fay and Co. (1) to have the shares (currently in the name of Sy and Lim)
transferred to his name in the corporate books, (2) to issue new certificates of stock and (3)
to deliver the corresponding dividends to him claiming that he acquired ownership of the
stocks by virtue of their contract of pledge, by prescription, and by novation.
ISSUE: WON the corporate secretary may be ordered by the Court to transfer the shares of
stock in the name of petitioner Lim Tay by virtue of
(1) contract of pledge,
(2) prescription and
(3) novation as claimed by petitioner Lim Tay?
RULING: NO. In order that a writ of mandamus may issue, it is essential that the person
petitioning for the same has a clear legal right to the thing demanded and that it is the
imperative duty of the respondent to perform the act required. In the case at bar, petitioner
Lim Tay has no ownership at all.
(1) Without foreclosure and purchase at auction, pledgee is NOT the owner of pledged
shares
There is no showing that petitioner made any attempt to foreclose or sell the shares
through public or private auction, as stipulated in the contracts of pledge and as required by
Article 2112 of the Civil Code. Therefore, ownership of the shares could not have passed to
him. The pledgor remains the owner during the pendency of the pledge and prior to
foreclosure and sale, as explicitly provided by Article 2103 of the same Code.
(2) No ownership by prescription
Prescription should not begin to run on the action to demand the return of the thing pledged
while the loan still exists.
(3) No novation
In the present case, novation cannot be presumed by (a) respondents indorsement and
delivery of the certificates of stock covering the 600 shares, (b) petitioners receipt of
dividends from 1980 to 1983, and (c) the fact that respondents have not instituted any
action to recover the shares since 1980.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

126

It was merely in compliance with Article 2093 of the Civil Code, which requires that the
thing pledged be placed in the possession of the creditor or a third person of common
agreement; and Article 2095, which states that if the thing pledged are shares of stock,
then the instrument proving the right pledged must be delivered to the creditor.
Moreover, the fact that respondents allowed the petitioner to receive dividends pertaining to
the shares was not meant to relinquish ownership thereof. The same was done pursuant to
the stipulation in the agreement between the petitioner and Respondents Sy Guiok and Sy
Lim.
DOCTRINE:
The duty of a corporate secretary to record transfers of stocks is ministerial. However, he
cannot be compelled to do so when the transferees title to said shares has no prima facie
validity or is uncertain.
DISPOSITIVE: Sy Guiok and Alfonso Lim and respondent corporation Go Fay and Co.
won. Petition of Lim Tay is denied.
NAVA v PEERS MARKETING
FACTS:
Teofilo Po as an incorporator subscribed to eighty shares of Peers Marketing Corporation at
one hundred pesos a share or a total par value of eight thousand pesos. Po paid two
thousand pesos or twenty-five percent of the amount of his subscription. No certificate of
stock was issued to him or, for that matter, to any incorporator, subscriber or stockholder.
On April 2, 1966 Po sold to Ricardo A. Nava for two thousand pesos twenty of his eighty
shares. In the deed of sale Po represented that he was "the absolute and registered owner
of twenty shares" of Peers Marketing Corporation.
Nava requested the officers of the corporation to register the sale in the books of the
corporation. The request was denied because Po has not paid fully the amount of his
subscription. Nava was informed that Po was delinquent in the payment of the balance due
on his subscription and that the corporation had a claim on his entire subscription of eighty
shares which included the twenty shares that had been sold to Nava.
ISSUE: Whether or not Peers may be compelled by mandamus to register the stocks in
Navas name.
RULING: NO. Theres no certificate of stock issued in favor of Po. Shares of stock may be
transferred by delivery to the transferee of the certificate properly indorsed. "Title may be
vested in the transferee by delivery of the certificate with a written assignment or
indorsement thereof" There should be compliance with the mode of transfer prescribed by
law.
The usual practice is for the stockholder to sign the form on the back of the stock
certificate. The certificate may thereafter be transferred from one person to another. If the
holder of the certificate desires to assume the legal rights of a shareholder to enable him to
vote at corporate elections and to receive dividends, he fills up the blanks in the form by
inserting his own name as transferee. Then he delivers the certificate to the secretary of the
corporation so that the transfer may be entered in the corporation's books. The certificate is
then surrendered and a new one issued to the transferee.
That procedure cannot be followed in the instant case because, as already noted, the
twenty shares in question are not covered by any certificate of stock in Po's name.
Moreover, the corporation has a claim on the said shares for the unpaid balance of Po's

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

127

subscription. A stock subscription is a subsisting liability from the time the subscription is
made. The subscriber is as much bound to pay his subscription as he would be to pay any
other debt. The right of the corporation to demand payment is no less incontestable.
In this case no stock certificate was issued to Po. Without the stock certificate, which is the
evidence of ownership of corporate stock, the assignment of corporate shares is effective
only between the parties to the transaction.
DOCTRINE: In this case no stock certificate was issued to Po. Without the stock certificate,
which is the evidence of ownership of corporate stock, the assignment of corporate shares
is effective only between the parties to the transaction.
DISPOSITIVE: In view of the foregoing considerations, the trial court's judgment dismissing
the petition for mandamus is affirmed.
LEE WON v WACK WACK GOLF & COUNTRY CLUB
FACTS:
Wack wack Golf and Country Club, Inc. (WGCCI), a non-stock corporation, issued to Iwao
Teruyama Membership Certificate No. 201 which was assigned to M. T. Reyes on April 22,
1944. Subsequently in the same year 1944, M. T. Reyes transferred and assigned said
certificate to the Lee Won. On April 26, 1955, Lee Won filed an action in the Court of First
Instance of Manila against WGCCI, alleging that shortly after the rehabilitation of WGCCI
after the war, Lee Won asked it to register in its books the assignment his favor and to
issue to the him a new certificate, but that WGCCI had refused and still refuses to do so
unlawfully; and praying that he, Lee Won, be declared the owner of one share of stock of
the corporation and that the latter be ordered to issue a correspondent new certificate. On
June 6, 1955, WGCCI filed a motion to dismiss, alleging that from 1944, when the Lee
Won's right of action had accrued, to April 26, 1955, when the complaint was filed, eleven
years have elapsed, and that therefore the complaint was filed beyond the 5-year period
fixed in Article 1149 of the Civil Code. On July 30, 1955, the Court of First Instance of
Manila issued an order dismissing the complaint. As Lee Won's motion for reconsideration
filed on August 27, 1955 and second motion for reconsideration filed on September 13,
1955, were both denied, he has taken the present appeal.
ISSUE: Whether or not Lee Won is entitled to the registration of the transferred share of
stock.
RULING: YES. The certificate in question contains a condition to the effect that no
assignment thereof "shall be effective with respect to the club until such assignment is
registered in the books of the club, as provided in the By-Laws." The decisive question that
arises is whether Lee Won was bound, under said condition and By-Laws of WGCCI or any
statutory rule for that matter, to present and register the certificate assigned to him in 1944
within any definite or fixed period. WGCCI has not made herein any pretense to that effect;
but it contends that from the moment the certificate was assigned to the Lee Won, the
latter's right to have the assignment registered commenced to exist. This contention is
correct, but it would not follow that said right should be exercised immediately or within a
definite period. The existence of a right is one thing, and the duration of said right is
another.
DISPOSITIVE: Appealed order was reversed. Case was remanded to the trial court for
further proceedings.
B. Restrictions on transfers C V2 321-332
1. General rule; free transferability of shares

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

128

General rule: Shares of stock are freely transferable, without restriction.


Exception:In close corporations, restrictions may be placed on the transfer of shares.
Such restrictions must appear in the AOI and in the by-laws, as well as in the certificate
of stock. Otherwise, the restriction shall not be binding on any purchaser thereof in
good faith.
The restrictions imposed shall be no more onerous than granting the existing
stockholders or the corporation the option to purchase the shares of the transferring
stockholder with such reasonable terms, conditions or period stated therein. If this
option is not exercised upon the expiration of the period, the transferring stockholder
may sell his shares to any third person. (Sec. 98)
WHAT IS THE EFFECT OF ISSUANCE OR TRANSFER OF STOCK IN BREACH OF
THE RESTRICTIONS?
The corporation may, at its option, refuse to register the transfer of stock in the name of
the transferee. (Sec. 99.4)However, this shall not be applicable if the transfer, though
otherwise contrary to subsections (1), (2) and (3) of Sec. 99, has been consented to by
all the stockholders of the close corporation, or if the close corporation has amended its
AOI in accordance with Title XII of the Code.
For his part, the transferee may rescind the transfer or recover from the transferor
under any applicable warranty, whether express or implied.
2. Restrictions; validity; requirements
PADGETT v BABCOCK & TEMPLETON
FACTS:
From January 1, 1923 to April 15, 1929, Padgett was an employed in Babcock &
Templation Inc (Babcock). He bought 35 shares at P100/share at the suggestion of the
president of Babcock. He also received 9 shares from Babcock for his Christmas bonus.
He is now the owner of 44 shares for which the 12 certificates were issued. The word
"nontransferable" appears on each and every one of these certificates.
Before leaving the corporation, he proposed to the president that the corporation buy his 44
shares at par value plus the interest thereon, or that he be authorized to sell them to other
persons.
The corporation bought similar shares belonging to other employees, at par value.
Sometime later, the president offered to buy his shares first at P85 each and then at P80.
Padgett knowing that he is in a disadvantage, did not agree. He then questions in court the
transferability of his stocks because he is left at a position where he can't dispose his
stocks despite wanting to leave the corporation Babcock.
ISSUE: W/N the shares are transferable despite the restriction appearing therein
RULING: YES. The word "non transferable" appearing on the 12 certificates of shares of
stock, is declared null and void. The Court ordered Babcock to issue in lieu thereof new
ones without any restriction whatsoever, with the costs of both instances against Babcock.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

129

Shares of corporate stock being regarded as property, the owner of such shares may, as a
general rule, dispose of them as he sees fit, unless the corporation has been dissolved, or
unless the right to do so is properly restricted, or the owner's privilege of disposing of his
shares has been hampered by his own action.
Restriction consisting in the word "nontransferable" appearing on the 12 certificates is
illegal and should be eliminated. There has been no such contract, either express or
implied, between Padgett and Babcock which could made it non transferable. In the
absence of a similar contractual obligation and of a legal provision applicable thereto, it is
logical to conclude that it would be unjust and unreasonable to compel the said defendants
to comply with a non-existent or imaginary obligation.
Neither would the transfer of such share upset the ownership percentage between a
Filipino and Foreigner as required provided by law. In fact the corporation is not one of
those listed nationalized corporation, so there is no proper justification of limiting the
transfer of such a personal property.
FLEISCHER v BOTICA NOLASCO
FACTS:
Manuel Gonzalez was the original owner of the five shares of stock in question, Nos. 16,
17, 18, 19 and 20 of the Botica Nolasco, Inc.; that on March 11, 1923, he assigned and
delivered said five shares to the plaintiff, Henry Fleischer, by accomplishing the form of
endorsement provided on the back thereof, together with other credits, in consideration of a
large sum of money owed by Gonzalez to Fleischer; that on March 13, 1923, Dr. Eduardo
Miciano, who was the secretary-treasurer of said corporation, offered to buy from Henry
Fleischer, on behalf of the corporation, said shares of stock, at their par value of P100 a
share, for P500; that by virtue of article 12 of the by-laws of Botica Nolasco, Inc., said
corporation had the preferential right to buy from Manuel Gonzalez said shares; that the
plaintiff refused to sell them to the defendant; that the plaintiff requested Doctor Miciano to
register said shares in his name; that Doctor Miciano refused to do so, saying that it would
be in contravention of the by-laws of the corporation.
It also appears from the record that on the 13th day of March, 1923, two days after the
assignment of the shares to the plaintiff, Manuel Gonzales made a written statement to the
Botica Nolasco, Inc., requesting that the five shares of stock sold by him to Henry Fleischer
be noted transferred to Fleischer's name. He also acknowledged in said written statement
the preferential right of the corporation to buy said five shares.
ISSUE: Whether or not article 12 of the by-laws of the Botica Nolasco, Inc., is in conflict
with the provisions of the Corporation Law (Act No. 1459).
RULING: NO. It does not suggest that any discrimination may be created by the
corporation in favor or against a certain purchaser. The holder of shares, as owner of
personal property, is at liberty, under said section, to dispose of them in favor of
whomsoever he pleases, without any other limitation in this respect, than the general
provisions of law. Therefore, a stock corporation in adopting a by-law governing transfer of
shares of stock should take into consideration the specific provisions of section 35 of Act
No. 1459, and said by-law should be made to harmonize with said provisions. It should not
be inconsistent therewith.
The only restraint imposed by the Corporation Law upon transfer of shares is found in
section 35 of Act No. 1459, quoted above, as follows: "No transfer, however, shall be valid,
except as between the parties, until the transfer is entered and noted upon the books of the
corporation so as to show the names of the parties to the transaction, the date of the

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

130

transfer, the number of the certificate, and the number of shares transferred." This
restriction is necessary in order that the officers of the corporation may know who are the
stockholders, which is essential in conducting elections of officers, in calling meeting of
stockholders, and for other purposes. but any restriction of the nature of that imposed in the
by-law now in question, is ultra vires, violative of the property rights of shareholders, and in
restraint of trade.
Moreover, the by-laws now in question cannot have any effect on the appellee. He had no
knowledge of such by-law when the shares were assigned to him. He obtained them in
good faith and for a valuable consideration. He was not a privy to the contract created by
said by-law between the shareholder Manuel Gonzalez and the Botica Nolasco, Inc. Said
by-law cannot operate to defeat his rights as a purchaser.
DOCTRINE: A stock corporation in adopting by-laws governing the transfer of shares of
stock should take into consideration the specific provisions of the Corporation Law. The bylaws of corporations should be made to harmonize with the provisions of the Corporation
Law. By-laws must not be inconsistent with the provisions of the Corporation Law. By-laws
of a corporation are valid if they are reasonable and calculated to carry into effect the
objects of the corporation provided they are not contradictory to the general policy of the
laws of the land.
Under a statute authorizing by-laws for the transfer of stock of a corporation, it can do no
more than prescribe a general mode of transfer on the corporate books and cannot justify
an unreasonable restriction upon the right to sell. The shares of stock of a corporation are
personal property and the holder thereof may transfer the same without unreasonable
restrictions.
The power to enact by-laws restraining the sale and transfer of stock must be found in the
governing statute or charter. Restrictions upon the traffic in stock must have their source in
legislative enactments, as the corporation itself cannot create such impediments. By-laws
of a corporation are intended merely for the protection of the corporation, and prescribe
regulations and not restrictions; they are always subject to the charter of the corporation.
The corporation, in the absence of such a power, cannot ordinarily inquire into or pass upon
the legality of the transaction by which its stock passes from one person to another, nor can
it question the consideration upon which a sale is based. A by-law of a corporation cannot
take away or abridge the substantial rights of stockholders. Courts will carefully scrutinize
any attempt on the part of a corporation to impose restrictions or limitations upon the right
of stockholders to sell and assign their stock. Restrictions cannot be imposed upon a
stockholder by a by-law without statutory or charter authority. The owner of corporate stock
has the same uncontrollable right to sell or alienate, which attaches to the ownership of any
other species of property.
DISPOSITIVE: The decision of the lower court is affirmed.
ALLEN v BILTMORE TISSUE CORP
FACTS:
1. Biltmore Tissue Corporation was organized in 1932, with an authorized capitalization
of 1,000 shares without par value, to manufacture and deal in paper and paper
products. The by-laws adopted by the incorporators-directors, contain provisions
limiting the number of shares (originally 5, later 20) available to each stockholder
(section 28) and restricting stock transfers both during the life of the stockholder and
in case of his death (sections 29 30)
2. Whenever a stockholder desires to sell or transfer his shares, he must according to
one by-law, give the corporation or other stockholders an opportunity to repurchase
the stock at the price that was paid for the same to the Corporation at the time the
Corporation issued the stock. (Right of first refusal/ Preemptive Right)

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

131

3. If however, the option is not exercised, then after the lapse of 90 days, the stock may
be sold by the holder to such person and under such circumstances as he sees fit.
4. Harry Kaplan, a paper jobber, was one of Biltmores customers and some months
after its incorporation purchased 5 shares of stock from the corporation at $5 each. In
1936, Kaplan received a stock dividend of 5 more shares, and two years later,
purchased an additional 10 shares for $100. (He now has 20 shares.) On the face of
each of the three certificates, running vertically along the left-hand margin, appear
the legend. Issued subject to restrictions in Sections 28, 29, and 30 of the by-laws.
5. On Kaplans death, Biltmores Board of Directors voted to exercise the option to
purchase the stock pursuant to Section 30 of the by-laws. Now, although the by-law
provision permitted purchase at the same price that the company received therefor
from the stockholder originally, the corporation nevertheless, decided to pay $20 for a
share, considerably more that the original purchase price, based on the price at
which it had acquired shares from the other stockholders.
6. Kaplans executors declined to sell to the corporation, insisting that the stock, which
had been in the decedents name, be transferred to them. They contend that the
legend on the certificate fails to meet the requirement of section 176 of the Personal
Property Law and that the by-law is void as an unreasonable restraint. Basically, such
states: There shall be no restriction upon the transfer of shares represented by a
stock certificate by virtue of any by-law of such corporation, or otherwise, unless the
x x x restriction is stated upon the certificate.
Plaintiff maintains that the restriction must be set out verbatim.
ISSUE: Whether the provision, according the corporation a right of first option to
purchase the stock at the price, which it originally received it, amounts to an
unreasonable restraint.
RULING: NO. First, it meets the requisite notice of restriction. Written in legend of the
by-laws is specific citation leading to the deemed restrictions.
The courts have often said that the first option provision is in the nature of a contract
between the corporation and its stockholders and, as such, binding upon them. The
general rule that ownership of property cannot exist in one person and the right of
alienation in another has been frequently applied to shares of corporate stock and
cognizance has been taken of the principle that the right of transfer is a right of
property, and if another has the arbitrary power to forbid a transfer of property by the
owner that amounts to annihilation of property.
However, such is not the case here. The corporation had its option only for a 90-day
period. If it did not exercise its privilege within the time, the deceased stockholders
legal representative was at liberty to dispose of said stock as he saw fit, and, once so
disposed of, it would thereafter be free of restriction. In a very real sense, therefore, the
primary purpose of the by-laws was to enable a particular party, the corporation to buy
the shares, not to prevent the other party, the stockholder, from selling them.
DOCTRINE: As the cases make clear, what the law condemns is, not a restriction on
transfer, a provision merely postponing sale during the option period, but an effective
prohibition against transferability itself.
DISPOSITIVE: In sum, then the validity of the restriction on transfer does not rest on
any abstract notion of intrinsic fairness of price. To be invalid, more than mere disparity
between option price and current value of the stock must be shown. Since the parties
have in effect agreed on a price formula which suited them, and provision is made
freeing the stock for outside sale should the corporation not make, or provide for, the
purchase, the restriction is reasonable and valid.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

132

C. Unauthorized transfers C V2 346-348


Certificates indorsed in blank; when quasi-negotiable
A possessor, even without authority, may transfer good title to a bona fide purchaser if:
the real owner endorses the certificate in blank
the conveyance is for purposes other than transfer
that relying on the stock certificate, the purchaser believes the possessor to be the owner thereof or
has authority to transfer the same.
This proceeds from the theory of quasi-negotiability which provides that in endorsing a certificate in
blank, the real owner clothes the possessor with apparent authority, thus, estopping him later from
asserting his rights over the shares of stock against a bona fide purchaser.
Quasi-negotiability does not apply in cases where the real owner:
a.did not entrust the certificate to anyone; and
b.is not otherwise guilty of estoppel
For example, in case the transfer is made by a finder or a thief.
Forged Transfers
A corporation does not incur any misrepresentation in the issuance of a certificate made pursuant to
a forged transfer. It can always recall from the person the certificate issued, for cancellation.
In case where the certificate so issued comes into the hands of a bona fide purchaser for value from
the original purchaser, the corporation is estopped from denying its liability. It must recognize both the
original and the new certificate. But if recognition results to an over-issuance of shares, only the
original certificate may be recognized, without prejudice to the right of the bona fide purchaser to sue
the corporation for damages.
SANTAMARIA v HONG KONG SHANGHAI
FACTS:
Josefa T. Santamaria bought 10,000 shares of the Batangas Minerals, Inc., through the offices of
Woo, Uy-Tioco & Naftaly, a stock brokerage firm and pay therefore the sum of P8,041.20. The buyer
received Stock Certificate No. 517, issued in the name of Woo, Uy-Tioco & Naftaly and indorsed in
bank by this firm.
Santamaria purchased of 10,000 shares of the Crown Mines, Inc. with R.J. Campos & Co. (RJC), and
delivered Certificate No. 517 to the latter as security therefor with the understanding that said
certificate would be returned to her upon payment of the 10,000 Crown Mines, Inc. shares.
At the time of the delivery of a stock Certificate No. 517 to RJC. this certificate was in the same
condition as that when Santamaria received from Woo, Uy-Tioco & Naftaly, with the sole difference
that her name was later written in lead pencil on the upper right hand corner thereof.
Santamaria went to RJC to pay for her order of 10,000 Crown Mines shares and to get back
Certificate No. 517. Cosculluela then informed her that RJC was no longer allowed to transact
business due to a prohibition order from SEC. She was also inform that her Stock certificate was in
the possession of the HSBC.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

133

Certificate No. 517 came into possession of the HSBC because RJC had opened an overdraft
account with this bank and to this effect it had executed a document of hypothecation, of which RJC
pledged to the said bank "all stocks, shares and securities which come into their possession.
Certificate No. 517, indorsed by RJC to the HSBC, was sent by HSBC to the office of the Batangas
Minerals, Inc. with the request that the same be cancelled and a new certificate be issued in the
name of R.W. Taplin as trustee and nominee of the banking corporation. Taplin was an officer of this
institution in charge of the securities belonging to or claimed by the bank. Batangas Minerals issued
Certificate No. 715 in lieu of Certificate No. 517, in the name of Robert W. Taplin as trustee and
nominee of the HSBC
Santamaria made the claim to the bank for her certificate for the purpose of paying
10,000 shares of the Crown Mines, Inc. In her interview with Taplin, she informed
certificate belonged to her, and she demanded that it be returned to her. Taplin replied
did not know anything about the transaction had between her and RJC, and that he
anything until the case of the bank with Campos shall have been terminated.

her order for


him that the
that the bank
could not do

ISSUE: WON the transfer of the stock is valid


RULING: NO. A careful analysis of the facts seems to justify this contention. Certificate of stock No.
517 was made out in the name of Wo, Uy-Tioco & Naftaly, brokers, and was duly indorsed in bank by
said brokers. This certificate of stock was delivered by Santamaria to RJC to comply with a
requirement that she deposit something on account if she wanted to buy 10,000 shares of Crown
Mines Inc.
In making said deposit, Santamaria did not take any precaution to protect herself against the possible
misuse of the shares represented by the certificate of stock. Santamaria could have asked the
corporation that had issued said certificate to cancel it and issue another in lieu thereof in her name to
apprise the holder that she was the owner of said certificate. This she failed to do, and instead she
delivered said certificate, as it was, to RJC, thereby clothing the latter with apparent title to the shares
represented by said certificate including apparent authority to negotiate it by delivering it to said
company while it was indorsed in blank by the person or firm appearing on its face as the owner
thereof. The defendant Bank had no knowledge of the circumstances under which the certificate of
stock was delivered to RJC, and had a perfect right to assume that RJC was lawfully in possession of
the certificate in view of the fact that it was a street certificate, and was in such form as would entitle
any possessor thereof to a transfer of the stock on the books of the corporation concerned.
There is no question that, in this case, plaintiff made the negotiation of the certificate of stock to other
parties possible and the confidence she placed in RJC made the wrong done possible. This was the
proximate cause of the damage suffered by her. She is, therefore, estopped from claiming further title
to or interest therein as against a bona fide pledge or transferee thereof, for it is a well-known rule
that a bona fide pledgee or transferee of a stock from the apparent owner is not chargeable with
knowledge of the limitations placed on it by the real owner, or of any secret agreement relating to the
use which might be made of the stock by the holder.
On the other hand, it appears that this certificate of stock, indorsed as it was in blank by Woo, UyTioco & Naftaly, stock brokers, was delivered to HSBC by RJC, duly indorsed by the latter, pursuant
to a letter of hypothecation executed by RJC, in favor of said Bank.
The said certificate was delivered to the Bank in the ordinary course of business, together with many
other securities, and at the time it was delivered, the Bank had no Knowledge that the shares
represented by the certificate belonged to the plaintiff for, as already said, it was in the form of street
certificate which was transferable by mere delivery. The rule is "where one of two innocent parties

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

134

must suffer by reason of a wrongful or unauthorized act, the loss must fall on the one who first trusted
the wrong doer and put in his hands the means of inflicting such loss"
It is therefore clear that plaintiff, in failing to take the necessary precautions upon delivering the
certificate of stock to her broker, was chargeable with negligence in the transaction which resulted to
her own prejudice, and as such, she is estopped from asserting title to it as against the defendant
Bank.
DE LOS SANTOS v REPUBLIC & MCGRATH
FACTS:
1. Action involves title to 1, 600, 000 shares of stock of Lepanto Consolidated Mining,Co.
(Lepanto)
2. Originally, half of the shares were claimed by Apolinario de los Santos, and the other half by
Isabelo Astraquillo
3. During pendency of case, Isabelo allegedly conveyed his interest to Apolinario
4. The shares of stock in question are covered by stock certificates in favor of Vicente Madrigal,
who is registered in the books of Lepanto as owner and whose indorsement in blank appears
on the back of the certificates
5. Apolinario claims that he bought 500, 000 shares from Juan Campos in Manila and bought
300, 000 shares from Carl Hess, and that he later bought 800, 000 shares from Carl for the
account and benefit of Isabelo, all before Christmas of 1942.
6. By virtue of vesting order P-12, the title to 1.6M shares was vested in Alien Property
Custodian of the US (APC) as Japanese property.
7. Property Claims Committee allowed claims
Philippine Alien Property Admin reversed, title to shares remain to Property Admin
8. Atty Gen of the US claims that before the war, Vicente bought the shares in trust and for the
benefit of Mistui Busaan Kaisha (Mitsui); that Vicente deliverd certificates with his blank
indorsement to Mitsuis, and that latter never sold or disposed it.
ISSUE: WON Apolinario Delos Santos and Isabelo Astraquillo are the owners of the said shares of
stock by virtue of the alleged sale.
RULING: NO. Section 35 of the Corporation Law provides that the shares of stock issued are
personal property and may be transferred by delivery of the certificate indorsed by the owner or his
attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall be
valid, except as between the parties, until the transfer is entered and noted upon the books of the
corporation.
No such entry in the name of the plaintiffs have been made, it therefore follows that the transfer
allegedly effected by Juan and Carl is not valid.
On the Quasi-Negotiablity of a Certificate of Stock
A certificate of stock is sometimes regarded as quasi- negotiable, in the sense that it may be
transferred by endorsement, coupled with delivery. However, it is a NON-NEGOTIABLE instrument.
Therefore, a transferee under a forged assignment acquires no title which can be asserted against
the true owner, unless his own negligence has been such as to create an estoppels against him. If the
owner of the certificate has endorsed it in blank, and it is stolen from him, no title is acquired by an
innocent purchase for value.
Ratio for this rule: where one of two innocent parties must suffer by reason of a wrongful or
unauthorized act, the loss must fall on the one who first trusted the wrongdoer and put in his hands
the means of inflicting such loss.
Negligence which will work an estoppels must be proximate cause, one that must be in or
immediately connected with the transfer itself

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

135

In the case, neither Vicente nor Mitsuis had alienated the shares of stock in question. Its not even
claimed that either had, through negligence, given occasion for an improper or irregular disposition of
the shares of stock. Moreover, the certificates of stock were in the name of Vicente, the alleged
sellers, were not registered owners of the shares of stock. Being presumed to know the law, plaintiffs
advisedly assumed those risks and hence, cannot validly claim against the registered stockholder, the
status of purchasers in good faith.
Note: There were a lot of coincidences in the testimony of the plaintiffs: alleged vendors are both
dead (Carl was executed by the Japanese and Miguel died during the liberation) theres no way of
verifying their claim; that the house of Leonard Recio, who allegedly forwarded the stock certificates
to Atty. Orlina, and was given a receipt for such, accidentally caught fire, and had the receipt burnt.
The court noted that the version of the plaintiffs deprived them of all the means to check the certainty
of their allegations.
DISPOSITIVE: Decision reversed, Apolinario Delos Santos et al, dismissed.
DOCTRINE: On transfer of Certificates of Stock: . No transfer, however, shall be valid, except as
between the parties, until the transfer is entered and noted upon the books of the corporation
On the Quasi-Negotiablity of a Certificate of Stock: A certificate of stock is a non- negotiable
instrument, which may sometimes be regarded as quasi- negotiable, in the sense that it may be
transferred by endorsement, coupled with delivery.
SUPER CORPO REVIEWER: De los Santos filed a claim with the Alien Property Custodian for a
number of shares of the Lepanto corporation. He contended that said shares were bought from one
Campos and Hess, both of them dead. The Philippine Alien Property Administrator rejected the claim.
He instituted the present action to establish title to the aforementioned shares of stock.
The US Attorney General, the successor of the Alien Property Administrator, opposed the action on
the ground that the said shares of stock were bought by one Madrigal, in trust for the true owner,
Matsui, and then delivered to the latter indorsed in blank.
Issue: Had de los Santos in fact purchased the shares of stock?
De los Santos sole evidence that he purchased the said shares was his own unverified testimony.
The alleged vendors of the stocks who could have verified the allegation, were already dead. Further,
the receipt that might have proven the sale, was said to have been lost in a fire. On the other hand, it
was shown that the shares of stock were registered in the records of Lepanto in the name of
Madrigal, the trustee of Matsui; that Matsui was subsequently given possession of the corresponding
stock certificates, though endorsed in blank; and, that Matsui had neither sold, conveyed nor
alienated these to anybody.
It is the rule that if the owner of the certificate has endorsed it in blank, and is stolen, no title is
acquired by an innocent purchaser of value. This is so because even though a stock certificate is
regarded as quasi-negotiable, in the sense that it may be transferred by endorsement, coupled with
delivery, the holder thereof takes it without prejudice to such rights or defenses as the registered
owner or credit may have under the law, except in so far as such rights or defenses are subject to the
limitations imposed by the principles governing estoppel.
D. Collateral transfers C V2 360-361
Shares of stock are personal property. Thus, they can either be pledged or mortgaged. However,
such pledge or mortgage cannot have any legal effect if it is registered only in the corporate books.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

136

Where a certificate is delivered to the creditor as a security, the contract is considered a pledge, and
the Civil Code will apply.
If the certificate of stock is not delivered to the creditor, it must be registered in the registry of deeds
of the province where the principal office of the corporation is located, and in case where the domicile
of the stockholder is in a different province, then registration must also be made there.
In a situation where, the chattel mortgage having been registered, the stock certificate was not
delivered to the creditor but transferred to a bona fide purchaser for value, it is the rule that the bona
fide purchaser for value is bound by the registration in the chattel mortgage registry. It is said that
such a rule tends to impair the commercial value of stock certificates.
CHUA GUAN v SAMAHANG MAGSASAKA and SIMPLICIO OCAMPO, ADRIANO G. SOTTO, and
EMILIO VERGARA, as president, secretary and treasurer respectively of the same, defendantsappellees.
FACTS:
The defendant is a corporation duly organised under the laws of the Philippine Islands with principal
office in Cabanatuan, Nueva Ecija and the individual defendants are the president, secretary and
treasurer. June 18, 1931, Gonzalo H. Co Toco, owner of 5,894 shares of the capital stock of
Samahang Magsasaka Inc. represented by 9 certificates having a PV of P5 per share mortgaged said
shares to Chua Chiu to guarantee the payment of a debt of P20,000 due on or before June 19, 1932.
Certificates of stock were delivered with the mortgage to the mortgagee, Chua Chiu. Mortgage was
duly registered in the office of the registered of deeds of Manila June 23, 1931, and in the office of the
said corporation September 30, 1931.
November 28, 1931, Chua Chiu assigned all his right and interest in said mortgage to the Chua Guan
and assignment was registered in the office RoD Manila on December 28, 1931, and in the office of
the corporation on January 4, 1932. Debtor Co Toco defaulted in the payment of said debt at maturity
and Chua Guan foreclosed said mortgage and delivered the certificates of stock and copies of the
mortgage and assignment to the sheriff of the City of Manila in order to sell the said shares at public
auction. The sheriff auctioned said shares December 22, 1932, and the sheriff executed certificate of
sale of shares in favour of plaintiff as the highest bidder for P14,390.
Chua Guan tendered the certificates of stock standing in the name of Co Toco to officers of the
corporation for cancellation and demanded that they issue new certificates in the name of Chua
Guan. but the officers (defendants) refused. Chua Guan filed an action for writ of mandamus with CFI
Nueva Ecija, praying for defendants to transfer the said 5,894 shares of stock to the plaintiff by
cancelling the old certificates and issuing new ones. The parties entered into a stipulation in which the
defendants admitted all of the allegations of the complaint and the plaintiff admitted all of the special
defenses in the answer of the defendants, and on this stipulation they submitted the case for
decision.
Defendants in their defense, refused to cancel said certificates (Co Tocos) and to issue new ones in
the name of Chua Guan because prior to the date of the latters demand (February 4, 1933), 9
attachments had been issued and served and noted on the books of the corporation against Co
Tocos shares and Chua Guan objected to having these attachments noted on the new certificates
which he demanded. The SC affirmed the judgment appealed from, holding that the attaching
creditors are entitled to priority over the defectively registered mortgage of the appellant.
ISSUE: WON the writs of attachment takes priority over the said mortgage and the registration of said
chattel mortgage in the registry of chattel mortgages in the office of the register of deeds of Manila,
under date of July 23,1931, give constructive notice to the said attaching creditors.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

137

RULING: YES. The attaching creditors are entitled to priority over the defectively registered mortgage
of the appellant. Section 4 of Act No. 1508 provides two ways for executing a valid chattel mortgage
which shall be effective against third persons:
a.The possession of the property mortgage must be delivered to and retained by the mortgagee
b.Without such delivery, the mortgage must be recorded in the proper office or offices of the register
or registers of deeds.
As to the proper place of registration of such a mortgage. - Section 4 Act no. 1508 provides that in
such a case the mortgage shall be registered in the province in which the mortgagor resides at the
time of making the same or, if he is a non-resident, in the province in which the property is situated;
and it also provides that if the property is situated in a different province from that in which the
mortgagor resides the mortgage shall be recorded both in the province of the mortgagor's residence
and in the province where the property is situated.
With respect to a chattel mortgage of shares of stock of a corporation - IF registration in the province
of the owners domicile should be sufficient, those who lend on such security would be confronted
with the practical difficulty of being compelled not only to search the records of every province in
which the mortgagor might have been domiciled but also every province in which a chattel mortgage
by any former owner of such shares might be registered. It was not the intention of the legislature to
put this prohibitive impediment upon the hypothecation (pledge) of shares of stock in view of the great
volume of business that is done on the faith of the pledge of shares of stock as collateral.
It is a general rule for purposes of execution, attachment and garnishment, it is not the domicile of the
owner of a certificate but the domicile of the corporation which is decisive. Sec 4 of Act No. 1508
holds that the property in the shares may be deemed to be situated in the province in which the
corporation has its principal office or place of business. If this province is also the province of the
owners domicile, a single registration is sufficient. If not the chattel mortgage should be registered
both at the owners domicile and in the province where the corporation has its principal office if
business. The property mortgaged in this sense is not the certificate but the participation and share of
the owner in the assets of the corporation.
The only safe way to accomplish the hypothecation of shares of stock of a Philippine corporation is
for the creditor to insist on the assignment and delivery of the certificate and the issuance of new one
to him.
To the debtor this may be unsatisfactory because it leaves the creditor as the ostensible owner of the
shares. But the mrs possession and retention of the debtors certificate by the creditor gives some
security to the creditor against an attempted voluntary transfer by the debtor, provided the by-laws of
the corporation expressly enact that the transfers may be made only upon the surrender of the
certificate.
Section 35 of the Corporation Law enacts that shares of stock may be transferred by delivery of the
certificate endorsed by the owner or his attorney in fact or other person legally authorized to make the
transfer."
DOCTRINE: The shares still standing in the name of the debtor on the books of the corporation will
be liable to seizure by attachment or levy on execution at the instance of other creditors.
The transfer by endorsement and delivery of a certificate with the intention to pledge the shares
covered thereby should be sufficient to give legal effect to that intention and to consummate the
juristic act without necessity of registration.
DISPOSITIVE: Defendant won. Judgement appealed from affirmed.
SUPER CORPO REVIEWER: To guarantee payment of a debt, Co mortgaged his shares of Samahang
Magsasaka stock to Chiu. The said mortgage was duly registered in the City of Manila. Chiu later assigned his

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

138

rights in the mortgage to Guan who soon foreclosed the same after Co failed to pay. Guan won in the public
bidding. He requested the corporation that new certificates be issued in his name. The corporation refused
because apparently prior to Guans demand, several attachments against the shares covered by the certificates
had been recorded in its books.
Did the chattel mortgage in the registry of deeds of Manila gave constructive notice to the attaching creditors?
The Chattel Mortgage Law provides two ways of executing a valid chattel mortgage: 1) the possession of
mortgaged property is delivered and retained by the mortgagee; and, 2) without delivery, the mortgage is
recorded in the register of deeds. But if chattel mortgage of shares may be made validly, the next question then
becomes: where should such mortgage be properly registered?
It is the general rule that the situs of shares is the domicile of the owner. It is also generally held that for the
purpose of execution, attachment, and garnishment, it is the domicile of the corporation that is decisive. Going
by these principles, it is deemed reasonable that chattel mortgage of shares be registered both at the owners
domicile and in the province where the corporation has its principal office. It should be understood that the
property mortgaged is not the certificate but the participation and share of the owner in the assets of the
corporation.
It is recognized that this method of hypothecating shares of stock in a chattel mortgage is rather tedious and
cumbersome. But the remedy lies in the legislature.
Note: The provision of the Chattel Mortgage Law (Act No. 1508) providing for delivery of mortgaged property
to the mortgagee as a mode of constituting a chattel mortgage is no longer valid in view of the Civil Code
provision defining such as a pledge.
E. Non-stock corporations non-transferability of membership
Although shares of stock are as a rule freely transferable, membership in a non-stock corporation is
personal and non-transferable, unless the articles of incorporation or by-laws provide otherwise. The
court may not strip him of his membership without cause. (Sec. 90)
XVI.

Dissolution Campos V2 367-438


A. Causes of dissolution C V2 367-389
1. Expiration of corporate term
2. Shortening corporate term
Section 120. Dissolution by shortening corporate term. A voluntary dissolution may be
effected by amending the articles of incorporation to shorten the corporate term pursuant to
the provisions of this Code. A copy of the amended articles of incorporation shall be
submitted to the Securities and Exchange Commission in accordance with this Code. Upon
approval of the amended articles of incorporation of the expiration of the shortened term, as
the case may be, the corporation shall be deemed dissolved without any further
proceedings, subject to the provisions of this Code on liquidation. (n)
NOTE: Thesimplestandmost expedientway of effecting dissolution
is by shortening the corporate term and waiting for such term
to expire.
3. Voluntary dissolution when no creditors affected Sec 117, 118
Section 117. Methods of dissolution. A corporation formed or organized under the
provisions of this Code may be dissolved voluntarily or involuntarily. (n)

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

139

Section 118. Voluntary dissolution where no creditors are affected. If dissolution of a


corporation does not prejudice the rights of any creditor having a claim against it, the
dissolution may be effected by majority vote of the board of directors or trustees, and by a
resolution duly adopted by the affirmative vote of the stockholders owning at least twothirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members of
a meeting to be held upon call of the directors or trustees after publication of the notice of
time, place and object of the meeting for three (3) consecutive weeks in a newspaper
published in the place where the principal office of said corporation is located; and if no
newspaper is published in such place, then in a newspaper of general circulation in the
Philippines, after sending such notice to each stockholder or member either by registered
mail or by personal delivery at least thirty (30) days prior to said meeting. A copy of the
resolution authorizing the dissolution shall be certified by a majority of the board of directors
or trustees and countersigned by the secretary of the corporation. The Securities and
Exchange Commission shall thereupon issue the certificate of dissolution
This is effected by majority vote of the BOD and a 2/3 vote of the OCS or members. (Note
the special notice requirements.)The copy of the resolution authorizing the dissolution shall
be certified by a majority of the BOD and countersigned by the secretary of the corporation.
THE SEC shall thereupon issue the certificate of dissolution.

4. Voluntary dissolution where creditors affected Sec 117, 119


Section 117. Methods of dissolution. A corporation formed or organized under the
provisions of this Code may be dissolved voluntarily or involuntarily.
Section 119. Voluntary dissolution where creditors are affected. Where the dissolution of
a corporation may prejudice the rights of any creditor, the petition for dissolution shall be
filed with the Securities and Exchange Commission. The petition shall be signed by a
majority of its board of directors or trustees or other officers having the management of its
affairs, verified by its president or secretary or one of its directors or trustees, and shall set
forth all claims and demands against it, and that its dissolution was resolved upon by the
affirmative vote of the stockholders representing at least two-thirds (2/3) of the outstanding
capital stock or by at least two-thirds (2/3) of the members at a meeting of its stockholders
or members called for that purpose.
If the petition is sufficient in form and substance, the Commission shall, by an order reciting
the purpose of the petition, fix a date on or before which objections thereto may be filed by
any person, which date shall not be less than thirty (30) days nor more than sixty (60) days
after the entry of the order. Before such date, a copy of the order shall be published at least
once a week for three (3) consecutive weeks in a newspaper of general circulation
published in the municipality or city where the principal office of the corporation is situated,
or if there be no such newspaper, then in a newspaper of general circulation in the
Philippines, and a similar copy shall be posted for three (3) consecutive weeks in three (3)
public places in such municipality or city.
Upon five (5) days notice, given after the date on which the right to file objections as fixed
in the order has expired, the Commission shall proceed to hear the petition and try any
issue made by the objections filed; and if no such objection is sufficient, and the material
allegations of the petition are true, it shall render judgment dissolving the corporation and
directing such disposition of its assets as justice requires, and may appoint a receiver to
collect such assets and pay the debts of the corporation.
(1)Filing of petition for dissolution with SEC

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

140

A petition for dissolution must be filed with the SEC after having been signed by a majority
of the BOD, verified by the president or secretary or one of the directors, and resolved upon
by the affirmative vote of 2/3 of the OCS or members. The petition must set forth all claims
and demands against the corporation, and the fact that the dissolution was approved by the
SHs with the requisite 2/3 vote.
(2)Fixing of date by SEC for filing of objections to petition
If the petition is sufficient in form and substance, the SEC shall fix a date on or before which
objections thereto may be filed by any person.
Date:not less than 30 days nor more than 60 days after the
entry of the order
(3)Publication of order
Before the date fixed by the SEC, the SEC order shall be published and posted accordingly.
Newspaper:Once a week for 3 weeks in a newspaper of general circulation published in
the municipality or city where the corporation's principal office is situated, or there be no
such newspaper, in a newspaper of general circulation in the Philippines
Posting:For 3 consecutive weeks in 3 public places in the city or municipality where the
corporation's principal office is situated
(4)Hearing of the petition for dissolution
Upon 5 days notice, given after the date on which the right to file objections to the order
has expired, the SEC shall proceed to hear the petition and try any issue made by the
objections filed.
If no objection is sufficient, and the material allegations are true, the SEC shall render
judgment dissolving the corporation and directing such disposition of its assets as justice
requires.
Note: The SEC may appoint a receiver to collect such
assets and pay the debts of the corporation.
5. Failure to organize; continuous inoperation Sec. 22
Section 22. Effects on non-use of corporate charter and continuous inoperation of a
corporation. If a corporation does not formally organize and commence the transaction of
its business or the construction of its works within two (2) years from the date of its
incorporation, its corporate powers cease and the corporation shall be deemed dissolved.
However, if a corporation has commenced the transaction of its business but subsequently
becomes continuously inoperative for a period of at least five (5) years, the same shall be a
ground for the suspension or revocation of its corporate franchise or certificate of
incorporation. (19a)
This provision shall not apply if the failure to organize, commence the transaction of its
businesses or the construction of its works, or to continuously operate is due to causes
beyond the control of the corporation as may be determined by the Securities and
Exchange Commission.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

141

6. Dissolution by minority in close corporations Sec. 105


Section 105. Withdrawal of stockholder or dissolution of corporation. In addition and
without prejudice to other rights and remedies available to a stockholder under this Title,
any stockholder of a close corporation may, for any reason, compel the said corporation to
purchase his shares at their fair value, which shall not be less than their par or issued
value, when the corporation has sufficient assets in its books to cover its debts and
liabilities exclusive of capital stock: Provided, That any stockholder of a close corporation
may, by written petition to the Securities and Exchange Commission, compel the dissolution
of such corporation whenever any of acts of the directors, officers or those in control of the
corporation is illegal, or fraudulent, or dishonest, or oppressive or unfairly prejudicial to the
corporation or any stockholder, or whenever corporate assets are being misapplied or
wasted.
In close corporations, any stockholder may, by written petition to the SEC, compel the
dissolution of such corporation when:
(1)Any of the acts of the directors, officers, or those in control
of the corporation is:
Illegal;
Fraudulent;
Dishonest;
Oppressive or unfairly prejudicial to the corporation
or any other SH;
(2)Corporate assets are being misapplied or wasted. (Sec. 105)
FINANCING CORPORATION v TEODORO
FACTS
(Note: no mention whether close corp or not, assumption is NOT close corp)
Minority Stockholders of Financing Corporation filed a complaint before CFI against
Financing Corporation and Amado Araneta, its president and general manager, claiming
among other things alleged gross mismanagement and fraudulent conduct of the corporate
affairs of the defendant corporation by J. Amado Araneta, and asking that
(1) the corporation be dissolved;
(2) that J. Amado Araneta be declared personally accountable for the amounts of the
unauthorized and fraudulent disbursements and disposition of assets made by him, and
(3) that he be required to account for said assets, and
(4) that pending trial and disposition of the case on its merits a receiver be appointed to
take possession of the books, records and assets of the defendant corporation
preparatory to its dissolution and liquidation and distribution of the assets.
Respondent Judge Teodoro granted the petition for the appointment of a receiver and
designated Mr. Alfredo Yulo as such receiver.
Petitioners argue that since the principal remedy sought by minority stockholders is
dissolution, and that according to law a suit for the dissolution of a corporation can be
brought and maintained only by the State through its legal counsel, the minority
stockholders have no right or personality to maintain the action for dissolution, corollary, the
auxiliary remedy for appointment of receiver has no basis.
ISSUE: Whether the minority stockholders of Financing Corp. have legal standing to bring
an action for its dissolution and request appointment of receiver pendente lite?

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

142

RULING: Yes. although as a rule, minority stockholders of a corporation may not ask for its
dissolution in a private suit, and that such action should be brought by the Government
through its legal officer in a quo warranto case, at their instance and request, there might
be exceptional cases wherein the intervention of the State, for one reason or another,
cannot be obtained, as when the State is not interested because the complaint is strictly a
matter between the stockholders and does not involve, in the opinion of the legal officer of
the Government, any of the acts or omissions warranting quo warranto proceedings, in
which minority stockholders are entitled to have such dissolution. When such action or
private suit is brought by them, the trial court had jurisdiction and may or may not grant the
prayer, depending upon the facts and circumstances attending it. Having such jurisdiction,
the appointment of a receiver pendente lite is left to the sound discretion of the trial court.
In the case at bar, the grounds for the prayer for receivership are as follows:
(1) imminent danger of insolvency;
(2) fraud and mismanagement, particularly, wrongful and unauthorized diversion from
corporate purposes and use for personal benefit of defendant Araneta, for the benefit of the
corporations under his control and of which he is majority stockholder and/or for the benefit
of his relatives, personal friends;
(3) violations of the corporation law and the by-laws of the corporation such as refusal to
allow minority stockholders to examine the books and records of the corporation;
(4) failure to achieve the fundamental purpose of the corporation;
(5) if administration, possession and control of the affairs, books, etc. of defendant
corporation are left in the hands of the defendant Araneta and the present corporate
officials, under his power and influence, the remaining assets of the corporation are in
danger of being further dissipated, wasted or lost and of becoming ultimately unavailable
for distribution among its stockholders; and
(6) the best means to protect and preserve the assets of defendant corporation is the
appointment of a receiver.
DOCTRINE:
As a rule, minority stockholders of a corporation may not ask for its dissolution in a private
suit, and that such action should be brought by the Government through its legal officer in a
quo warranto case.
However, there might be exceptional cases wherein the intervention of the State, for one
reason or another, cannot be obtained, in which minority stockholders are entitled to have
such dissolution.
DISPOSITIVE: Minority stockholders won. Order of respondent Judge Teodoro is affirmed.
Petition denied.
7. Involuntary
C v2 385-389; Sec 121, Sec 5.1(m) SRC; Sec 6(e), PD 902-A; Sec 144, Rule 66, ROC
Section 121. Involuntary dissolution. A corporation may be dissolved by the Securities
and Exchange Commission upon filing of a verified complaint and after proper notice and
hearing on the grounds provided by existing laws, rules and regulations. (n)
Section 5. Powers and Functions of the Commission. 5.1. The commission shall act with
transparency and shall have the powers and functions provided by this code, Presidential
Decree No. 902-A, the Corporation Code, the Investment Houses law, the Financing
Company Act and other existing laws. Pursuant thereto the Commission shall have, among
others, the following powers and functions:

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

143

(m) Suspend, or revoke, after proper notice and hearing the franchise or certificate of
registration of corporations, partnership or associations, upon any of the grounds provided
by law; and
Sec. 6. In order to effectively exercise such jurisdiction, the Commission shall possess the
following powers:
(e) To issue subpoena duces tecum and summon witnesses to appear in any proceedings
of the Commission and in appropriate cases order search and seizure or cause the search
and seizure of all documents, papers, files and records as well as books of accounts of any
entity or person under investigation as may be necessary for the proper disposition of the
cases before it;
(a)Revocation of Certificate of Registration by SEC (Sec. 121)
A corporation may be dissolved by the SEC upon filing of a verified complaint and after
proper notice and hearing on grounds provided by existing laws, rules and regulations.
(b)Quo Warranto proceedings (See Sec. 5b, PD 902-A and Rule 66, Rules of
Court. Previously, the SEC had exclusive jurisdiction over quo warranto proceedings
involving corporation. Under the Securities Regulation Code or RA 8799, however, the
jurisdiction of the SEC over all cases enumerated under Sec. 5 of PD 902-A have been
transferred to the Regional Trial Courts.
THE GROUNDS FOR INVOLUNTARY DISSOLUTION OF A CORPORATION UNDERQUO
WARRANTOPROCEEDINGS ARE:
(1)When the corporation has offended against a provision of an act for its creation or
renewal;
(2)When it has forfeited its privileges and franchises by non-user;
(3)When it has committed or omitted an act which amounts to a surrender of its corporate
rights, privileges or franchises;
(4)When it misused a right, privilege or franchise conferred upon it by law, or when it has
exercised a right, privilege or franchise in contravention of law
(PNB v. CFI, 209 SCRA 294; 1992)

GOVERNMENT v PHILIPPINE ESTATES


FACTS:
This is an action in the nature of quo warranto. It was brought by the Attorney-General for
and on the behalf of the Government of the Philippine Islands for the purpose of having the
charter of the defendant corporation declared forfeited. The complaint alleged that the
defendant was a corporation duly organized under the laws of the Philippine Islands; that
for a period of eighteen months previous to the filing of the complaint (Nov. 21, 1914), it had
continuously offended against the laws of the Philippine Islands and had misused its
corporate authority, franchises, and privileges and had assumed privileges and franchises
not granted; that it had engaged in the business of buying and selling real estate; that on
the 31st of May, 1913, it entered into a contract with the Tayabas Land Company for the
purpose of engaging in the business of purchasing lands along the right of way of the

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

144

Manila Railroad Company through the Province of Tayabas with a view to reselling the
same to the Manila Railroad Company at a profit. A copy of the contract was made part of
the complaint. The plaintiff alleged, that by the acts and omissions of the defendant, it had
forfeited its corporate rights, privileges, powers, and franchises, dissolving it as a
corporation, and to grant such other and further relief as might seem just and equitable to
the court, and for costs.
By said stipulation it was agreed that the defendant was a corporation duly organized; that
The Tayabas Land Company was a partnership; that a contract was entered into between
the defendant and The Tayabas Land Company by virtue of which the defendant delivered
to the said The Tayabas Land Company P304,459.42 which the plaintiff contended
amounted to a contribution by the defendant to the capital of The Tayabas Land Company
but which the defendant contended amounted to a loan to said concern; that the money
thus received was devoted to the purchase of the real estate in the Province of Tayabas
along the proposed right of way of the Manila Railroad Company in that province; that the
purpose of these purchases was for resale to the Manila Railroad Company or any other
person offering an acceptable price.
Certain facts are important in order to make clear the argument of the appellants.
First. The defendant corporation by its charter was authorized, among other things:
( j) To buy shares of the Compaia de Navegacion, Ferrocarriles, Diques, y Almacenes de
Depositos, and, in this manner or otherwise, to engage in any mercantile or industrial
enterprise.
(k) With no other restrictions than those provided by law, place funds of the corporation in
hypothecary or pignorative loans, in public securities of the United States, in stocks or
shares issued by firms, corporations, or companies that are legally organized and operated,
and in rural and urban property. It may also contract and guarantee all kinds of obligations,
in conformity with existing laws. (Bill of Exceptions, p.21)
Second. These powers are necessarily limited by section 75 of the Act of Congress of July
1, 1902, and by the section 13 Act of 1459, the latter being a reproduction of the former,
which is as follows:
That no corporation shall be authorized to conduct the business of buying and selling real
estate or be permitted to hold or own real estate except such as may be reasonably
necessary to enable it to carry out the purposes for which it is created, . . . . Corporations,
however, may loan funds upon real estate, security, and purchase real estate when
necessary for the collection of loans, but they shall dispose of real estate so obtained within
five years after receiving the title . . . .
ISSUE: Whether or not the corporation must be ordered dissolved for violation of the
statute prohibiting buying and selling of real estate.
RULING: YES. There are a number of features of this contract that should be noted. (1)
there was no period fixed in the contract for the repayment of the money, except that the
first returns from the sale of the land was to be devoted to the payment of the capital. There
was no date fixed for this payment. (2) The entire amount of the "credit" was not to be
turned over at once but was to be used by The Tayabas Land Company as it was needed.
(3) The return on the capital was not by a fixed rate of interest but 25 per cent of the profits
earned by The Tayabas Land Company in "todos los negocios" was to be paid to the
defendant. (4) The defendant corporation agreed to pay 25 per cent of "los gastos
generales, reales y necesarios que The Tayabas Land Company tenga que efectuar para el
desenvolvimiento de los asuntos" (all general expenditures true and necessary that The
Tayabas Land Company must make for the development of its business.) (Articulo sexto of
the contract.) (5) The consent of the defendant was necessary when The Tayabas Land
Company desired to sell the land at a price under P0.50 per square meter but was not

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

145

required if the selling price was over that amount. (6) The defendant acted as the treasurer
of the enterprise. It paid out the money as it was needed for the purchase of land and
received the proceeds of the sale of land as well as acting as the depositary of the deeds,
covering the land.
Section 212 of Act No. 190 provides a judgment which may be rendered in said case:
When in any such action, it is found and adjudged that the corporation has, by any act done
or omitted surrendered, or forfeited its corporate rights, privileges, and franchise, or has not
used the same during the term of five years, judgment shall be entered that it be ousted
and excluded therefrom and that it be dissolved; but when it is found and adjudged that a
corporation has offended in any matter or manner which does not by law work as a
surrender or forfeiture, or has misused a franchise or exercised a power not conferred by
law, but not of such a character as to work a surrender or forfeiture of its franchise,
judgment shall be rendered that it be ousted from the continuance of such offense or the
exercise of such power.
In the case of State of Minnesota vs. Minnesota Thresher Manufacturing Co. (3 L.R.A. 510)
the court said (p. 518):
The scope of the remedy furnished by its (quo warranto) is to forfeit the franchises of a
corporation for misuser or nonuser. It is therefore necessary in order to secure a judicial
forfeiture of respondent's charter to show a misuser of its franchises justifying such a
forfeiture. And as already remarked the object being to protect the public, and not to
redress private grievances, the misuser must be such as to work or threaten a substantial
injury to the public, or such as to amount to a violation of the fundamental condition of the
contract by which the franchise was granted and thus defeat the purpose of the grant; and
ordinarily the wrong or evil must be one remediable in no other form of judicial proceeding.
Courts always proceed with great caution in declaring a forfeiture of franchises, and require
the prosecutor seeking the forfeiture to bring the case clearly within the rules of law entitling
him to exact so severe a penalty. (People vs. North River Sugar Refining Co., 9 L.R.A., 33,
39; State vs. Portland Natural Gas Co., 153, Ind., 483.)
DOCTRINE: While it is true that the courts are given a wide discretion in ordering the
dissolution of corporations for violations of its franchises, etc., yet nevertheless, when such
abuses and violations constitute or threaten a substantial injury to the public or such as to
amount to a violation of the fundamental conditions of the contract (charter) by which the
franchises were granted and thus defeat the purpose of the grant, then the power of the
courts should be exercised for the protection of the people.
DISPOSITIVE: The judgment of the lower court should be modified. It is hereby ordered
and decreed that the franchise heretofore granted to the defendant by which it was
permitted to exist and do business as a corporation in the Philippine Islands, be withdrawn
and annulled and that it be disallowed to do and to continue doing business in the
Philippine Islands, unless it shall within a period of six months after final decision, liquidate,
dissolve and separate absolutely in every respect and in all of its relations, complained of in
the petition, with The Tayabas Land Company, without any findings to costs.
GOVERNMENT v EL HOGAR FILIPINO
FACTS:
The Philippine Commission enacted Act No. 1459, also known as the Corporation Law,
on March 1, 1906. El Hogar Filipino, organized in 1911 under the laws of the Philippine

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

146

Islands, was the first corporation organized under Sec. 171-190 Act No. 1459, devoted to
the subject of building and loan associations, their organization and administration. In the
said law, the capital of the corporation was not permitted to exceed P3M, but Act No.
2092 amended the statute, permitting capitalization to the amount of ten millions.
El Hogar took advantage of the amendment of Act No. 1459 and amended its AOI as a
result thereof, stating that the amount of capital must not exceed what has been stated in
Act No. 2092. This resulted to El Hogar having 5,826 shareholders, 125,750 shares with
paid-up value of P8.7M. The corporation paid P7.16M to its withdrawing stockholders.
The Government of the Philippine Islands filed an action against El Hogar due to the
alleged illegal holding title to real property for a period exceeding five (5) years after the
same was bought in a foreclosure sale. Sec. 13(5) of the Corporation Law states that
corporations must dispose of real estate obtained within 5 years from receiving the title.
The Philippine Government also prays that El Hogar be excluded from all corporate rights
and privileges and effecting a final dissolution of said corporation.
It appears from the records that El Hogar was the holder of a recorded mortgage on the
San Clemente land as security for a P24K loan to El Hogar. However, shareholders and
borrowers defaulted in payment so El Hogar foreclosed the mortgage and purchased the
land during the auction sale. A deed of conveyance in favor of El Hogar was executed
and sent to the Register of Deeds of Tarlac with a request that the certificate of title be
cancelled and a new one be issued in favor of El Hogar from the Register of Deeds of
Tarlac. However, no reply was received. El Hogar filed a complaint with the Chief of the
General Land Registration Office. The certificate of title to the San Clemente land was
received by El Hogar and a board resolution authorizing Benzon to find a buyer was
issued. Alcantara, the buyer of the land, was given extension of time to make payment
but defaulted so the contract treated rescinded. Efforts were made to find another buyer.
Respondent acquired title in December 1920 until the property was finally sold to Felipa
Alberto in July 1926. The interval exceeded 5 years but the period did not commence to
run until May 7, 1921 when the register of deeds delivered the new certificate of title. It
has been held that a purchaser of land registered under the Torrens system cannot
acquire the status of an innocent purchaser for value unless the vendor is able to place
the owners duplicate in his hands showing the title to be in the vendor. During the period
before May 1921, El Hogar was not in a position to pass an indefeasible title to any
purchaser. Therefore, El Hogar cannot be held accountable for this delay which was not
due to its fault. Likewise, the period from March 25, 1926 to April 20, 1926 must not be
part of the five-year period because this was the period where respondent was under the
obligation to sell the property to Alcantara prior to the contracts rescission due to
Alcantaras non-payment.
Another circumstance causing the delay is the fact that El Hogar purchased the property
in the full amount of the loan made by the former owner which is nearly P24K when it was
subsequently found that the property was not salable and later sold for P6K
notwithstanding El Hogars efforts to find a purchaser upon better terms.
ISSUE: Whether or not the acts of El Hogar merit its dissolution or deprivation of its
corporate franchise and to exclude it from all corporate rights and privileges
RULING: NO.
1. Alleged illegal holding of real property for a period exceeding five years from receipt
of title-Cause of delay is not respondents fault

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

147

2. That respondent is owning and holding a business lot with the structure thereon in
excess of its reasonable requirements and in contravention of Sec. 13(5) of Corpo.
Law- WITHOUT MERIT
Every corporation has the power to purchase, hold and lease such real
property as the transaction would of the lawful business may reasonably
and necessarily require.
3. That respondent is engaged in activities foreign to the purposes for which the
corporation was created and not reasonably necessary to its legitimate ends-VALID
The administration of property, payment of real estate taxes, causing
necessary repairs, managing real properties of non-borrowing
shareholders is more befitting to the business of a real estate agent or a
trust company than a building and loan association.
4. That the by-laws of the association stating that, the board of directors by the vote of
an absolute majority of its members is empowered to cancel shares and to return the
balance to the owner by reason of their conduct or any other motive or liquidation is
in direct conflict with Sec. 187 of the Corporation Law which provides that the board
of directors shall not have the power to force the surrender and withdrawal of
unmatured stock except in case of liquidation or forfeiture of stock for delinquencyWITHOUT MERIT
There is no provision of law making it a misdemeanor to incorporate an
invalid provision in the by-laws of a corporation; and if there were such,
the hazards incident to corporate effort would be largely increased.
5. Art. 61 of El Hogars by-laws which states that attendance in person or by proxy by
shareholders owning one-half plus one of the shareholders shall be necessary to
constitute a quorum for the election of directors is contrary to Sec. 31 of the Corpo
Law which provides that owners of the majority of the subscribed capital stock
entitled to vote must be present either in person or by proxy at all elections of
directors- WITHOUT MERIT
No fault can be imputed to the corporation on account of the failure of the
shareholders to attend the annual meetings and their non-attendance in
meetings is doubtless to be interpreted in part as expressing their
satisfaction of the way in which things have been conducted. Mere failure
of a corporation to elect officers does not terminate the terms of existing
officers nor dissolve the corporation. The general rule is to allow the
officer to holdover until his successor is duly qualified.
6. That the directors of El Hogar, instead of receiving nominal pay or serving without
pay, have been receiving large compensation, varying in amount from time to time,
out of respondents profits- WITHOUT MERIT
With the growth of the corporation, the amount paid as compensation to
the directors has increased beyond what would probably be necessary is
a matter that cannot be corrected in this action. Nor can it properly be
made a basis for depriving respondent of its franchise or enjoining it from
compliance with the provisions of its own by-laws. If a mistake has been
made, the remedy is to lie rather in publicity and competition.
7. That the promoter and organizer of El Hogar was Mr. Antonio Melian and that in the
early stages of the organization of the association, the board of directors authorized
the association to make a contract with him and that the royalty given to him as
founder is unconscionable, excessive and out of proportion to the services
rendered-NOT SUSTAINED

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

148

The mere fact that compensation is in excess of what may be considered


appropriate is not a proper consideration for the court to resolve. That El
Hogar is in contact with its promoter did not affect the associations legal
character. The court is of the opinion that the traditional respect for the
sanctity of the contract obligation should prevail over the radical and
innovating tendencies.

8. That Art. 70 of El Hogars by-laws, requiring persons elected as board of directors to


be holders of shares of the paid up value of P5,000 which shall be held as security, is
objectionable since a poor member or wage earner cannot serve as a director
irrespective of other qualifications- NOT SUSTAINED
Corpo. Law expressly gives the power to the corporation to provide in its
by-laws for the qualification of its directors and the requirement of
security from them for the proper discharge of the duties of their pffice in
the manner prescribed in Art. 70 is highly prudent and in conformity with
good practice.
9. That respondent abused its franchise in issuing special shares alleged to be illegal
and inconsistent with the plan and purposes of building and loan associationsWITHOUT MERIT
The said special shares are generally known as advance payment
shares which were evidently created for the purpose of meeting the
condition caused by the prepayment of dues that is permitted. Sec. 178
of Corpo Law allows payment of dues or interest to be paid in advance
but the corporation shall not allow interest on advance payment grater
than 6% per annum nor for a period longer than one year. The amount is
satisfied by applying a portion of the shareholders participation in the
annual earnings.The mission of special shares does not involve any
violation of the principle that the shares must be sold at par.
10. That in making purchases at foreclosure sales constituting as security for 54 of the
loans, El Hogar bids the full amount after deducting the withdrawal value, alleged to
be pusuing a policy of depreciating at the rate of 10 percent per annum, the value of
the real properties it acquired and that this rate is excessive-UNSUSTAINABLE
The board of directors possess discretion in this matter. There is no
provision of law prohibiting the association from writing off a reasonable
amount for depreciation on its assets for the purpose of determining its
real profits. Art. 74 of its by-laws expressly authorizes the board of
directors to determine each year the amount to be written down upon the
expenses for the installation and the property of the corporation. The
court cannot control the discretion of the board of directors about an
administrative matter as to which they have no legitimate power of
action.
11. That respondent maintains excessive reserve funds-UNFOUNDED
The function of this fund is to insure stockholders against losses. When
the reserves become excessive, the remedy is in the hands of the
Legislature.
No prudent person would be inclined to take a policy in a company which
had so improvidently conducted its affairs that it only retained a fund
barely sufficient to pay its present liabilities and therefore was in a
condition where any change by the reduction of interest upon or
depreciation in the value of securities or increase of mortality would
render it insolvent and subject to be placed in the hands of a receiver.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

149

12. That the board of directors has settled upon the unlawful policy of paying a straight
annual dividend of 10 percent per centum regardless of losses suffered and profits
made by the corporation, in contravention with the requirements of Sec. 188 of the
Corpo law- UNFOUNDED
As provided in the previous cause of action, the profits and losses shall
be determined by the board of directors and this means that they shall
exercise the usual discretion of good businessmen in allocating a portion
of the annual profits to purposes needful of the welfare of the
association. The law contemplates distribution of earnings and losses
after legitimate obligations have been met.
13. That El Hogar has made loans to the knowledge of its officers which were intended to
be used by the borrowers for other purposes than the building of homes and no
attempt has been made to control the borrowers with respect to the use made of the
borrowed funds- UNFOUNDED
There is no statute expressly declaring that loans may be made by these
associations SOLELY for the purpose of building homes. The building of
himes in Sec. 171 of Corpo Law is only one among several ends which
building and loan associations are designed to promote and Sec. 181
authorizes the board of directors of the association to fix the premium to
be charged.
14. That the loans made by defendant for purposes other than building or acquiring
homes have been extended in extremely large amounts and to wealthy persons and
large companies- WITHOUT MERIT
The question of whether the making of large loans constitutes a misuser
of the franchise as would justify the court in depriving the association of
its corporate life is a matter confided to the discretion of the board of
directors. The law states no limit as to the size of the loans to be made
by the association. Resort should be had to the legislature because it is
not a matter amenable to judicial control
15. That when the franchise expires, supposing the corporation is not reorganized, upon
final liquidation of the corporation, a reserve fund may exist which is out of all
proportion to the requirements that may fall upon it in the liquidation of the companyNO MERIT
This matter may be left to the discretion of the board of directors or to
legislative action if it should be deemed expedient to require the gradual
suppression of reserve funds as the time for dissolution approaches. It is
no matter for judicial interference and much less could the resumption of
the franchise be justified on this ground.
16. That various outstanding loans have been made by the respondent to corporations
and partnerships and such entities subscribed to respondents shares for the sole
purpose of obtaining such loans-NO MERIT
Sec. 173 of Corpo Law declares that any person may become a
stockholder in building and loan associations. The phrase ANY PERSON
does not prevent a finding that the phrase may not be taken in its proper
and broad sense of either a natural or artificial person.
17. That in disposing real estate purchased by it, some of the properties were sold on
credit and the persons and entities to which it was sold are not members nor
shareholders nor were they made members or shareholders, contrary to the provision
of Corpo Law requiring requiring loans to be stockholders only- NOT SUSTAINED

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

150

The law does not prescribe that the property must be sold for cash or
that the purchaser shall be a shareholder in the corporation. Such sales
can be made upon the terms and conditions approved by the parties.

DOCTRINE: The corporation has not been shown to have offended against the law in a
manner that should entail a forfeiture of its charter. Certainly no court with any discretion
to use in the matter would visit upon El Hogar and its thousands of shareholders the
extreme penalty of the law as a consequence of the delinquency here shown to have
been committed.
Government of the Philippine Islands vs. Philippine Sugar Estates Development Co. (38
Phil., 15): . . . When it is found and adjudged that a corporation has offended in any
matter or manner which does not by law work as a surrender or forfeiture, or has misused
a franchise or exercised a power not conferred by law, but not of such a character as to
work a surrender or forfeiture of its franchise, judgment shall be rendered that it be outset
from the continuance of such offense or the exercise of such power.
DISPOSITIVE: Respondent is enjoined in the future from administering real property
not owned by itself, except as may be permitted to it by contract when a borrowing
shareholder defaults in his obligation. In all other respects, the complaint is DISMISSED.
REPUBLIC v SECURITY CREDIT
FACTS:
Articles of Incorporation of Security Credit and Acceptance corporation were registered with
the Securities and Exchange Commission. When they applied with SEC for the registration
and licensing of their securities under the Securities Act, the latter referred it to the Central
Bank which in turn rendered an opinion classifying defendant corporation as engaged in
banking. SEC then advised the corporation to comply with the requirements under the
General Banking Act. However Security Credit did not comply claiming that it is only an
Investment Corporation and not a Banking one.
Pursuant to a search warrant issued by MTC Manila, members of Central Bank intelligence
division and Manila police seized documents and records relative to the business
operations of the corporation. After examination of the same, the intelligence division of the
Central Bank submitted a memorandum to the then Acting Deputy Governor of Central
Bank finding that the corporation is engaged in banking operations.
In lieu of the memorandum, the Monetary Board issued are solution declaring that the
corporation is performing banking operations without first complying with the provisions of
Republic Act No. 337. Notwithstanding such resolution, the corporation, have been and are
still performing the functions and activities which had been declared to constitute illegal
banking operations; the corporation had established 74 branches in principal cities and
towns throughout the Philippines.
Through a systematic and vigorous campaign undertaken by Security Credit, it had
managed to induce the public to open 59,463 savings deposit accounts with an aggregate
deposit of P1,689,136.74.
Accordingly, the Solicitor General commenced this quo warranto proceedings for the
dissolution of the corporation, with a prayer that meanwhile a writ of preliminary injunction
be issued ex parte enjoining the corporation and its branches as well as its officers and
agents from performing the banking operations.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

151

The Solicitor General also prayed that a receiver be appointed pendente lite. Super
intendent of Banks of the Central Bank was then appointed by the Supreme Court as
receiver pendente lite of defendant corporation.
ISSUE: Whether or not defendant corporation was engaged in banking operations.
RULING: YES. An investment company which loans out the money of its customers,
collects the interest and charges a commission to both lender and borrower, is a bank.
It is conceded that a total of 59,463 savings account deposits have been made by the
public with the corporation and its 74 branches, with an aggregate deposit of
P1,689,136.74, which has been lent out to such persons as the corporation deemed
suitable. Therefore, it is clear that these transactions partake of the nature of banking, as
the term is used in Section 2 of the General Banking Act.
Hence, Security Credit has violated the law by engaging in banking without securing the
administrative authority required in Republic Act No. 337 Accordingly, the defendant
corporation was ordered dissolved and appointment of receiver was made permanent for
its dissolution and liquidation.
REPUBLIC v BISAYA LAND TRANSPORTATION
SUMMARY OF THE CASE: This case is about the Republic, through the Solicitor General,
filing a petition for quo warranto against the Bisaya Land Transportation Co. Inc., seeking
its forcible dissolution.
FACTS:The Bisaya Land Transportation Company is a corporation in Cebu City, organized
in 1935 under the Corporation Law, for the principal purpose of engaging in the business of
land and water transportantation.
The instant case came into being on 1959, when Petitioner Republic of the Philippines,
through the then SolGen Barot, filed a petition for quo warranto for the dissolution of the
company on the ground that Respondent corporation, through its co-respondents Miguel
Cuenco, Manuel Cuenco, Lourdes Cuenco, Jose Velez, Jesus Velez and Federico Reyes,
acting in their official capacity as officers and controlling SHs; and several new Directors of
respondent corporation, by conspiring and confabulating together with the aid of their
associates, agents and confederates, had violated and continues to violate, offended, and
continues to offend the provisions of the Corporation Law and other Philippine statues.
The acts allegedly commited are embodied in nine causes of action:
1. Falsely reconstituting its AOI by adding new purposes not included namely: lumber
concessions, cattle ranch, agriculture, and general merchandise, to conceal its
illegal transactions;
2. Adopting a resolution to acquire hectares of public land in Zamboanga and timber
concession in Mindanao through its BODs;
3. Passing a resolution to lease a pasture land on a public land in Negros Occidental;
4. Operating a merchandise store which is neither necessary for, nor incidental to, the
accomplishment of its principal business for which it was organized;
5. Mariano and Manuel Cuenco were allowed to act as presidents without owning a
single stock;
6. Engaging in mining by organizing coal mines and allowing said corporation to use
its facilities and assets;
7. Importing and selling at black market prices to third persons, the proceeds of which
were appropriated by respondent directors;
8. Paying its laborers and employees wages below the minimum wage law; and

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

152

9. Deliberately failing to maintain accurate and faithful stock and transfer books.
Petitioner filed a manifestation stating that the motion for judgment on the matter of the
implementation of the dissolution be submitted to the discretion of the lower court.
ISSUE: WON the OSG is vested with full power to manage and control the States litigation,
which includes the power to discontinue such litigation if and when in his opinion this
should be done; and, that it can validly allow the trial court to decide on the matter, and,
therefore, the findings of the said court ought to be given due weight and credit.
RULING: YES. After a very careful and deliberate consideration of the evidence adduced
by petitioner, the lower court came to the conclusion that the same did not really warrant a
quo warranto by the State that could truly justify to decapitate corporate life, and that the
corporate acts or omissions complained of had not resulted in substantial injury to the
public, nor were they wilful and clearly obdurate. The court found that the several acts of
misuse and misapplication of the funds and/or assets of the Bisaya Land Transportation
Co., Inc. were committed more particularly by the respondent Dr. Manuel Cuenco with the
cooperation of Jose P. Velez, for the commission of which they may be personally held
liable. There appears to be no reason for us to disregard the findings of the trial court,
which, applying well- settled doctrines, ought to be given due weight and credit. Besides,
the court a quo found that the controversy between the parties was more personal than
anything else and did not at all affect public interest.
The Solicitor General himself asserts that the only purpose of his motion for the dismissal
of this quo warranto is to take the State out of an unnecessary court litigation, so that the
dismissal of the case would result in the disposition solely of the quo warranto by and
between petitioner Republic and the respondents named therein. Other interested parties
who might feel aggrieved, therefore, would not be without their remedies since they can still
maintain whatever claims they may have against each other. It has been held that relief by
dissolution will be awarded only where no other adequate remedy is available, and is not
available where the rights of the stockholders can be, of are, protected in some other way.
Meeting squarely the issue of whether or not the Solicitor General is vested with absolute
and unlimited power to discontinue the States litigation and, accordingly, to have the quo
warranto petition dismissed, if and when in his opinion this should be done.
DOCTRINE:The general rule seems to be that the plaintiff may do so with the approval of
the court, subject to well-defined exceptions (such as, for example, where the answer sets
up a counterclaim which cannot stand independently of the main action).
DISPOSITIVE:The order of the lower court granting the OSGs motion to dismiss the quo
warranto proceeding and dismissing appellant Miguel Cuencos cross claim, is upheld.
B. Effects of dissolution; winding up and dissolution Sec. 122
Section 122. Corporate liquidation. Every corporation whose charter expires by its own limitation or
is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated
in any other manner, shall nevertheless be continued as a body corporate for three (3) years after the
time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or
against it and enabling it to settle and close its affairs, to dispose of and convey its property and to
distribute its assets, but not for the purpose of continuing the business for which it was established.
At any time during said three (3) years, the corporation is authorized and empowered to convey all of
its property to trustees for the benefit of stockholders, members, creditors, and other persons in
interest. From and after any such conveyance by the corporation of its property in trust for the benefit

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

153

of its stockholders, members, creditors and others in interest, all interest which the corporation had in
the property terminates, the legal interest vests in the trustees, and the beneficial interest in the
stockholders, members, creditors or other persons in interest.
Upon the winding up of the corporate affairs, any asset distributable to any creditor or stockholder or
member who is unknown or cannot be found shall be escheated to the city or municipality where such
assets are located.
Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall
distribute any of its assets or property except upon lawful dissolution and after payment of all its debts
and liabilities.
WHAT ARE THE EFFECTS OF DISSOLUTION?
Corporation ceases to be a juridical person and consequently can no longer continue transacting its
business.
Corporate existence continues for 3 years following dissolution for the ff. purposes only:
(a)winding up of affairs; and
(b)liquidation of corporate assets.
Corporation can no longer continue its business, except for winding up.
Corporation CANNOT even be a de factocorporation.
Corporate existence may be subject to COLLATERAL attack.
NOTEthat the subsequent dissolution of a corporation may not remove or impair any right or remedy
in favor of or against, nor any liability incurred by, any corporation, its stockholders, members,
directors, trustees or officers. (Sec. 145)
1. Loss of juridical personality C V2 407-408
BUENAFLOR v CAMARINES SUR INDUSTRY
FACTS:
1. On 25 June 1957, Jaime T. Buenaflor filed his application (P.S. Case 107548)
together with another application to establish a cold storage and refrigeration
service of about 6,000 cubic feet capacity (P.S. Case 107549).
2. The Commission, by order of 12 September 1957, set the applications for hearing
on 9 October 1957, requiring Buenaflor to publish them in two newspapers, and to
serve copy thereof to Iigo Daza and Camarines Sur Industry Corporation
(Camarines Corporation, for brevity ). The two owned ice plants in neighboring
municipalities and had been apparently selling ice to Sabangs inhabitants.
3. After receiving a copy of Buenaflors application, the Camarines Corporation
submitted to the Commission on 1 October 1957, its own two applications: one for
authority to construct and manage a 5-ton ice plant, and likewise registered
opposition to Buenaflors proposed ice business, on the ground that it was the
pioneer distributor of the commodity in that particular locality . A joint hearing of the
four applications of both parties was set on 25 October 1957.
4. On said hearing, Buenaflors attorneys presented a motion to dismiss the
Camarines Corporations applications, challenging its personality, inasmuch as its
corporate life had expired in November 1953, in accordance with its own articles of
incorporation. The counsel of Camarines Corporation was surprised by such
motion and asked, and was granted time to answer.
5. The corporators of Camarines Corporation got busy and executed on 30 October
1957, and registered on 31 October 1957, new articles of incorporation of

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

154

Camarines Sur Industry Corporation, and at the same time, notarized a deed of
conveyance assigning to the new corporation, all the assets of the expired (old)
corporation, together with its existing certificates of public convenience to operate
ice factories in Naga and Magarao.
6. On 8 November 1957, the Camarines Corporation (new) answered the motion to
dismiss, by alleging, to the amazement of Buenaflor, its recent incorporation, plus
its acquisition of the assets and certificates of the old Camarines Corporation with
the Commissions approval as above described.
7. In the Commissions decision as regards the applications of the corporations, the
following were held:
Camarines Corporation is really the pioneer ice plant in Maragao since 1945.
We believe, therefore, that applicant Camarines Corporation has a better right
than Buenaflor to the certificate for a 5-ton ice plant in Sabang. However, in
light of the fact that the services rendered by Camarines Corporation in this
aspect may not necessarily be adequate, Buenaflor is granted a certificate for
one ton ice plant in Sabang.
As to the cold storage service, we think that Buenaflor has a better right to the
certificate by virtue of Buenaflors right of priority in the filing of his application
and the fact that he is as financially capable as the Camarines Corporation to
install the service, we believe that the certificate for the cold storage service in
Sabang should be granted to Buenaflor. He is granted a certificate of 5,000
cubic feet cold storage service.
8. Buenaflor appealed in so far as he was denied authority to erect a 5-ton ice plant.
ISSUE: Has the Camarines Sur Industry Corporation lost its standing as a juridical entity
upon the expiration/termination of its corporate life? (And thus cannot be given standing as
a prior corporation entitled to preference in the ice-plant business.)
RULING: YES. Since 1953, the old Corporation had been illegally plying its business of
selling ice in Sabang because, under the Corporation Law, Section 77 (now Section 122 of
the Corporation Code), after November 1953, it could not lawfully continue the business for
which it had been established (operate ice plant, sell ice, etc). After November 1953, it
could only continue to exist for three years for the purpose of prosecuting and defending
suits by or against it, and of enabling it gradually to settle and close its affairs, to dispose
and convey its property and to divide its capital stock. It could not, without violating the law,
continue to sell ice.
When the old Corporation docketed its application on 1 October 1957, it had no juridical
personality, it had ceased to exist as a corporation and could not sue nor apply for
certificate, for it was incapable of receiving a grant. It was not even a corporation de facto.
And then there is no application subscribed by the new Camarines Corporation. Far from
being mere technicality, these points support a conclusion, which appears to be just and
equitable, not only for the reasons already indicated, but also to compensate Buenaflors
diligence and courage in exposing the irregular practice of a ghost corporation foisting its
services upon the unsuspecting public of Sabang and neighboring territory, enjoying a
franchise without paying, perhaps the corporate income tax and other burdens attached to
corporate existence.
Remembering the Camarines Corporatoins automatic cessation in November 1956 (3
years after November 1953), the Court must decline to regard the new Camarines
Corporation (formed 30 October 1957) as a continuation of the old. At most, it is the
transferee of the properties of the old corporation (or more property, the assets of the
stockholders) plus the certificate of public convenience to operate the ice plant in Naga and
Magarao. And yet, as stated, the new corporation has not yet filed any application for
certificate of public convenience in Sabang, and has not published such application.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

155

DOCTRINE: A corporation is deemed to lose its status as a juridical entity upon the
expiration of its corporate life according to its articles of incorporation (absent renewal). It
cannot lawfully continue the business for which it had been established. It could only
continue to exist for three years for the purpose of prosecuting and defending suits by or
against it, and of enabling it gradually to settle and close its affairs, to dispose and convey
its property and to divide its capital stock.
DISPOSTIVE: Buenaflors application for five tons, instead of one ton, subject to the usual
conditions imposed by the Public Service Commission on ice plant establishments was
approved.
NATIONAL ABACA v PORE
FACTS:
Plaintiff filed with the Municipal Court of Tacloban, Leyte, a complaint, against defendant
Pore, for the recovery of P1,213.34, allegedly advanced to her for the purchase of hemp for
the account of the former and for which she had allegedly failed to account. Defendant
alleged that she had accounted for all cash advances received by her for the
aforementioned purpose from the plaintiff. In due course, court rendered judgment, finding
that the defendant had not accounted for cash advances in the sum of P272.49, which she
was, accordingly, sentenced to pay to the plaintiff, with legal interest in addition to the costs.
Court having subsequently denied a reconsideration of this decision, as well a new trial
prayed for the plaintiff, the latter appealed to the CFI of Leyte, in which defendant moved to
dismiss the complaint upon the ground that plaintiff has no legal capacity to sue, it having
abolished by Executive Order No. 372 of the President of the Philippines. Plaintiff objected
thereto upon the ground that pursuant to said executive order, plaintiff "shall nevertheless
be continued as a body corporate for a period of three (3) years from the effective date" of
said executive order, "for the purpose of prosecuting and defending suits by or against it
and of enabling the Board of Liquidators to settle and close its affairs. CFI issued an order
dated directing plaintiff to amend the complaint, by including the Board of Liquidators as coparty plaintiff, with the admonition that otherwise the case would be dismissed.
Court issued another order dismissing the case, without pronouncement as to costs, it
appearing that the aforementioned amended had not been made, despite the fact that copy
of said order had been sent, by registered mail, to plaintiff's counsel. Copy of the last order
was delivered to counsel for the plaintiff, which filed a motion alleging that copy of the order
was received by the plaintiff; that thereupon said counsel prepared an amended complaint
as directed by the court; that said counsel handed two copies of said amended complaint to
Mrs. Receda Vda. de Ocampo, the employee of the aforesaid Board of Liquidators in
charge of plaintiff's incoming and outgoing correspondence, with instructions to them mail
said copies to the CFI of Leyte and to counsel for defendant herein; that plaintiff's counsel
received copy of the order, that thereupon he inquired from plaintiff's mailing clerk whether
or not his instructions, concerning the mailing of copies of said amended complaint, had
been complied with; that he then found out that, although said copies of the amended
complaint were entered in the record book of plaintiff's outgoing correspondence, only the
copy addressed to defendant's counsel had actually been mailed; that the original copy of
the amended complaint, addressed to the clerk of court, could not be located, despite
diligent efforts made to find the same; that plaintiff's failure to file in court the original of said
amended complaint is imputable to the excusable negligence of the aforementioned Mrs.
Ocampo, whose affidavit was annexed, also, to the motion for reconsideration; and that,
plaintiff has a just and valid claim against the defendant. Plaintiff prayed, therefore, that
said order be reconsidered and set aside and that its aforementioned amended complaint
be admitted.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

156

ISSUE: WON an action, commenced within 3 years after the abolition of plaintiff, as a
corporation, may be continued by the same after the expiration of said period
RULING: NO. The rule appears to be well settled that, in the absence of statutory provision
to the contrary, pending actions by or against a corporation are abated upon expiration of
the period allowed by law for the liquidation of its affairs.
It is generally held, that where a statute continues the existence of a corporation for a
certain period after its dissolution for the purpose of prosecuting and defending suits, etc.,
the corporation becomes defunct upon the expiration of such period, at least in the absence
of a provision to the contrary, so that no action can afterwards be brought by or against it,
and must be dismissed. Actions pending by or against the corporation when the period
allowed by the statute expires, ordinarily abate.
This time limit does not apply unless the circumstances are such as to bring the corporation
within the provision of the statute. However, the wording of the statutes, in some
jurisdictions authorize suits after the expiration of the time limit, where the statute provides
that for the purpose of any suit brought by or against the corporation shall continue beyond
such period for a further named period after final judgment. (Fletcher's Cyclopedia on
Corporations, Vol. 16, pp. 892-893.).
Our Corporation Law contains no provision authorizing a corporation, after 3 years from the
expiration of its lifetime, to continue in its corporate name actions instituted by it within said
period of 3 years. In fact, section 77 of said law provides that the corporation shall "be
continued as a body corporate for 3 years after the time when it would have been
dissolved, for the purposed of prosecuting and defending suits by or against it", so that,
thereafter, it shall no longer enjoy corporate existence for such purpose. For this reason,
section 78 of the same law authorizes the corporation, "at any time during said three years .
. . to convey all of its property to trustees for the benefit of members, stockholders, creditors
and other interested", evidently for the purpose, among others, of enabling said trustees to
prosecute and defend suits by or against the corporation begun before the expiration of
said period.
Obviously, the complete loss of plaintiff's corporate existence after the expiration of the
period of three (3) years for the settlement of its affairs is what impelled the President to
create a Board of Liquidators, to continue the management of such matters as may then be
pending.
SUPER CORPO REVIEWER: Plaintiff National Abaca Corporation filed a complaint against
Pore for the recovery of a sum of money advanced to her for the purchase of hemp . She
moved to dismiss the complaint by citing the fact that National Abaca had been abolished
by EO 372 dated Nov. 24, 1950. Plaintiff objected to such by saying that it shall
nevertheless be continued as a corporate body for a period of 3 years from the effective
date of said order for the purpose of prosecuting and defending suits by or against it and to
enable the Board of Liquidators to close its affairs.

Can an action commenced within 3 years after the abolition of plaintiff corporation be
continued by the same after the expiration of said period?

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

157

The Corp. Law allows a corporation to continue as a body for 3 years after the time when it
would have been dissolved for the purposes of prosecuting and defending suits by or
against it. But at any time during the 3 years, the corporation should convey all its property
to trustees so that the latter may be the ones to continue on with such prosecution, with no
time limit on its hands. Since the case against Pore was strong, the corp.'s amended
complaint was admitted and the case was remanded to the lower court.
CEBU PORT LABOR UNION v STATE MARINE
FACTS:
1. Cebu Port La Union (CPL)- duly recognized labor association, represented by its
president, Alejo Cababajay, who was
2. States Marine Corporation (SMC)- corporation duly organized and existing under
the laws of the Philippines
3. CPL alleged that:
a. SMC could be served summons through Mr. Gotianuy, whereas other
respondents are capataces of a group of laborers and/or stevedorers
b. awarded a contract for the exclusive right of loading and unloading of the
cargoes of the vessel M/V Bisayas (formerly owned by Elizalde & Co., at
the time of the filing of the petition it was owned operated by SMC)
c. that vessel would soon resume its voyage and it came to the knowledge of
CPL that the stevedoring work will be given to the other respondents,
NIcasio Pansacala, Andrestura, Alfonso Villajas and Perpetuo Regis
d. Right of loading and unloading the cargoes will deprive CPL, and it will
cause them irreparable loss and injury
4. CFI-favored CPL and ordered ex-parte the issuance of preliminary injunction
5. Sheriffs return of service of the writ showed that respondents were personally
served with the said order, on the left part though was a note: SMC was dissolved
on Oct. 17P 1952 followed by an illegible countersign.
6. Then, respondents filed an ex-parte motion for dissolution (of the w. preliminary
injunction), alleging that:
a. said writ caused great damage to the respondents since the defunct SMC
never awarded any contract to CPL and that present owners, M/V Bisayas,
never entered into a contract with CPL relative to stevedoring work
b. that allegations of CPL was insufficient since SMC was no longer exisiting
c. that granting, Elizalde & Co and CPL had a contract, it cannot be
maintained that CPL had any right to follow this vessel to whomsoever it
may belong
7. SMC filed for its dismissal, alleging that SMC had no legal capacity to sue or be
sued, it having been dissolved on October 17, 1952.
8. CFI- favoured CPL
9. Originally appealed to SC but was referred to SC because it involves a question of
jurisdiction
ISSUE: WON SMC may be held liable, it having been dissolved on October 17, 1952
RULING: NO. There is no denial that the vessel M/V BISAYAS was sold to SMC and later
purchased by Royal Lines, which renamed it to M/V MELLIZA; ad that Joseph Gotianuy,
who was Preseident and general Manager of SMC, is also the present General manager of
the Royal Lines. There is no showing, however, that CPL was granted stevedoring jobs on
the M/V MELLIZA. SMC was able to present a certificate from SEC that it was already
dissolved.
Sec 77- Every corporation whose charter expires by its own limitation, or is annulled by
forfeiture; or whose corporate existence is terminated, shall nevertheless be continued as a
body corporate for 3 years after the time when it would have been dissolved, for the

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

158

purpose of prosecuting and defending suits by or against it and of enabling it gradually to


settle and close its affairs to dispose of and convey its property and to divide capital stock,
but not for the purpose of continuing the business for which it was established.
3- year period allowed by law is only for the purpose of winding up its affairs.
It appearing that SMC was already dissolved at the time the petition was filed, and the
vessel subject of the agreement having changed hands, it cannot be compelled to respect
such agreement specially considering that it cannot be made as a party to this suit.
In sum, the alleged verbal agreement between CPL and Elizalde & Co. couldnt give CPL
any right because: a) There was no competent evidence to show the alleged verbal
agreement; b) SMC is not and was not in existence at the time of the institution, and has no
personality and; c) M/V BISAYAS, at the time of this case, was not the property of SMC
DISPOSITIVE: SMC won. Petition dismissed.
DOCTRINE: A corporation that has been dissolved shall nevertheless be continued as a
body corporate for 3 years after the time when it would have been dissolved, for the
purpose of winding up its affairs, but NOT for the purpose of continuing the business for
which it was established.
GONZALES v SUGAR REGULATORY ADMINISTRATION
FACTS:
This is a Petition for Certiorari which asks this Court to reverse the order of the RTC Iloilo
City dismissing petitioners' complaint as against herein respondent SRA.
December 23, 1987, petitioner spouses, Ramon and Lilia Gonzales, filed a complaint
seeking cancellation of a mortgage and recovery of a sum of money against the Republic
Planters Bank ("RPBank"), Philippine Sugar Commission ("Philsucom") and the SRA.
Complaint alleged that on May 13, 1980, petitioners obtained a loan from the RPBank in
the amount of P 176,000.00 secured by a real estate mortgage. Proceeds of the loan were
released on a staggered basis and loan was "payable from the 1980-1981 sugar crop.
September 24, 1987, petitioners received a statement of account from RPBank stating that
petitioners had an outstanding loan balance due of P 652,446.38. Petitioner requested
copies of the promissory notes executed by them and breakdown of re-payments, it
appeared that they had already more than fully repaid their loan because they had received
total amount of P l,041,610.55 in loan funds from the RPBank and that they had re-paid
total amount of P 1,051,296.77. Thus they are praying that the real estate mortgage be
cancelled, and that Philsucom and SRA be required jointly and severally to reimburse the
petitioners amount of P 289,260.88, moral damages of P 50,000.00 and attorney's fees of P
50,000.00.
Petitioners urged that abolition of Philsucom by EO No. 18 in effect destroyed their right to
recover from Philsucom what is due to them and that they had been deprived of property
without due process of law and the abolition of Philsucom and the transfer of assets from
Philsucom to respondent SRA are unconstitutional and ineffective. Petitioners also
contends that dismissal of the complaint as against SRA was erroneous because the
abolition of Philsucom and transfer of assets from Philsucom to respondent SRA constitute
an unconstitutional taking of property rights and, therefore, ineffective. The implicit theory of
petitioners is that they have a right to follow Philsucom's assets in the hands of the SRA.
RPBank, Philsucom and SRA moved to dismiss the complaint upon the ground of lack of
cause of action. Philsucom and SRA through the SolGen, denied any obligation on the part
of the Philsucom to return any amount to petitioners on account of allegedly unauthorized

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

159

deductions from the proceeds of petitioners' sugar sold by the Philsucom. For its part, the
SRA also noted that while the deductions complained of were made by the Philsucom
during the period from 1980 to 1984, the SRA itself had been created by Executive Order
No. 18 only on May 18, 1986 and that it was not a party to the real estate mortgage
between petitioners and the RPBank. Trial court granted the motion to dismiss insofar as
SRA was concerned, while denying that same motion insofar as RPBank and Philsucom
were concerned.
ISSUE: 1. WON Philsucom due to its dissolution has loss its juridical personality and WON
it exempts Philsucom from paying its obligations.
2.WON Petitioners are entitled to receive reimbursements and WON SRA may be made
liable for such.
RULING:
1. NO. EO 18, Sec. 13. Transitory Provisions provides that although the Philsucom is
hereby abolished, it shall nevertheless continue as a juridical entity for three years after the
time when it would have been so abolished, for the purpose of prosecuting and defending
suits by or against it and enabling it to settle and close its affairs, to dispose of and convey
its property and to distribute its assets, but not for the purpose of continuing the functions
for which it was established, under the supervision of the Sugar Regulatory Administration.
Corporation Code provides for termination of corporate life, the dissolution of the
corporation, the winding up of its operations, the liquidation of its assets, the payment of its
obligations and distribution of any residual assets to its stockholders. The termination of the
life of a juridical entity does not by itself imply the diminution or extinction of rights
demandable against such juridical entity.
The 3 year period provided for in the 3rd paragraph of Section 13 of EO No. 18 is about to
expire. There is nothing to prevent Philsucom from appointing a trustee, SRA for instance
and conveying all its properties to such trustee, for the benefit of the Government, creditors
and other persons in interest, following at least by analogy the provisions of the second
paragraph of Section 122 of the Corporation Code
2. YES. Dismissal of petitioners' complaint against SRA was clearly premature. Petitioners
have a cause of action against SRA to the extent that they are able to prove lawful claims
against Philsucom, which claims Philsucom is or may be unable to satisfy, and to the extent
respondent SRA did, or does, in fact take over all or some of the assets of Philsucom.
EO No. 18, promulgated on May 28 1986, abolished the Philsucom, created the SRA and
authorized the transfer of assets from Philsucom to SRA. Section 13 of Executive Order
No. 18 reads as follows:
Sec. 13. Transitory Provisions.- The Philippine Sugar Commission (Philsucom) is hereby
abolished. The Sugar Regulatory Administration may retain some of the personnel of said
agency as it may deem necessary. Any public officer or employee separated from service
as a result of the abolition of Philsucom effected under the laws then in force, receive the
retirement and other benefits accruing thereunder. In case of lack of funds to support the
retirement and separation pay of affected officers and employees of the Philsucom, a
special fund shall be set aside by the Ministry of Budget for this purpose. Assets and
records that, as determined by the Sugar Regulatory Administration, are required in its
operation are hereby transferred to the Sugar Regulatory Administration.
Philsucom, it will be seen, succeeded as a matter of course to all the assets, liabilities and
records of the Philippine Sugar Institute and the Sugar Quota Administration. The SRA did
not, quite possibly because the Government wanted the opportunity to examine the assets,
liabilities and records carefully and to determine the compatibility of (asserted) liabilities of

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

160

the Philsucom with applicable law and relevant requirements of public policy and the public
interest.
Section 13 of EO No. 18 is not to be interpreted as authorizing respondent SRA to disable
Philsucom from paying Philsucom's demandable obligations by simply taking over
Philsucom's assets and immunizing them from legitimate claims against Philsucom. The
right of those who have previously contracted with, or otherwise acquired lawful claims
against, Philsucom, to have the assets of Philsucom applied to the satisfaction of those
claims, is a substantive right and not merely a procedural remedy. Section 13 cannot be
read as permitting the SRA to destroy that substantive right.
Should the assets of Philsucom remaining in Philsucom at the time of its abolition not be
adequate to pay for all lawful claims against Philsucom, respondent SRA must be held
liable for such claims against Philsucom to the extent of the fair value of assets actually
taken over by the SRA from Philsucom. To this extent, claimants against Philsucom do
have a right to follow Philsucom's assets in the hands of SRA or any other agency for that
matter. Section 11 of EO No. 18, the SRA will continue, "until otherwise provided, as
directed and ordered by the President of the Philippines," to collect and receive the
proceeds of "levies, charges and other impositions as [then] granted by law, decree and/or
executive order, to the Philsucom.
DOCTRINE: Corporation Code provides for termination of corporate life, the dissolution of
the corporation, the winding up of its operations, the liquidation of its assets, the payment of
its obligations and distribution of any residual assets to its stockholders. The termination of
the life of a juridical entity does not by itself imply the diminution or extinction of rights
demandable against such juridical entity.
DISPOSITIVE: SC- ruled in favor of Petitioner. Order of the trial court dated August 2, 1988
in Civil Case No. 17926 is hereby SET ASIDE to the extent that such order dismissed
petitioners' complaint against respondent SRA.

2. Executory contracts C V2 414


The prevailing view is that executory contracts are not extinguished by dissolution. Sec.
145 of the Code states that "No right or remedy in favor of or against any corporation.nor
any liability incurredshall be removed or impaired either by the subsequent dissolution
of said corp. or by any subsequent amendment or repeal of this Code or of any part
thereof."
3. Methods of liquidation C V2 415-417
WHAT IS LIQUIDATION?(Sec. 122)
Liquidation, or winding up, refers to the collection of all assets of the corporation, payment
of all its creditors, and the distribution of the remaining assets, if any, among the
stockholders thereof in accordance with their contracts, or if there be no special contract,
on the basis of their respective interests.
WHAT ARE THE METHODS OF LIQUIDATING A CORPORATION? AND WHO MAY
UNDERTAKE THE LIQUIDATION OF A CORPORATION?
1.Liquidation by the corporation itself through its board of directors

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

161

Although there is no express provision authorizing this method, neither is there any
provision in the Code prohibiting it.
2.Conveyance of all corporate assets to trustees who will take charge of liquidation.
If this method is used, the 3-year limitation will not apply provided the designation of the
trustees is made within said period. There is no time limit within which the trustee must
finish liquidation, and he may sue and be sued as such even beyond the 3-year period
unless the trusteeship is limited in its duration by the deed of trust. (See Nat'l Abaca Corp.
v. Pore, supra)
3.Liquidation is conducted by the receiver who may be appointed by the SEC upon
its decreeing the dissolution of the corp.
As with the previous method, the three-year rule shall not apply. However, the mere
appointment of a receiver, without anything more, does not result in the dissolution of the
corporation nor bar it from the exercise of its corporation rights.
FOR HOW LONG MAY THE LIQUIDATION OF A CORPORATION BE UNDERTAKEN?
Generally, a corporation may be continued as a body corporate for the purpose of
liquidation for 3 years after the time when it would have so dissolved. (Sec. 122)However, it
was held in the case ofClemente v. CA (supra)that if the 3-year period has expired without a
trustee or receiver having been expressly designated by the corporation itself within that
period, the BOD itself may be permitted to so continue as "trustees" by legal implication to
complete the corporate liquidation.
WHAT CAN AND SHOULD BE DONE DURING THE PERIOD OF LIQUIDATION?
(Sec. 122)
(1)Collection of corporate assets and property;
(2)Conveyance of all corporate property to trustees for the benefit of SHs, members,
creditors, and other persons in interest;
(3)Payment of corporation's debts and liabilities;
(4)Distribution of assets and property
4. Distribution of assets after payment of debts C V2 417-418
GENERAL RULE:No corporation shall distribute any of its assets or property except upon
lawful dissolution and after payment of all its debts and liabilities. (Sec. 122)
EXCEPTION:In cases of decrease of capital stock, and as otherwise allowed by the
Corporation Code
WHAT HAPPENS IF AN ASSET CANNOT BE DISTRIBUTED TO THE PERSON
ENTITLED TO IT?

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

162

Any asset distributable to any creditor or stockholder or member who is unknown or cannot
be found shall be escheated to the city or municipality where such assets are located. (Sec.
122)
BOARD OF LIQUIDATORS v KALAW
CHINA BANKING v MICHELIN
FACTS:
George OFarrel & Cie Inc. is a domestic corporation acting as agent and representative of
the Michelin & Cie, a foreign corporation engaged in the sale and distribution of Michelin
tires. Michelin decided to discontinue their business relations, and it was discovered that
OFarrel failed to account for an amount representing the price of tires sold by the latter.
Michelin claims the money was disposed by OFarrel for its own use and benefit and
without the authority or consent of Michelin. Gaston OFarrel (the person) and Sanchez
executed a mortgage on the house of OFarrel and shares owned by both to guarantee
payment of the amount to the Michelin, but left a balance which the latter seeks to recover.
The board of OFarrel filed a petition for its dissolution and sought the appointment of
Gaston as receiver and liquidator, which was granted by TC. Michelin filed its claim against
OFarrel Corp with a prayer that its claim be allowed as a preferred one against the latter.
TC grants motion of Michelin. Nobody except Michelin and Gaston was notified of the
order. China Bank intervened and moved that Michelins claim be allowed as an ordinary
one under the Insolvency Law and sought the nullification of the TC orders.
ISSUE:
Whether or not Michelins claim must be considered preferred.
RULING: NO. The appointment of a receiver by the court to wind up the affairs of the
corporation upon petition of voluntary dissolution does not empower the court to hear and
pass on the claims of the creditors of the corporation at first hand. In such cases, the
receiver does not act as a receiver of an insolvent corporation. Since "liquidation" as
applied to the settlement of the affairs of a corporation consists of adjusting the debts and
claims, that is, of collecting all that is due the corporation, the settlement and adjustment of
claims against it and the payment of its just debts, all claims must be presented for
allowance to the receiver or trustees or other proper persons during the winding-up
proceedings within the 3 years provided by the Corporation Law as the term for the
corporate existence of the corporation, and if a claim is disputed so that the receiver cannot
safely allow the same, it should be transferred to the proper court for trial and allowance,
and the amount so allowed then presented to the receiver or trustee for payment. The
rulings of the receiver on the validity of claims submitted are subject to review by the court
appointing such receiver though no appeal is taken to the latter ruling, and during the
winding-up proceedings after dissolution, no creditor will be permitted by legal process or
otherwise to acquire priority, or to enforce his claim against the property held for distribution
as against the rights of other creditors.
Section 176 of the Code of Civil Procedure dealing with the appointment of receiver upon
decree of dissolution of a corporation provides that the court "may . . . appoint a receiver to
take charge" of the estate and effects of the corporation, "and to pay the outstanding debts
thereof, and to divide the money and other properties that shall remain over among the
stockholders or members", and consistent with said provision section 66 of the Corporation
Law provides with respect to decrees of dissolution rendered upon voluntary application
that the court "may appoint receivers to collect and take charge of the assets of the
corporation." Such language found in both statutes on the subject is permissive rather than
mandatory and tends to recognize that in cases of voluntary dissolution there is no
occasion for the appointment of a receiver except under special circumstances and upon
proper showing. There can be no doubt that when enacting the Corporation Law the

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

163

Legislature intended to let the shareholders have the control of the assets of the
corporation upon dissolution in winding up its affairs. The normal method of procedure is for
the directors and executive officers to have charge of the winding up operations, though
there is the alternative method of assigning the property of the corporation to trustees for
the benefit of its creditors and shareholders.
Section 77 and 78 of the Corporation Law make the general purpose of the law manifest.
Section 77 provides that every corporation whose charter expires by its own limitation or
whose corporate existence terminates in "any other manner", shall nevertheless be
continued as a body corporate for three years "after the time when it would have been so
dissolved" for winding up operations; and section 78 provides that "said corporations at any
time during the three years term may convey its property to trustees for the benefit of
creditors, stockholders and others concerned."
Appellants contention that appellees claim cannot be allowed as a preferred claim is well
taken for even admitting for the sake of argument that the merchandise which sale price is
the subject of appellees claim was shipped to the corporation under a commission
agreement or any other agreement carrying the obligation to return either the goods or its
price, the fact is that the merchandise in the case at bar was no longer in the corporations
possession nor could the appellee trace the proceeds from its sale, and this is made
manifest by the very fact of the written agreement entered into between the appellee and
the corporation whereby the appellee accepted payment of the obligation by installments
duly secured with a mortgage of property to guarantee its payment. But such is not the
case, however, for the very agreement of May 31, 1930, mentioned in paragraph 5 of
appellees claim, shows that the rubber tires consigned to the corporation were to be sold
by the latter "por orden, cuenta y riesgo de los Sres. M. Michelin & Cie." and that the
customers accounts were opened "por orden, cuenta y riesgo de M. Michelin & Cie.", and
so much is this true that the uncollected accounts were turned over to and received by the
appellee, M. Michelin & Cie. Under such circumstances the amount of appellees claim
appears to be in the nature of a balance of a current account between the two firms more
than anything else.
DOCTRINE: Section 176 of the Code of Civil Procedure dealing with the appointment of
receiver upon decree of dissolution of a corporation provides that the court "may . . .
appoint a receiver to take charge" of the estate and effects of the corporation, "and to pay
the outstanding debts thereof, and to divide the money and other properties that shall
remain over among the stockholders or members", and consistent with said provision
section 66 of the Corporation Law provides with respect to decrees of dissolution rendered
upon voluntary application that the court "may appoint receivers to collect and take charge
of the assets of the corporation."
DISPOSITIVE: The order appealed from is reversed, and the appellees claim is hereby
declared to be an ordinary claim. The appellee is ordered to refund to the corporation the
sum of P5,000 erroneously paid by the receiver, with costs against the appellee. So
ordered.
SUPER CORPO REVIEWER: The appointment of a receiver by the court to wind up the
affairs of the corporation upon petition of voluntary dissolution does not empower the court
to hear and pass on the claims of the creditors of the corporation at first hand. In such
cases, the receiver does not act as a receiver of an insolvent corporation. Since
"liquidation" as applied to the settlement of the affairs of a corporation consists of adjusting
the debts and claims, that is, of collecting all that is due the corporation, the settlement and
adjustment of claims against it and the payment of its just debts, all claims must be
presented for allowance to the receiver or trustees or other proper persons during the
winding-up proceedings within the 3 years provided by the Corporation Law as the term for

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

164

the corporate existence of the corporation, and if a claim is disputed so that the receiver
cannot safely allow the same, it should be transferred to the proper court for trial and
allowance, and the amount so allowed then presented to the receiver or trustee for
payment. The rulings of the receiver on the validity of claims submitted are subject to
review by the court appointing such receiver though no appeal is taken to the latter ruling,
and during the winding-up proceedings after dissolution, no creditor will be permitted by
legal process or otherwise to acquire priority, or to enforce his claim against the property
held for distribution as against the rights of other creditors.
Note: Under the Corporation Code, it is the SEC which may
appoint the receiver.
SUMERA v VALENCIA
GELANO v CA
FACTS:
Insular Sawmill, Inc. leased the paraphernal property (property solely owned by the
wife) of Guillermina M. Gelano for P1.2K/month
November 19, 1947-December 26, 1950: Carlos Gelano (husband) obtained cash
advances of P25,950 on account of rentals
agreement: Insular Sawmill, Inc. could deduct the same from the monthly rentals of
the leased premises until the cash advances are fully paid
Carlos Gelano was able to pay only P5,950.00 thereby leaving an unpaid balance
of P20,000.00 which he refused to pay
Guillermina M. Gelano refused to pay on the ground that said amount was for the
personal account of her husband asked for by, and given to him, without her
knowledge and consent and did not benefit the family
May 4, 1948 to September 11, 1949: Spouses Gelanos purchased lumber
materials on credit leaving P946.46 unpaid
July 14, 1952: Joseph Tan Yoc Su, as accomdating party, executed a joint and
several promissory note with Carlos Gelano in favor of China Banking Corporation
bank in the amount of P8,000.00 payable in 60 days to help renew the previous
loan of the spouses
The bank collected P9,106.00 including interests by debiting the current account of
the corp.
Carlos only paid P5,000
Guillermina refused to pay on the ground that she had no knowledge of such
accomodation
May 29, 1959: Insular thru Atty. German Lee, filed a complaint for collection against
the spouses before the CFI
In the meantime, private respondent amended its Articles of Incorporation to
shorten its term of existence up to December 31, 1960 only
On November 20, 1964, the CFI favored Insular holding Carlos Gelano liable
On August 23, 1973, the court held spouses jointly and severally liable
ISSUE: W/N a corporation, whose corporate life had ceased by the expiration of its term of
existence, could still continue prosecuting and defending suits after its dissolution and
beyond the period of 3 years provided for under the Corporation law, to wind up its affairs,
without having undertaken any step to transfer its assets to a trustee or assignee.
RULING: YES Affirmed with modification - the conjugal property is liable
The time during which the corporation, through its own officers, may conduct
the liquidation of its assets and sue and be sued as a corporation is limited to 3
years from the time the period of dissolution commences; but that there is no

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

165

time limited within which the trustees must complete a liquidation placed in
their hands.

Only the conveyance to the trustees must be made within the 3-year
period (MAIN DOCTRINE)
The Effect of the conveyance is to make the trustees the legal owners of the
property conveyed, subject to the beneficial interest therein of creditors and
stockholders
trustee may commence a suit which can proceed to final judgment even
beyond the 3-year period
"trustee" = general concept - include the counsel to whom was entrusted in the
instant case
The purpose in the transfer of the assets of the corporation to a trustee upon its
dissolution is more for the protection of its creditor and stockholder
Debtors may not take advantage of the failure of the corporation to transfer its
assets to a trustee
Section 77 of the Corporation Law, when the corporate existence is terminated
in any legal manner, the corporation shall nevertheless continue as a body
corporate for 3 years after the time when it would have been dissolved, for the
purpose of prosecuting and defending suits by or against it

REPUBLIC v MARSMAN DEVELOPMENT


FACTS:Sometime before October 15, 1953 an investigation was conducted on the
business operation and activities of the corporation leading to the discovery that certain
taxes were due (from) it on logs produced from its concession. The Bureau of Internal
Revenue made three assessments, totalling P59,133.78, and demanded payment thereof.
Defendants however failed to pay the taxes hence the filing of charges in court. The
defendants contend that the present action is already barred under section 77 of the
Corporation Law, Act No. 1459, as amended, which allows the corporate existence of a
corporation to continue only for three years after its dissolution, for the purpose of
presenting or defending suits by or against it, and to settle and close its affairs.
They point out that inasmuch as the Marsman Development Co. was extra-judicially
dissolved on April 23, 1954, a fact admitted in the amended complaint, the filing of both the
original complaint on September 8, 1958 and the amended complaint on August 26, 1956
was beyond the aforesaid three-year period.
ISSUE: Whether or not the right of the government to collect the sums has already
prescribed.
RULING: NO. The stress given by appellants to the extinction of the corporate and juridical
personality as such of appellant corporation by virtue of its extra-judicial dissolution which
admittedly took place on April 23, 1954 is misdirected.
Further, at any time during said three years said corporation is authorized and empowered
to convey all of its property to trustees for the benefit of members, stock-holders, creditors,
and others interested. From and after any such conveyance by the corporation of its
property in trust for the benefit of its members, stockholders, creditors, and others in
interest, all interest which the corporation had in the property terminates, the legal interest
vests in the trustee, and the beneficial interest in the members, stockholders, creditors, or
other persons in interest.
Thus, in whatever way the matter may be viewed, the Government became the creditor of
the corporation before the completion of its dissolution by the liquidation of its assets.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

166

Appellant F.H. Burgess, whom it chose as liquidator, became in law the trustee of all its
assets for the benefit of all persons enumerated in Section 78, including its creditors,
among whom is the Government, for the taxes herein involved. To assume otherwise would
render the extra-judicial dissolution illegal and void, since, according to Section 62 of the
Corporation Law, such kind of dissolution is permitted only when it "does not affect the
rights of any creditor having a claim against the corporation."
It is immaterial that the present action was filed after the expiration of three years after April
23, 1954, for at the very least, and assuming that judicial enforcement of taxes may not be
initiated after said three years despite the fact that the actual liquidation has not been
terminated and the one in charge thereof is still holding the assets of the corporation,
obviously for the benefit of all the creditors thereof, the assessment aforementioned, made
within the three years, definitely established the Government as a creditor of the
corporation for whom the liquidator is supposed to hold assets of the corporation. And since
the suit at bar is only for the collection of taxes finally assessed against the corporation
within the three years invoked by appellants, their fourth assignment of error cannot be
sustained.
DOCTRINE: While Section 77 of the Corporation Law provides for a three-year period for
the continuation of the corporate existence of the corporation for purpose of liquidation,
therein nothing in said provision which bars an action for the recovery of the debts of the
corporation against the liquidator thereof, after the lapse of the said three-year period.
DISPOSITIVE: The Republic can validly collect the sums.
SUPER CORPO REVIEWER: Defendant corp. was a timber license holder with
concessions in Camarines Norte. Investigations led to the discovery that certain taxes were
due on it. BIR assessed Marsman 3 times for unpaid taxes. Atty. Moya, in behalf of the
corp., received the first 2 assessments. He requested for reinvestigations. As a result, corp.
failed to pay within the prescribed period. Numerous BIR warnings were given. After 3
years of futile notifications, BIR sued the corp.
Although Marsman was extrajudicially dissolved, with the 3-year rule, nothing however bars
an action for recovery of corporate debts against the liquidators. In fact, the 1st assessment
was given before dissolution, while the 2nd and 3rd assessments were given just 6 months
after dissolution (within the 3-year rule). Such facts definitely established that the
Government was a creditor of the corp. for whom the liquidator was supposed to hold
assets of the corp.
TAN TIONG BIO v COMMISSIONER
FACTS:
1. On 19 October 1946, the Central Syndicate (Syndicate for brevity, a corporation
organized under the laws of the Philippines, through its General Manager, David
Sycip, sent a letter to the Collection of Internal Revenue advising the latter that it
purchased from Dee Hong Lue, the entire stock of surplus properties which the
said Dee Hong Lue had bought from the Foreign Liquidation Commission. It
assumed Dee Hong Lues obligations to pay 3% sales tax and on said surplus
goods.
2. On 31 January 1948, the Syndicate again wrote the Collector requesting the
refund of P1,103.28 representing an alleged excess payment of sales tax due to
the adjustment and reduction of the purchase price in the amount of P31,522.18.
The said letter was referred to an agent for verification and report The
investigation resulted in the following findings:

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

167

Dee Hong Lue purchased the surplus goods as trustee for the Central
Syndicate, which was in the process of organization at the time of the
bidding;
That it was the representatives of the Central Syndicate that removed the
surplus goods from their base of Leyte on 21 February 1947;
That the Syndicate must have realized a gross profit of 18.8% from its sales
thereof; and
That if the sales tax were to be assessed on its gross sales it would be the
amount of P43,750.00, which the corporation had deposited in the name of
Dee Hong Lue as estimated sales tax due from the latter.
Based on the above report, the Collector decided that the Central Syndicate was
the importer and original seller of the surplus goods in question and, therefore
the one liable to pay sales tax.
The Collector assessed against the syndicate the amount of P33,797.88 and
P300.00 as deficiency sales tax. Also, in a separate letter, he denied that request
of the Syndicate for the refund of P1,103.28.
The Syndicate appealed to the Court of Tax Appeals, but the Collector still
insisted that the former must pay the deficiency sales tax and surcharge as was
previously demanded.
On 5 November 1954, the Collector filed a motion requiring the syndicate to file a
bond to guarantee the payment of the tax assessed against it but such motion
was denied by the Court of Tax Appeal on the ground that it cannot be legally
done. As it appears, the Syndicate is already a non-existing entity due to the
expiration of its corporate existence. In view of such new information, the
Collector instead filed a motion to dismiss the appeal of the Syndicate on the
ground that such has no personality to maintain the action then pending before it.
The Court of Tax Appeals issued a resolution dismissing the appeal primarily on
the just aforementioned ground.
Upon appeal of the Syndicate, the SC decided that the appeal should not be
dismissed. It could be substituted by its successors-in-interest, to wit:
Tan Tion Bio,
Yu Khe Thai,
Alfonso Sycip,
Dee Hong Lue, Lim Shui Ty,
Sy Seng Tong,
Sy En,
Co Giap, and
David Sycip.
The Court of Appeals eventually decided in favor of the decision of the Collector
of Internal Revenue, except with regard to the imposition of the compromise
penalty of P300.00, the collection of which is unauthorized and illegal in the
absence of a compromise agreement between the parties.
Petitioners appealed.

3.
4.
5.
6.

7.

8.

9.

ISSUE: The Central Syndicate, having already been dissolved because of the expiration
of its corporate existence, whether the sales tax in question can be enforced against its
successors-in-interest who are the present petitioners?
RULING: YES. Considering that the Central Syndicate realized from the sale of the
surplus goods a net profit of P299,073.83, and that the sale of said goods was the only
transaction undertaken by said Syndicate, there being no evidence to the contrary, the
conclusion is that said net profit remained intact and was distributed among the
stockholders when the corporation liquidated and distributed its assets on 15 August
1948, immediate after the sale of the said surplus goods. Petitioners are therefor, the

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

168

beneficiaries of the defunct corporation and as such should be held liable to pay the
taxes in question. However, there being no express provisions requiring the stockholders
of the corporation to be solidarily liable for its debts which liability must be express and
cannot be presumed, petitioners should be held to be liable for the tax in question ONLY
in proportion to their shares in the distribution of the assets of the defunct corporation.
DOCTRINE: The dissolution of a corporation does not extinguish the debts due or owing
to it.
A creditor of a dissolved corporation may follow its assets, as in the nature of a trust fund,
into the hands of its stockholders.
An indebtedness of a corporation to the federal government for income and excess profit
taxes is not extinguished by the dissolution of a corporation.
DISPOSITIVE: The Court decided in favor of the Collector of Internal Revenue. The
successors-in-interest of the Central Syndicate are held liable for tax payments only in so
far as their shares in the assets of the defunct corporation had been distributed to them
SUPER CORPO REVIEWER: The creditor of a dissolved corp. may follow its assets, as
in the nature of a trust fund, once they pass into the hands of the stockholders. The
dissolution of a corp. does not extinguish the debts due or owing to it.
An indebtedness of a corp. to the government for income and excess profit taxes is not
extinguished by the dissolution of the corp. The hands of government cannot, of course,
collect taxes from a defunct corporation, it loses thereby none of its rights to assess taxes
which had been due from the corporation, and to collect them from persons, who by
reason of transactions with the corporation hold property against which the tax can be
enforced and that the legal death of the corporation no more prevents such action than
would the physical death of an individual prevent the government from assessing taxes
against him and collecting them from his administrator, who holds the property which the
decedent had formerly possessed. Thus, petitioners can be held personally liable for the
corporation's taxes, being successors-in-interest of the defunct corporation.
CHUNG KA BIO v IAC
FACTS:
The Philippine Blooming Mills Company, Inc. was incorporated for a term of 25 years. The
members of its board of directors executed a deed of assignment of all of the accounts
receivables, properties, obligations and liabilities of the old PBM in favor of Chung Siong
Pek in his capacity as treasurer of the new PBM, then in the process of
reincorporation. The new PMB was issued a certificate of incorporation by the SEC.
Chung Ka Bio and the other petitioners herein, all stockholders of the old PBM, filed with
the SEC a petition for liquidation (but not for dissolution) of both the old PBM and the new
PBM. The allegation was that the former had become legally non-existent for failure to
extend its corporate life and that the latter had likewise been ipso facto dissolved for nonuse of the charter and continuous failure to operate within 2 years from incorporation.
ISSUE: WON the new corporation has not substantially complied with the two-year
requirement of Section 22 of the new Corporation Code on non-user because its
stockholders never adopted a set of by-laws.
WON a quo warranto proceeding is no longer necessary to dissolve a corporation which is
already "deemed dissolved" under Section 22 of the new Corporation Code.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

169

RULING: NO. Non-filing of the by-laws will not result in automatic dissolution of the
corporation. Under Section 6(i) of PD 902-A, the SEC is empowered to "suspend or
revoked, after proper notice and hearing, the franchise or certificate of registration of a
corporation" on the ground inter alia of "failure to file by-laws within the required period." It
is clear from this provision that there must first of all be a hearing to determine the
existence of the ground, and secondly, assuming such finding, the penalty is not
necessarily revocation but may be only suspension of the charter. In fact, under the rules
and regulations of the SEC, failure to file the by-laws on time may be penalized merely with
the imposition of an administrative fine without affecting the corporate existence of the
erring firm.
It should be stressed in this connection that substantial compliance with conditions
subsequent will suffice to perfect corporate personality. Organization and commencement
of transaction of corporate business are but conditions subsequent and not prerequisites
for acquisition of corporate personality. The adoption and filing of by-laws is also a condition
subsequent. Under Section 19 of the Corporation Code, a corporation commences its
corporate existence and juridical personality and is deemed incorporated from the date the
Securities and Exchange Commission issues certificate of incorporation under its official
seal. This may be done even before the filing of the by-laws, which under Section 46 of the
Corporation Code, must be adopted "within one month after receipt of official notice of the
issuance of its certificate of incorporation."
In any case, the deficiency claimed by the petitioners was corrected when the new PBM
adopted and filed its by-laws on September 6, 1981, thus rendering the issue moot and
academic.
It is needless as well to dwell on the second contention, in view of the findings that the new
PBM has not been ipso facto dissolved.
CLEMENTE v CA
FACTS:
1. In a civil action entitled, Declaration of Ownership with Receivership," before the
RTC the petitioners, LUIS C. CLEMENTE, LEONOR CLEMENTE DE ELEPAO
and the HEIRS OF ARCADIO C. OCHOA, sought to be declared as the owners of
a 5, 349 sq m. land in Calamba, and prayed for the distribution of rentals and other
fruits of the property
2. Defendants, ELVIRA PANDINCO-CASTRO and VICTOR CASTRO, claimed
ownership by virtue of acquisitive prescription.
3. During the hearing, only the plaintiffs came forward to prove their allegations, the
defendants did not present any evidence despite the several opportunities
accorded to them by the trial court.
4. "Sociedad Popular Calambea" aka "Sociedad Anonima," (Sociedad)- did business
and held itself out as a corporation from November, 1909, up to September 24,
1932. Its principal business was cockfighting or the operation and management of
a cockpit
5. Sociedad acquired by installments the said parcel of land in 1911, at the total cost
of P2,676.00
6. Petitioners evidence show that
Mariano Elepao and Pablo Clemente, now both
deceased, were original stockholders of the aforesaid sociedad.
7. Mariano Elepao subscribed and paid on November, 1909 for 40 shares of stocks
worth P200.00, while Pablo Clemente subscribed and paid 418 shares of stocks
worth P2,000.00.
8. Pablo Clemente's shares of stocks were later distributed and apportioned to his
heirs, in accordance with a Project of Partition: to Luis Clemente, shares worth

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

170

P510; to Ricardo Clemente, shares worth P510; to Leonor Clemente de Elepao,


shares also worth P510, and to Placida Clemente de Belarmino shares worth
P510.
9. The petitioners were later issued a Certificate of Stock, and on such, the petitioners
claim that since their fathers are the only known stockholders of the land, they are
entitled to be declared as owners.
10. RTC- dismissed. Absent a corporate liquidation, it is the corporation, not the
stockholders, which can assert, if at all, any title to the corporate assets
11. CA- sustained the dismissal
ISSUE: WON the petitioners may be declared as the owners of the land
RULING: NO. The evidences presented are not sufficient. Except in showing that they are
successors-in-interest, they have been unable to come up with any evidence to
substantiate their claim of ownership of the corporate asset.
If, indeed, the sociedad has long become defunct, it should behoove petitioners, or anyone
else who may have any interest in the corporation, to take appropriate measures before a
proper forum for a peremptory settlement of its affairs.
The termination of the life of a juridical entity does not by itself cause the extinction or
diminution of the rights and liabilities of such entity nor those of its owners and creditors. If
the three-year extended life has expired without a trustee or receiver. having been
expressly designated by the corporation within that period, the board of directors (or
trustees) itself, may be permitted to so continue as "trustees" by legal implication to
complete the corporate liquidation. Still in the absence of a board of directors or trustees,
those having any pecuniary interest in the assets, including not only the shareholders but
likewise the creditors of the corporation, acting for and in its behalf, might make proper
representations with the SEC, which has primary and sufficiently broad jurisdiction in
matters of this nature, for working out a final settlement of the corporate concerns
DISPOSITIVE: Petitioners lost. CA affirmed.
DOCTRINE: If the 3-year extended life has expired without a trustee or receiver:
BOD may may be permitted as trustees or;
Those having pecuniary interest in the assets may make proper representations to
the SEC
SUPER CORPO REVIEWER: The termination of the life of a juridical entity does not by
itself cause the extinction or diminution of the right and liabilities of such entity nor those of
its owners and creditors. If the 3-year extended life has expired without a trustee or receiver
having been expressly designated by the corporation itself within that period, the board of
directors or trustees itself may be permitted to so continue as "trustees" by legal implication
to complete the corporate liquidation. In the absence of a board of directors or trustees,
those having any pecuniary interest in the assets, including not only the shareholders but
likewise the creditors of the corporation, acting for and in its behalf, might make proper
representations with the SEC, which has primary and sufficiently broad jurisdiction in
matters of this nature, for working out a final settlement of the corporate concerns.
C. Distribution of assets of non-stock corporations Sec. 94; C 437-438
Section 94. Rules of distribution. In case dissolution of a non-stock corporation in accordance with
the provisions of this Code, its assets shall be applied and distributed as follows:
1. All liabilities and obligations of the corporation shall be paid, satisfied and discharged, or adequate
provision shall be made therefore;

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

171

2. Assets held by the corporation upon a condition requiring return, transfer or conveyance, and which
condition occurs by reason of the dissolution, shall be returned, transferred or conveyed in
accordance with such requirements;
3. Assets received and held by the corporation subject to limitations permitting their use only for
charitable, religious, benevolent, educational or similar purposes, but not held upon a condition
requiring return, transfer or conveyance by reason of the dissolution, shall be transferred or conveyed
to one or more corporations, societies or organizations engaged in activities in the Philippines
substantially similar to those of the dissolving corporation according to a plan of distribution adopted
pursuant to this Chapter;
4. Assets other than those mentioned in the preceding paragraphs, if any, shall be distributed in
accordance with the provisions of the articles of incorporation or the by-laws, to the extent that the
articles of incorporation or the by-laws, determine the distributive rights of members, or any class or
classes of members, or provide for distribution; and
5. In any other case, assets may be distributed to such persons, societies, organizations or
corporations, whether or not organized for profit, as may be specified in a plan of distribution adopted
pursuant to this Chapter.
WHAT ARE THE RULES FOR DISTRIBUTION OF ASSETS OF NON-STOCK CORPORATIONS?
(Sec. 94-95)
(1)All liabilities and obligations of the corporation shall be paid, satisfied, and discharged, or adequate
provision shall be made therefor.
(2)Assets held by the corporation upon a condition requiring return, transfer or conveyance, and
which condition occurs by reason of the dissolution, shall be returned, transferred or conveyed in
accordance with such requirements.
(3)Assets received and held by the corporation subject to limitations permitting their use only for
charitable, religious, benevolent, education or similar purposes, but not subject to condition (2) above,
shall be transferred or conveyed to one or more corporations, societies or organization engaged in
activities in the Philippines substantially similar to those of the dissolving corp. according to a plan of
distribution adopted pursuant to Sec. 95 of the Code.
(4)Assets other than those mentioned in preceding paragraphs shall be distributed in accordance with
the AOI or by-laws.
(5)In any other case, assets may be distributed to such persons, societies, organizations or
corporations, whether or not organized for profit, as may be specified in a plan of distribution adopted
pursuant to Sec. 95.
* The plan of distribution of assetsmay be adopted by a majority vote of the Board of trustees and
approval of 2/3 of the members having voting rights present or represented by proxy at the meeting
during which said plan is adopted.
It must be noted that the plan of distribution of assets must not be inconsistent with the provisions of
Title XI of the Code.
XVII.

Corporate combinations
WHAT ARE THE TECHNIQUES TO ACHIEVE A CORPORATE COMBINATION?
(1)Merger (A + B = A)

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

172

(2)Consolidation (A + B = C)
(3)Sale of substantially all corporate assets and purchase thereof by another corporation;
(4)Acquisition of all / substantially all of the stock of one corporation from its SHs in exchange for the stock of
the acquiring corporation
A. Purposes of combinations; methods
B. Merger and consolidations Sec 76 80
Section 76. Plan or merger of consolidation. Two or more corporations may merge into a single
corporation which shall be one of the constituent corporations or may consolidate into a new single
corporation which shall be the consolidated corporation.
The board of directors or trustees of each corporation, party to the merger or consolidation, shall
approve a plan of merger or consolidation setting forth the following:
1. The names of the corporations proposing to merge or consolidate, hereinafter referred to as the
constituent corporations;
2. The terms of the merger or consolidation and the mode of carrying the same into effect;
3. A statement of the changes, if any, in the articles of incorporation of the surviving corporation in
case of merger; and, with respect to the consolidated corporation in case of consolidation, all the
statements required to be set forth in the articles of incorporation for corporations organized under
this Code; and
4. Such other provisions with respect to the proposed merger or consolidation as are deemed
necessary or desirable. (n)
Section 77. Stockholders or members approval. Upon approval by majority vote of each of the
board of directors or trustees of the constituent corporations of the plan of merger or consolidation,
the same shall be submitted for approval by the stockholders or members of each of such
corporations at separate corporate meetings duly called for the purpose. Notice of such meetings
shall be given to all stockholders or members of the respective corporations, at least two (2) weeks
prior to the date of the meeting, either personally or by registered mail. Said notice shall state the
purpose of the meeting and shall include a copy or a summary of the plan of merger or consolidation.
The affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital
stock of each corporation in the case of stock corporations or at least two-thirds (2/3) of the members
in the case of non-stock corporations shall be necessary for the approval of such plan. Any dissenting
stockholder in stock corporations may exercise his appraisal right in accordance with the Code:
Provided, That if after the approval by the stockholders of such plan, the board of directors decides to
abandon the plan, the appraisal right shall be extinguished.
Any amendment to the plan of merger or consolidation may be made, provided such amendment is
approved by majority vote of the respective boards of directors or trustees of all the constituent
corporations and ratified by the affirmative vote of stockholders representing at least two-thirds (2/3)
of the outstanding capital stock or of two-thirds (2/3) of the members of each of the constituent
corporations. Such plan, together with any amendment, shall be considered as the agreement of
merger or consolidation. (n)
Section 78. Articles of merger or consolidation. After the approval by the stockholders or members

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

173

as required by the preceding section, articles of merger or articles of consolidation shall be executed
by each of the constituent corporations, to be signed by the president or vice-president and certified
by the secretary or assistant secretary of each corporation setting forth:
1. The plan of the merger or the plan of consolidation;
2. As to stock corporations, the number of shares outstanding, or in the case of non-stock
corporations, the number of members; and
3. As to each corporation, the number of shares or members voting for and against such plan,
respectively. (n)
Section 79. Effectivity of merger or consolidation. The articles of merger or of consolidation, signed
and certified as herein above required, shall be submitted to the Securities and Exchange
Commission in quadruplicate for its approval: Provided, That in the case of merger or consolidation of
banks or banking institutions, building and loan associations, trust companies, insurance companies,
public utilities, educational institutions and other special corporations governed by special laws, the
favorable recommendation of the appropriate government agency shall first be obtained. If the
Commission is satisfied that the merger or consolidation of the corporations concerned is not
inconsistent with the provisions of this Code and existing laws, it shall issue a certificate of merger or
of consolidation, at which time the merger or consolidation shall be effective.
If, upon investigation, the Securities and Exchange Commission has reason to believe that the
proposed merger or consolidation is contrary to or inconsistent with the provisions of this Code or
existing laws, it shall set a hearing to give the corporations concerned the opportunity to be heard.
Written notice of the date, time and place of hearing shall be given to each constituent corporation at
least two (2) weeks before said hearing. The Commission shall thereafter proceed as provided in this
Code. (n)
Section 80. Effects of merger or consolidation. The merger or consolidation shall have the following
effects:
1. The constituent corporations shall become a single corporation which, in case of merger, shall be
the surviving corporation designated in the plan of merger; and, in case of consolidation, shall be the
consolidated corporation designated in the plan of consolidation;
2. The separate existence of the constituent corporations shall cease, except that of the surviving or
the consolidated corporation;
3. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities
and powers and shall be subject to all the duties and liabilities of a corporation organized under this
Code;
4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights,
privileges, immunities and franchises of each of the constituent corporations; and all property, real or
personal, and all receivables due on whatever account, including subscriptions to shares and other
choses in action, and all and every other interest of, or belonging to, or due to each constituent
corporation, shall be deemed transferred to and vested in such surviving or consolidated corporation
without further act or deed; and
5. The surviving or consolidated corporation shall be responsible and liable for all the liabilities and
obligations of each of the constituent corporations in the same manner as if such surviving or
consolidated corporation had itself incurred such liabilities or obligations; and any pending claim,

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

174

action or proceeding brought by or against any of such constituent corporations may be prosecuted
by or against the surviving or consolidated corporation. The rights of creditors or liens upon the
property of any of such constituent corporations shall not be impaired by such merger or
consolidation. (n)
WHAT IS THE PROCEDURE FOR MERGER OR CONSOLIDATION?
1. Board of Directors of the constituent corporations must prepare and approve a plan of merger
or consolidation.
2. 2/3 vote of OCS of the constituent corporations.
3. Execution of the Articles of Merger/Consolidation, to be signed by the Pres/VP and certified
by the secretary / assistant secretary.
4. Submission to the SEC for approval.
WHAT ARE THE EFFECTS OF MERGER OR CONSOLIDATION?(Sec. 80)
1. The constituent corporation shall become a single corporation:
If merger: the surviving corporation designated in the plan of merger
If consolidation: the consolidated corporation designated in the plan of Consolidation.
2. The separate existence of the constituent corporations shall cease, except that of the
surviving or consolidated corporation.
3. The surviving or consolidated corporation shall possess all rights, privileges, immunities and
powers and shall be subject to all the duties and liabilities of a corporation organized under
the Corporation Code.
4. The surviving or consolidated corporation shall thereupon and thereafter possess all the
rights, privileges, immunities and franchises of each of the constituent corporations;
5. All property (real or personal)and all receivables due on whatever account (including
subscriptions to shares and other choses in action), and all and every other interest of, or
belong to, or due to each constituent corporation, shall be deemed transferred and vested in
such surviving or consolidated corporationwithout further act or deed.
6. The surviving or consolidated corporation shall be responsible and liable for all the liabilities
and obligations of each of the constituent corporations in the same manner as if such
surviving or consolidated corporation had itself incurred such liabilities or obligations; and any
pending claim, action or proceeding brought by or against any of such constituent
corporations may be prosecuted by or against the surviving or consolidated corporation.
(Note: The merger or consolidation doesnotimpair the rights of creditors or liens upon the
property of any such constituent corporations.)
WHAT ARE THE RULES GOVERNING MERGER OR CONSOLIDATION INVOLVING A
FOREIGN CORPORATION LICENSED IN THE PHILIPPINES? (Sec. 132)
A foreign corporation authorized to transact business in the Philippines may merge or
consolidate with any domestic corporation if such is permitted under Philippine law and by the law
of its incorporation.
The requirements on merger or consolidation as provided in the Corporation Code must be
complied with.
Whenever a foreign corporation authorized to transact business in the Philippines is a party to a
merger or consolidation in its home country or state, such foreign corporation shall file a copy of
the articles or merger or consolidation with the SEC and the appropriate government agencies
within 60 days after such merger or consolidation becomes effective. Such copy of the articles
must be duly authenticated by the proper officials of the country or state under the laws of which
merger or consolidation was effected.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

175

If the absorbed corporation in such a merger / consolidation happens to be the foreign


corporation doing business in the Philippines, it shall file a petition for withdrawal of its license in
accordance with Sec. 136.
C. Sale of all or substantially all corporate assets Sec 40, appraisal sight; compared with merger
Section 40. Sale or other disposition of assets. Subject to the provisions of existing laws on illegal
combinations and monopolies, a corporation may, by a majority vote of its board of directors or
trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its
property and assets, including its goodwill, upon such terms and conditions and for such
consideration, which may be money, stocks, bonds or other instruments for the payment of money or
other property or consideration, as its board of directors or trustees may deem expedient, when
authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding
capital stock, or in case of non-stock corporation, by the vote of at least to two-thirds (2/3) of the
members, in a stockholders or members meeting duly called for the purpose. Written notice of the
proposed action and of the time and place of the meeting shall be addressed to each stockholder or
member at his place of residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting
stockholder may exercise his appraisal right under the conditions provided in this Code.
A sale or other disposition shall be deemed to cover substantially all the corporate property and
assets if thereby the corporation would be rendered incapable of continuing the business or
accomplishing the purpose for which it was incorporated.
After such authorization or approval by the stockholders or members, the board of directors or
trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge
or other disposition of property and assets, subject to the rights of third parties under any contract
relating thereto, without further action or approval by the stockholders or members.
Nothing in this section is intended to restrict the power of any corporation, without the authorization by
the stockholders or members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of any
of its property and assets if the same is necessary in the usual and regular course of business of said
corporation or if the proceeds of the sale or other disposition of such property and assets be
appropriated for the conduct of its remaining business.
In non-stock corporations where there are no members with voting rights, the vote of at least a
majority of the trustees in office will be sufficient authorization for the corporation to enter into any
transaction authorized by this section.
WHEN IS A SALE OR OTHER DISPOSITION DEEMED TO COVER SUBSTANTIALLY ALL THE
CORPORATE PROPERTY AND ASSETS?
If by the sale the corporation would be rendered incapable of continuing the business or
accomplishing the purpose for which it was incorporated. (Sec. 40)
WHAT ARE THE REQUIREMENTS? (Sec. 40)
1. Majority vote of BOD + 2/3 vote of OCS or members at a meeting duly called for the purpose;
2. Compliance with the laws on illegal combinations and monopolies
Note, however, that after such approval by the SHs, the BOD may nevertheless, in its discretion,
abandon such sale or other disposition without further action or approval by the SHs. This, of course,
is subject to the rights of third parties under any contract relating thereto.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

176

WHEN IS SH APPROVALNOTNECESSARY FOR THE ABOVE DISPOSITION?


1. If the disposition is necessary in the usual and regular course of business; or
2. If the proceeds of the disposition be appropriated for the conduct of its remaining business
(Sec. 40)
IS THE APPRAISAL RIGHT AVAILABLE TO DISSENTING STOCKHOLDERS?
Yes. However, it must be stressed that this right is generally available only to dissenting stockholders
of thesellingcorporation, not the purchasing corporation. (It can be argued, though, that in instances
wherein the purchase constitutes an investment in a purpose other than its primary purpose,
stockholders' approval of such investment is necessary, and anyone who objects thereto will have the
appraisal right under Sec. 42.)
REYES v BLOUSE
EDWARD J. NELL v PACIFIC FARMS
D. Exchange of stocks
In this method, all or substantially all the stockholders of the "acquired" corporation are made
stockholders of the acquiring corporation. With the exchange, the acquired corporation becomes a
subsidiary of the acquiring corporation. Although this method does not combine the 2 businesses
under a single corporation as in merger and sale of assets, from the point of view of the acquiring
(parent) corporation, there is hardly any difference between owing the acquired corporation's
business directly and operating it through a controlled subsidiary. In fact, the parent corporation would
have the power to buy all the subsidiary's assets and dissolve it, achieving the same result as in the
other methods of combination. (Campos & Campos)
XVIII.

Foreign corporations
Campos V 2 483-606
Sec 123-135, inclusive
WHAT IS A FOREIGN CORPORATION?(Sec. 123)
A corporation formed and organized under laws other than those of the Philippines, regardless of the
citizenship of the incorporators and stockholders. Such corporation must have been organized and must
operate in a country which allows Filipino citizens and corporations to do business there.
In times of war: For purposes of security of the state, the citizenship of the controlling stockholders
determines the corporations nationality.
IN WHAT WAYS CAN A FOREIGN CORPORATION DO BUSINESS IN THE PHILS.?
(1)Wholly-owned subsidiary; or
(2)Branch office; or
(3)Joint venture with a local partner.
Section 123. Definition and rights of foreign corporations. For the purposes of this Code, a foreign
corporation is one formed, organized or existing under any laws other than those of the Philippines and
whose laws allow Filipino citizens and corporations to do business in its own country or state. It shall have the

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

177

right to transact business in the Philippines after it shall have obtained a license to transact business in this
country in accordance with this Code and a certificate of authority from the appropriate government agency.
(n)
Section 124. Application to existing foreign corporations. Every foreign corporation which on the date of the
effectivity of this Code is authorized to do business in the Philippines under a license therefore issued to it,
shall continue to have such authority under the terms and condition of its license, subject to the provisions of
this Code and other special laws. (n)
Section 125. Application for a license. A foreign corporation applying for a license to transact business in
the Philippines shall submit to the Securities and Exchange Commission a copy of its articles of incorporation
and by-laws, certified in accordance with law, and their translation to an official language of the Philippines, if
necessary. The application shall be under oath and, unless already stated in its articles of incorporation, shall
specifically set forth the following:
1. The date and term of incorporation;
2. The address, including the street number, of the principal office of the corporation in the country or state of
incorporation;
3. The name and address of its resident agent authorized to accept summons and process in all legal
proceedings and, pending the establishment of a local office, all notices affecting the corporation;
4. The place in the Philippines where the corporation intends to operate;
5. The specific purpose or purposes which the corporation intends to pursue in the transaction of its business
in the Philippines: Provided, That said purpose or purposes are those specifically stated in the certificate of
authority issued by the appropriate government agency;
6. The names and addresses of the present directors and officers of the corporation;
7. A statement of its authorized capital stock and the aggregate number of shares which the corporation has
authority to issue, itemized by classes, par value of shares, shares without par value, and series, if any;
8. A statement of its outstanding capital stock and the aggregate number of shares which the corporation has
issued, itemized by classes, par value of shares, shares without par value, and series, if any;
9. A statement of the amount actually paid in; and
10. Such additional information as may be necessary or appropriate in order to enable the Securities and
Exchange Commission to determine whether such corporation is entitled to a license to transact business in
the Philippines, and to determine and assess the fees payable.
Attached to the application for license shall be a duly executed certificate under oath by the authorized official
or officials of the jurisdiction of its incorporation, attesting to the fact that the laws of the country or state of the
applicant allow Filipino citizens and corporations to do business therein, and that the applicant is an existing
corporation in good standing. If such certificate is in a foreign language, a translation thereof in English under
oath of the translator shall be attached thereto.
The application for a license to transact business in the Philippines shall likewise be accompanied by a
statement under oath of the president or any other person authorized by the corporation, showing to the
satisfaction of the Securities and Exchange Commission and other governmental agency in the proper cases

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

178

that the applicant is solvent and in sound financial condition, and setting forth the assets and liabilities of the
corporation as of the date not exceeding one (1) year immediately prior to the filing of the application.
Foreign banking, financial and insurance corporations shall, in addition to the above requirements, comply
with the provisions of existing laws applicable to them. In the case of all other foreign corporations, no
application for license to transact business in the Philippines shall be accepted by the Securities and
Exchange Commission without previous authority from the appropriate government agency, whenever
required by law. (68a)
Section 126. Issuance of a license. If the Securities and Exchange Commission is satisfied that the
applicant has complied with all the requirements of this Code and other special laws, rules and regulations,
the Commission shall issue a license to the applicant to transact business in the Philippines for the purpose or
purposes specified in such license. Upon issuance of the license, such foreign corporation may commence to
transact business in the Philippines and continue to do so for as long as it retains its authority to act as a
corporation under the laws of the country or state of its incorporation, unless such license is sooner
surrendered, revoked, suspended or annulled in accordance with this Code or other special laws.
Within sixty (60) days after the issuance of the license to transact business in the Philippines, the license,
except foreign banking or insurance corporation, shall deposit with the Securities and Exchange Commission
for the benefit of present and future creditors of the licensee in the Philippines, securities satisfactory to the
Securities and Exchange Commission, consisting of bonds or other evidence of indebtedness of the
Government of the Philippines, its political subdivisions and instrumentalities, or of government-owned or
controlled corporations and entities, shares of stock in "registered enterprises" as this term is defined in
Republic Act No. 5186, shares of stock in domestic corporations registered in the stock exchange, or shares
of stock in domestic insurance companies and banks, or any combination of these kinds of securities, with an
actual market value of at least one hundred thousand (P100,000.) pesos; Provided, however, That within six
(6) months after each fiscal year of the licensee, the Securities and Exchange Commission shall require the
licensee to deposit additional securities equivalent in actual market value to two (2%) percent of the amount
by which the licensees gross income for that fiscal year exceeds five million (P5,000,000.00) pesos. The
Securities and Exchange Commission shall also require deposit of additional securities if the actual market
value of the securities on deposit has decreased by at least ten (10%) percent of their actual market value at
the time they were deposited. The Securities and Exchange Commission may at its discretion release part of
the additional securities deposited with it if the gross income of the licensee has decreased, or if the actual
market value of the total securities on deposit has increased, by more than ten (10%) percent of the actual
market value of the securities at the time they were deposited. The Securities and Exchange Commission
may, from time to time, allow the licensee to substitute other securities for those already on deposit as long as
the licensee is solvent. Such licensee shall be entitled to collect the interest or dividends on the securities
deposited. In the event the licensee ceases to do business in the Philippines, the securities deposited as
aforesaid shall be returned, upon the licensees application therefor and upon proof to the satisfaction of the
Securities and Exchange Commission that the licensee has no liability to Philippine residents, including the
Government of the Republic of the Philippines. (n)
Section 127. Who may be a resident agent. A resident agent may be either an individual residing in the
Philippines or a domestic corporation lawfully transacting business in the Philippines: Provided, That in the
case of an individual, he must be of good moral character and of sound financial standing. (n)
Section 128. Resident agent; service of process. The Securities and Exchange Commission shall require
as a condition precedent to the issuance of the license to transact business in the Philippines by any foreign
corporation that such corporation file with the Securities and Exchange Commission a written power of
attorney designating some person who must be a resident of the Philippines, on whom any summons and
other legal processes may be served in all actions or other legal proceedings against such corporation, and
consenting that service upon such resident agent shall be admitted and held as valid as if served upon the
duly authorized officers of the foreign corporation at its home office. Any such foreign corporation shall
likewise execute and file with the Securities and Exchange Commission an agreement or stipulation,

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

179

executed by the proper authorities of said corporation, in form and substance as follows:
"The (name of foreign corporation) does hereby stipulate and agree, in consideration of its being granted by
the Securities and Exchange Commission a license to transact business in the Philippines, that if at any time
said corporation shall cease to transact business in the Philippines, or shall be without any resident agent in
the Philippines on whom any summons or other legal processes may be served, then in any action or
proceeding arising out of any business or transaction which occurred in the Philippines, service of any
summons or other legal process may be made upon the Securities and Exchange Commission and that such
service shall have the same force and effect as if made upon the duly-authorized officers of the corporation at
its home office."
Whenever such service of summons or other process shall be made upon the Securities and Exchange
Commission, the Commission shall, within ten (10) days thereafter, transmit by mail a copy of such summons
or other legal process to the corporation at its home or principal office. The sending of such copy by the
Commission shall be necessary part of and shall complete such service. All expenses incurred by the
Commission for such service shall be paid in advance by the party at whose instance the service is made.
In case of a change of address of the resident agent, it shall be his or its duty to immediately notify in writing
the Securities and Exchange Commission of the new address. (72a; and n)
Section 129. Law applicable. Any foreign corporation lawfully doing business in the Philippines shall be
bound by all laws, rules and regulations applicable to domestic corporations of the same class, except such
only as provide for the creation, formation, organization or dissolution of corporations or those which fix the
relations, liabilities, responsibilities, or duties of stockholders, members, or officers of corporations to each
other or to the corporation. (73a)
Section 130. Amendments to articles of incorporation or by-laws of foreign corporations. Whenever the
articles of incorporation or by-laws of a foreign corporation authorized to transact business in the Philippines
are amended, such foreign corporation shall, within sixty (60) days after the amendment becomes effective,
file with the Securities and Exchange Commission, and in the proper cases with the appropriate government
agency, a duly authenticated copy of the articles of incorporation or by-laws, as amended, indicating clearly in
capital letters or by underscoring the change or changes made, duly certified by the authorized official or
officials of the country or state of incorporation. The filing thereof shall not of itself enlarge or alter the purpose
or purposes for which such corporation is authorized to transact business in the Philippines. (n)
Section 131. Amended license. A foreign corporation authorized to transact business in the Philippines
shall obtain an amended license in the event it changes its corporate name, or desires to pursue in the
Philippines other or additional purposes, by submitting an application therefor to the Securities and Exchange
Commission, favorably endorsed by the appropriate government agency in the proper cases. (n)
Section 132. Merger or consolidation involving a foreign corporation licensed in the Philippines. One or
more foreign corporations authorized to transact business in the Philippines may merge or consolidate with
any domestic corporation or corporations if such is permitted under Philippine laws and by the law of its
incorporation: Provided, That the requirements on merger or consolidation as provided in this Code are
followed.
Whenever a foreign corporation authorized to transact business in the Philippines shall be a party to a merger
or consolidation in its home country or state as permitted by the law of its incorporation, such foreign
corporation shall, within sixty (60) days after such merger or consolidation becomes effective, file with the
Securities and Exchange Commission, and in proper cases with the appropriate government agency, a copy
of the articles of merger or consolidation duly authenticated by the proper official or officials of the country or
state under the laws of which merger or consolidation was effected: Provided, however, That if the absorbed
corporation is the foreign corporation doing business in the Philippines, the latter shall at the same time file a

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

180

petition for withdrawal of its license in accordance with this Title. (n)
Section 133. Doing business without a license. No foreign corporation transacting business in the
Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in any
action, suit or proceeding in any court or administrative agency of the Philippines; but such corporation may
be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action
recognized under Philippine laws. (69a)
Section 134. Revocation of license. Without prejudice to other grounds provided by special laws, the
license of a foreign corporation to transact business in the Philippines may be revoked or suspended by the
Securities and Exchange Commission upon any of the following grounds:
1. Failure to file its annual report or pay any fees as required by this Code;
2. Failure to appoint and maintain a resident agent in the Philippines as required by this Title;
3. Failure, after change of its resident agent or of his address, to submit to the Securities and Exchange
Commission a statement of such change as required by this Title;
4. Failure to submit to the Securities and Exchange Commission an authenticated copy of any amendment to
its articles of incorporation or by-laws or of any articles of merger or consolidation within the time prescribed
by this Title;
5. A misrepresentation of any material matter in any application, report, affidavit or other document submitted
by such corporation pursuant to this Title;
6. Failure to pay any and all taxes, imposts, assessments or penalties, if any, lawfully due to the Philippine
Government or any of its agencies or political subdivisions;
7. Transacting business in the Philippines outside of the purpose or purposes for which such corporation is
authorized under its license;
8. Transacting business in the Philippines as agent of or acting for and in behalf of any foreign corporation or
entity not duly licensed to do business in the Philippines; or
9. Any other ground as would render it unfit to transact business in the Philippines. (n)
Section 135. Issuance of certificate of revocation. Upon the revocation of any such license to transact
business in the Philippines, the Securities and Exchange Commission shall issue a corresponding certificate
of revocation, furnishing a copy thereof to the appropriate government agency in the proper cases.
The Securities and Exchange Commission shall also mail to the corporation at its registered office in the
Philippines a notice of such revocation accompanied by a copy of the certificate of revocation.
Section 136. Withdrawal of foreign corporations. Subject to existing laws and regulations, a foreign
corporation licensed to transact business in the Philippines may be allowed to withdraw from the Philippines
by filing a petition for withdrawal of license. No certificate of withdrawal shall be issued by the Securities and
Exchange Commission unless all the following requirements are met;
1. All claims which have accrued in the Philippines have been paid, compromised or settled;
2. All taxes, imposts, assessments, and penalties, if any, lawfully due to the Philippine Government or any of

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

181

its agencies or political subdivisions have been paid; and


3. The petition for withdrawal of license has been published once a week for three (3) consecutive weeks in a
newspaper of general circulation in the Philippines.

WHAT IS THE SO-CALLED "GRANDFATHER RULE"?


Where a domestic corporation which has both Philippine and foreign stockholders is an investor in another
domestic corporation which has also both Philippine and foreign stockholders, the so-called "grandfather rule"
is used to determine whether or not the latter corporation is qualified to engage in a partially nationalized
business, i.e. by determining the extent of Philippine equity therein.
Under present SEC rules, if the percentage of Filipino ownership in the first corporation is at least 60%, then
said corporation will be considered as a Philippine national and all of its investment in the second corporation
would be treated as Filipino equity. On the other hand, if the Philippine equity in the first corporation is less
than 60%, then only the number of shares corresponding to such percentage shall be counted as of Philippine
nationality. (See SEC Rule promulgated on 28 Feb. 1967, cited in Opinion # 18, Series of 1989, Department
of Justice, dated 19 January 1989.)
NOTE:The reader would be well-advised to cross-reference this
definition of the "grandfather rule" with a trusted commentary.
PERMITTED AREAS OF INVESTMENT
100% EQUITY: Mass media, except recording
The practice of a profession (law, medicine, etc.)
Operation of rural banks
Cooperatives
Private security agencies
Small-scale mining
Utilization of marine resources
Ownership, operation, and management of cockpits;
Manufacture, repair, stockpiling of nuclear, biological, chemical, and radiological weapons;
Note: Retail trade is no longer required to be 100% Filipino-owned on account
of the Retail Trade Liberalization Act.
75%-25% EQUITY: Inter-island shipping (R.A. 1937, Sec. 8)
Private recruitment
Contracts for construction and repair of locally-funded public
works
Except: Public works that would fall under the BuildOperate-Transfer Law, as well as those that are foreign-funded
70%-30% EQUITY: Advertising
60%-40% EQUITY:Other industries.
LEGAL REQUIREMENS PRIOR TO TRANSACTION OF BUSINESS
Documentary Requirements(Sec. 125)
(1) BOI certificate

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

182

The BOI certificate is issued upon a finding of the Board of Investments that the business operations of the
foreign corp. will contribute to the sound and balanced development of the national economy on a selfsustaining basis. (See Omnibus Investments Code, Sec. 48-49)
NOTE: Applications, if not acted upon within 10 days from official acceptance thereof, shall be considered
automatically approved!(Art. 53, Omnibus Investments Code)
(2) SEC license to do business(Sec. 125)
Application under oath setting forth the information specified in Sec. 125;
Additional information as may be necessary or appropriate to enable the SEC to determine whether the
corporation is entitled to a license to transact business in the Philippines, and to determine and assess the
fees payable;
Duly executed certificate under oath by authorized official/s of the jurisdiction of the company's incorporation,
attesting to the fact that the laws of the country of the applicant allow Filipino citizens and corporations to do
business therein, and that the applicant is an existing corporation in good standing;
Statement under oath of the president or any other person authorized by the corporation showing that the
applicant is solvent and in good financial condition, and setting forth the assets and liabilities of the
corporation within 1 year immediately prior to the application.
(3) Certificate from appropriate government agency
NOTE: Certain sectors such as banking, insurance, etc. require prior approval
from the government agencies concerned. (Sec. 17)
Deposit requirement(Sec. 126)
Within 60 days after the issuance of the license, the licensee shall deposit with the SEC securities with an
actual market value of at least P 100,000.00. These securities are for the benefit of present and future
creditors, and shall consist of any of the following:
Bonds or other evidence of indebtedness of the Government or its instrumentalities, etc.;
Shares of stock in "registered enterprises" as defined in R.A. 5186;
Shares of stock in domestic corporations registered in the stock exchange;
Shares of stock in domestic insurance companies and banks.
Once the licensee ceases to do business in the Philippines, these deposited securities shall be returned,
upon the licensee's application and proof to the satisfaction of the SEC that the licensee has no liability to
Philippine residents or the Philippine government.
Note: Foreign banking and insurance corporations are the exceptions to this requirement.
Designation of a resident agent(Sec. 128)
The designation of a resident agent is a condition precedent to the issuance of the license to transact
business in the Philippines.
WHO: A resident of the Philippines.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

183

PURPOSE:To be served any summons and other legal processes which may be served in all actions or other
legal proceedings against such corporation. Service upon such resident shall be admitted and held as valid as
if served upon the duly authorized officers of the foreign corporation at its home office.
LAWS APPLICABLE TO FOREIGN CORPORATION
Foreign corporations lawfully doing business in the Philippines are bound by all laws, rules and regulations
applicable to domestic corporations of the same class.
Exceptions:
1. As regards the creation, formation, organization or dissolution of the corporation;
2. As regards the fixing of relations, liabilities, responsibilities, or duties of stockholders, members, or officers
or corporations to each other or to the corporation (Sec. 129)
EFFECTS OF FAILURE TO SECURE SEC LICENSE
WHAT ARE THE EFFECTS OF FAILURE TO SECURE A LICENSE?
1. The corporation will not be permitted to maintain agency in the Philippines;
2. The corporation will be subject to penalties and fines;
3. The corporation will not be permitted to maintain or intervene in any action before Philippine courts or
administrative agencies; it can be SUED.
MARSHALL WELLS Co v HENRY W. ELSER & CO
SUPER CORPO REVIEWER: Marshall Wells, a corporation organized under the State of Oregon, sued a
domestic corp. for the unpaid balance on a bill of goods. Defendant demurred to the complaint on the ground
that it did not show that plaintiff had complied with the law regarding corp. desiring to do business in the Phil.,
nor that the plaintiff was authorized to do business in the Phil.
The Supreme Court, in ruling for Marshall Wells, stated that the object of the statute was to subject the foreign
corp. doing business in the Phil. to the jurisdiction of its courts. The object of the statute was not to prevent it
from performing single acts but to prevent it from acquiring a domicile for the purpose without taking the steps
necessary to render it amenable to suit in the local courts. The implication of the law is that it was never the
purpose of the Legislature to exclude a foreign corp. which happens to obtain an isolated order for business
from the Phil., from securing redress in Phil. Courts, and thus, in effect to permit persons to avoid their
contract made with such foreign corporation.
HOW COURTS ACQUIRE JURISDICTION OVER FOREIGN CORPORATIONS?
As a rule, jurisdiction over a foreign corporation is acquired by the courts through service of summons on its
resident agent.
If there is no assigned resident agent, the government official designated by law can receive the summons
on their behalf and transmit the same to them by registered mail within 10 days. This will complete the service
of the summons. Summons can also be served on any of the corporation's officers or agents within the
Philippines.(See Sec. 128; Rule 14, Sec. 12, Rules of Court. Note that while Sec. 128 presupposes that the
foreign corporation has a license, Rule 14 does not make such an assumption.)
Note that if there is a designated agent, summons served upon the government official is not deemed a valid
process.
vJohnlo Trading case holds that the service on the attorney of an FC who was also charged with the duty of
settling claims against it is valid since no other agent was duly appointed.
vService on Officers or Agents of an foreign corporations domestic subsidiary will only vest jurisdiction if there
is sufficient ground to disregard the separate personalities.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

184

WITHDRAWAL OF FOREIGN CORPORATIONS (Sec 136, see above)


HOW:By filing a petition for withdrawal of license
REQUISITES FOR ISSUANCE OF CERTIFICATE OF WITHDRAWAL:
1. All claims which have accrued in the Philippines have been paid, compromised and settled;
2. All taxes, imposts, assessments, and penalties, if any, lawfully due to the Philippine Government or
any of its agencies or political subdivisions have been paid; and
3. The petition for withdrawal of license has been published once a week for 3 consecutive weeks in a
newspaper of general circulation in the Philippines.
REVOCATION AND SUSPENSION OF LICENSE (Sec 134, see above)
WHAT ARE THE GROUNDS FOR REVOCATION OR SUSPENSION OF A LICENSE OF A FOREIGN
CORPORATION?
1. Failure to file its annual report or pay any fees as required by the Corporation Code;
2. Failure to appoint and maintain a resident agent in the Philippines as required;
3. Failure, after change of resident agent or of his address, to submit to the SEC a statement of such
change;
4. Failure to submit to the SEC an authenticated copy of any amendment to its AOI or by-laws or of any
articles of merger or consolidation within the time prescribed by the Code;
5. A misrepresentation of any material matter in any application, report, affidavit or other document
submitted by such corporation pursuant to Title XV;
6. Failure to pay any and all taxes, imposts, assessments or penalties, if any, lawfully due to the
Philippine government or any of its agencies or political subdivisions;
7. Transacting business in the Philippines outside of the purpose/s for which such corporation is
authorized under its license;
8. Transacting business in the Philippine as agent of or acting for and in behalf of any foreign
corporation or entity not duly licensed to do business in the Philippines; or
9. Any other ground as would render it unfit to transact business in the Philippines.
WESTERN EQUIPMENT & SUPPLY CO. v REYES et. al
ATLANTIC MUTUAL INSURANCE CO. v CONTINENTAL INSURANCE CO v CEBU STEVEDORING
SUPER CORPO REVIEWER: A foreign corp. engaged in business in the Phil. can maintain suit in this
jurisdiction if it is duly licensed. If a foreign corp. is not engaged in business in the Phil., it can maintain such
suit if the transaction sued upon is singular and isolated, in which no license is required. In either case, the
fact of compliance with the requirement of license, or the fact that the suing corp. is exempt therefrom, as the
case may be, cannot be inferred from the mere fact that the party suing is a foreign corp. The qualifying
circumstance, being an essential part of the element of the plaintiffs capacity to sue, must be affirmatively
pleaded. In short, facts showing foreign corporations capacity to sue should be pleaded.
GENERAL GARMENTS CORP v DIRECTOR of PATENTS
SUPER CORPO REVIEWER: Domestic corporation General Garments registered Puritan trademark for its
mens wear. US corporation Puritan Sportswear petitioned the Phil. Patent Office for cancellation of said
trademark, alleging its ownership and prior use in the Phil.
The Supreme Court held that a foreign corp. which does not do business in the Phil. and is unlicensed but is
widely known in the Phil. through the use of its products here has legal right to maintain an action to protect

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

185

its reputation, corporate name and goodwill. The right to use the corporate name is a property right which the
corp. may assert and protect in any of the courts of the world.
LEVITON INDUSTRIES et al v HON. SERAFIN SALVADOR
FACTS:
1. On 17 April 1973, private respondent Leviton Manufacturing Co., Inc. filed a complaint for unfair
competition against petitioners Leviton Industries, Nena de la Cruz Lim, Domingo Go and Lim Kiat
before the Court of First Instance of Rizal, Branch XXXIII, presided by respondent Judge Serafin
Salvador.
2. The complaint substantially alleges that the plaintiff, Leviton Manufacturing Co., Inc. is a foreign
corporation organized and existing under the laws of the State of New York, United States of America,
with office located at 236 Greenpoint Avenue, Brooklyn City, State of New York, USA; that the
defendant Leviton Industries is a partnership organized and existing under the laws of the Philippines
with the principal office at 382 10 th Avenue, Grace Park, Caloocan City. Private defendants in this
case are partners of Leviton Industries.
3. Leviton Manufacturing Co., Inc. was founded in 1906 by Isidor Leviton. It is the largest manufacturer
of electrical wiring devices in the United States under the trademark Leviton, which various electrical
wing devices bearing the trademark Leviton and trade name Leviton Manufacturing Co., Inc. had
been exported to the Philippines since 1954; that due to the superior quality and widespread use of
its products by the public, the same was well known to Filipino consumers.
4. Long subsequent to the use of plaintiffs trademark and trade name in the Philippines, defendants
began manufacturing and selling electrical ballast, fuse and oval buzzer under the trademark Leviton
and trade name Leviton Industries Co.
5. Domingo Go, partner and general manager of defendant partnership, Leviton Industries, had
registered with the Philippine Patent Office the trademarks Leviton Label and Leviton with respect to
the ballast and fuse under Certificate Nos. SR-1132 and 15517, respectively.
6. The defendants not only used the trademark Leviton but likewise copied the design used by the
plaintiff in distinguishing its trademark; and that the use thereof by defendants of its products would
cause confusion in the minds of the consumers and likely to deceive them as to the source of origin,
thereby enabling the defendants to pass off their products as those of plaintiffs.
7. Invoking the provisions of Section 21-A of Republic Act No. 166, plaintiff prayed for damages.
Section 21-A. A foreign corporation or juristic person to which a mark or trade name has been
registered or assigned under this Act may bring an action hereunder for infringement, for unfair
competition, or false designation or origin and fake description, whether or not it has been licensed to
do business in the Philippines under Act Number Fourteen Hundred and Fifty Nine, as amended,
otherwise known as the Corporation Law, at the time it brings complaint: Provided, That the country
of which the said foreign corporation or juristic person is a citizen, or in which it is domiciled by treaty,
convention or law, grants a similar privilege to corporation or juristic persons of the Philippines.
ISSUE: Does plaintiff Leviton Manufacturing Co., Inc. have legal personality, being a foreign corporation, to
sue defendant Leviton Industries?
RULING: NO. Leviton Manufacturing Co., Inc. had failed to allege the essential facts bearing upon its
capacity to sue before the Philippine courts. Section 21-A indicates as a condition sine qua non the
registration of the trade mark of the suing foreign corporation with the Philippine Patent Office or, in the least,
that it be an assignee of such registered trademark. The said section further requires that the country, of
which the plaintiff foreign corporation or juristic person is a citizen or domiciliary, grants to Filipino corporations
or juristic entities the same reciprocal treatment, either through treaty, convention or law.
DOCTRINE: There are two conditions before an action by a foreign corporation under Section 21-A of the
Republic Act No. 166 may prosper:
1. The trade mark or trade name must have been registered by the foreign corporation in the Philippine
Patent Office;
2. That the country of which the foreign corporation is a domiciliary grants similar privileges to Philippine
corporations.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

186

DISPOSITIVE: Leviton Industries Co. won. Motion to dismiss the case filed by Leviton Manufacturing Co., Inc.
is granted.
Separate Opinions
BARREDO, J., concurring:
I concur in the above opinion and judgment as well as the concurring opinion of Justice Aquino.
AQUINO, J., concurring:
Although the case filed by petitioner under Section 21-A had been dismissed for failure to comply with the
necessary requirements, the company still has a cause of action under different provisions:
ADMINISTRATIVE CANCELLATION under Section 17 of Republic Act No. 166
The fact that it has filed with the Patent Office two petitions dated 15 July 1974 for the cancellation of the
trademark Leviton issued to Domingo Go shows that the dismissal of its instant action for unfair competition
does not leave it without any remedy whatsoever. Section 17 does not require that the trademark of the
foreign corporation alleged to have been infringed should be registered.
Take note however of Section 133 of the Corporation Code, which took effect on 1 May 1980:
Section 133. Doing business without a license. No foreign corporation transacting business in the
Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in any
action, suit or proceeding in any court or administrative agency of the Philippines; but such corporation may
be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action
recognized under Philippine laws. (69a)
LA CHEMISE LACOSTE S.A. v FERNANDEZ
SUPER CORPO REVIEWER: A foreign corporation not doing business in the Phil. needs no license to sue in
the Phil. for trademark violations.
Where a violation of our unfair trade laws which provide a penal sanction is alleged, lack of capacity to sue of
injured foreign corp. becomes immaterial (because a criminal offence is essentially an act against the State).
NOTE: Sec. 160 of R.A. 8293(Intellectual Property Code) provides that any foreign national or juridical
person who meets the requirements of Sec. 3 of the Act (i.e., is a national or is domiciled in a country party to
any convention, treaty or agreement relating to intellectual property rights or the repression of unfair
competition, to which the Philippines is also a party, or extends reciprocal rights to Philippine nationals by
law)and does not engage in business in the Philippines may bring a civil or administrative action for
opposition, cancellation, infringement, unfair competition, or false designation of origin and false description,
whether or not it is licensed to do business in the Philippines under existing laws.
CONVERSE RUBBER PRODUCTS v UNIVERSAL PRODS INC.
HOME INSURANCE v EASTERN SHIPPING LINES
SUPER CORPO REVIEWER: A contract entered into by a foreign insurance corp. not licensed to do business
in the Phil. is not necessarily void and the lack of capacity to sue at the time of execution of the contract is
cured by its subsequent registration.
WHAT CONSTITUTES BUSINESS:
WHAT IS CONSIDERED AS NOT DOING BUSINESS, AND THEREFORE NOT SUBJECT TO THE
LICENSING REQUIREMENT?

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

187

1. Mere investment as a shareholder and the exercise of the rights as such investor;
2. Having a nominee director or officer represent the foreign investors interests;
3. Appointing a representative or distributor in the Philippines who transacts business in his own name
and for his own account
Example: Rustans exclusive distributorship of Lacoste t-shirts
4. Publication of a general advertisement;
NOTE: Under the Code of Commerce, the publication of an ad is prima facie evidence (or at least
creates a presumption) of doing business in the Philippines.
5. Maintaining stock of goods for processing by another entity in the Philippines;
6. Consignment of equipment to be used in processing products for export;
7. Collecting information in the Philippines;
8. Performing services incidental to an isolated contract of sale
Example: Installing machinery sold by a foreign corporation to a Philippine buyer
WHAT IS THE TEST OF DOING BUSINESS IN THE PHILIPPINES?
Whether or not there is continuity of transactions which are in pursuance of the normal business of the
corporation. (Metholatum v. Mangaliman)
THE MENTHOLATUM CO. INC v MANGALIMAN
SUPER CORPO REVIEWER: The true test as to whether a foreign corporation is doing business in the
Philippines seems to be whether the foreign corp. is continuing the body or substance of the business for
which it was organized or whether it has substantially retired from it and turned it over to another. The term
implies a continuity of dealings and arrangements and contemplates performance of acts/works or the
exercise of the functions normally incident to and in progressive prosecution of the purpose and object of its
organization.
FAR EASTERN INTERNATIONAL IMPORT & EXPORT CORPORATION v NANKAI KOGYO CO, LTD
FACILITIES MANAGEMENT CORPORATION ET. AL v LEONARDO DE LA OSA,
The Court of Industrial Relations ordered Facilities Management Corporation (FMC) to pay Dela Osa his
overtime compensation, swing shift and graveyard shift premiums. FMC filed a petition for review on certiorari
on the issue of whether the CIR can validly affirm a judgment against persons domiciled outside and not
doing business in the Phil. and over whom it did not acquire jurisdiction.
The Supreme Court held that the petitioner may be considered as doing business in the Philippines within the
scope of Sec. 14, Rule 14 of the Rules of Court:
Sec. 14.Service upon private foreign corp. - If the defendant is a foreign corp., or a non-resident joint stock
corporation or association, doing business in the Phil., service may be made on its resident agent, on the
government official designated by law to the effect, or to an y of its officers or agents within the Philippines.
FMC had appointed Jaime Catuira as its agent with authority to execute Employment Contracts and receive,
on behalf of the corp., legal services from, and be bound by processes of the Phil. Courts, for as long as he
remains an employee of FMS. If a foreign corp. not engaged in business in the Phil., through an Agent, is not
barred from seeking redress from courts in the Phil., that same corp. cannot claim exemption done against a
person or persons in the Phil..
NOTE: Under Sec. 12, Rule 14 of the 1997 Rules of Civil Procedure, the term "doing business" has been
replaced with the phrase "has transacted business,"thereby allowing suits based on isolated transactions.
PACIFIC VEGETABLE OIL CORPORATION v SINGZON,

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

188

SUPER CORPO REVIEWER: This is an action instituted by the plaintiff, a foreign corporation, against the
defendant to recover a sum of money for damages suffered by the plaintiff as a consequence of the failure of
the defendant to deliver copra which he sold and bound himself to deliver to the plaintiff. Defendant filed a
motion to dismiss on the ground that the plaintiff failed to obtain a license to transact business in the Phil and,
consequently, it had no personality to file an action.
Has appellant transacted business in the Philippines in contemplation of law?
Contrary to the findings of the trial court, the copra in question was actually sold by the defendant to the
plaintiff in the US, the agreed price to be covered by an irrevocable letter of credit to be opened at the Bank of
California, and delivery to be made at the port of destination. It follows that the appellant corporation has not
transacted business in the Phil in contemplation of Sec. 68 and 69 which require any foreign corporation to
obtain a license before it could transact business, or before it could have personality to file a suit in the Phil.. It
was never the purpose of the Legislature to exclude a foreign corporation which happens to obtain an isolated
order of business from the Phil., from securing redress in the Phil. Courts, and thus, in effect, to permit
persons to avoid their contracts made with such foreign corp.. The lower court erred in holding that the
appellant corporation has no personality to maintain the present action.
AETNA CASUALTY & SURETY COMPANY v PACIFIC STAR LINE
SUPER CORPO REVIEWER: Aetna as subrogee of I. Shalom sued Pacific Star Line (PSL), the common
carrier for the loss of Linen & Cotton piece goods due to pilferage and damage amounting to US$2,300.00.
PSL contends that Aetna has no license to transact insurance business in the Philippines as gathered from
the Insurance Commission and SEC . It also argues that since said company has filed 13 other civil suits,
they should be considered as doing business here and not merely having entered into an isolated transaction.
Based on rulings in Mentholatum and Eastboard Navigation, the Supreme Court held that Aetna is not
transacting business in the Philippines for which it needs to have a license. The contract was entered into in
New York and payment was made to the consignee in the New York branch. Moreover, Aetna was not
engaged in the business of insurance in the Philippines but was merely collecting a claim assigned to it by
consignee. Because it was not doing business in the Philippines, it was not subject to Sec. 68-69 of the
Corporation Law and therefore was not barred from filing the instant case although it had not secured a
license to transact insurance business in the Philippines.
TOP WELD MANUFACTURING INC v ECED, S.A
FACTS:
1. Petitioner Top-Weld Manufacturing, Inc. (Top-Weld) is a Philippine corporation engaged in the
business of manufacturing and selling welding supplies and equipment. In pursuance to its business,
Top-Weld entered into separate contracts with two different foreign entities:
LICENSE AND TECHNICAL ASSISTANCE AGREEMENT
- Dated 2 January 1972.
- Entered into with IRTI, S.A., (IRTI), a corporation organized and existing under the laws of
Switzerland with principal office at Fribourg, Switzerland.
- By virtue of the agreement, the Top-Weld was constituted a licensee of IRTI to manufacture
welding products under certain specifications, with raw materials to be purchased by TopWeld from supplies designated by IRTI, for a period of 3 years up to 1 January 1975.
- Later extended to 31 December 1975.
DISTRIBUTOR AGREEMENT
- Dated 1 January 1975.
- Entered into with ECED, S.A., (ECED), a company organized and existing under the laws of
Panama with principal office at Apartado 1903 Panama I, City of Panama.
- Under this agreement, the petitioner was designated as ECEDs distributor in the Philippines
of certain welding products and equipment. By its terms, the contract was to remain effective
until terminated by either party upon giving 6 months or 180 days written notice to the other.
2. Top-Weld later on learned that the two foreign entities were negotiating with another group to replace
the petitioner as their licensee and distributor. Top-Weld instituted on 16 June 1975 suit against IRTI,

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

189

ECED, another corporation named EUTECTIC Corporation, organized under the laws of the State of
New York, U.S.A., and an individual named Victor C. Gaerlan, a Filipino citizen alleged to be
representative and employee of these three corporations.
3. Top-Weld sought the issuance of a writ of preliminary injunction to restrain the corporations from
negotiating with third persons or from actually carrying out the transfer of its distributorship and
franchising rights. It also asked the court to prohibit defendants from terminating their contracts, or if
already terminated, from putting into effect and carrying out the terms and the consequences of said
termination until after good faith negotiation on existing contracts between then had been carried out
and completed.
4. Allegedly, respondents in this case are guilty of provisions of No. 9, Section 4 of Republic Act no.
5455 on alien firms doing business in the Philippines.
Section 4. Licenses to do business. No alien and no firm, association, partnership, corporation, or
any other form of business organization formed, organized, chartered or existing under any laws
other than those of the Philippines, or which is not a Philippine National, or more than 30% of the
outstanding capital stock of which is owned or controlled by aliens shall do business or engage in any
economic activity in alien the Philippines, or be registered, licensed, or permitted by the Securities
and Exchange Commission, or by other bureau, office, agency, political subdivision, or instrumentality
of the government, to do business, or engage in an economic activity in the Philippines without first
securing a written certificate from the Board of Investments to the effect
5. IRTI and ECED deny the applicability of the aforementioned law as against them for the reason that
there was no written certificate applied for nor obtained by them from the Board of Investments and
thus the latter cannot legally require them to comply with No.9, Section 4, R.A. No. 5455.
ISSUE: Whether or not IRTI and ECED can be considered as doing business in the Philippines and,
therefore, subject to the provisions of R.A. No. 5455?
RULING: YES. There is no general rule governing principle laid down as to what constitutes doing or
engaging in or transacting business in the Philippines. Each must be judged in the light of its peculiar
circumstances.
The acts of these corporations should be distinguished from a single or isolated business transaction or
occasional, incidental and causal transactions, which do not come within the meaning of the law. Where a
single act or transaction, however, is not merely incidental or causal but indicates the foreign corporations
intention to do other business in the Philippines, said single act or transaction constitutes doing or engaging
in or transacting business in the Philippines.
The true test, however, seems to be whether the foreign corporation is continuing the body or substance of
the business or enterprise for which it was organized or whether it has substantially retired from it and turned
it over to another. The term implies a continuity of commercial dealings and arrangements, and contemplates,
to that extent, the performance of acts or works or the exercise of some of the functions normally incident to,
and in progressive prosecution of, the purpose and object of its organization.
Indeed, the two corporations are considered as doing business in the Philippines as falling within the
description laid down in the next preceding article. IRTI and ECED were doing business and engaging in
economic activity in the Philippines despite not having secured a written certificate or license from the Board
of Investments (BOI).
(To hold that the lack of license or certificate from the BOI would exempt the companies from the applicability
of R.A. No. 5455 cannot be countenanced. Such would open the way for an interpretation that by doing
business in the country without first securing the required written certificate from the BOI, a foreign
corporation may violate or disregard the safeguards which the law, by its provisions, seek to establish.)

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

190

HOWEVER, Top-Weld cannot invoke R.A. No. 5455 against IRTI and ECED because an illegal
situation was created when the parties voluntarily contracted without such license. The parties are
charged with knowledge of the existing law at the time they entered into the contract and at the time it
is to become operative. The rule of pari delicto applies and no remedy could be afforded to the parties
because of their presumptive knowledge that the transaction was tainted with illegality.
DOCTRINE: A foreign corporation is deemed to be doing business in the Philippines and is subject to the
jurisdiction of our courts when there is continuity in commercial dealing and arrangements with local entities
and there is performance of acts or works or the exercise of the functions normally incident to, and in
progressive prosecution of, the purpose and object of its organization.
DISPOSITIVE: The decision of the Court of Appeals is affirmed in that the writ of preliminary injunction is
denied.
SUPER CORPO REVIEWER: Topweld entered into 2 separate contracts with foreign entities: a license and
technical assistance agreement with IRTI, and a distributor agreement with ECED, SA. When Topweld found
out that the foreign corporations were looking into replacing Topweld as licensee and distributor, the latter
went to court to ask for a writ of preliminary injunction to restrain the foreign corporations from negotiating
with 3rdparties as violative of RA 5445 (4).
Although IRTI and ECED were doing business in the Philippines, since they had not secured a license from
BOI, the foreign corporations were not bound by the requirement on termination and Topweld could not invoke
the same against the former. Moreover, it was incumbent upon Topweld to know whether or not IRTI and
ECED were properly authorized to engage in such agreements. The Supreme Court held that both parties
were guilty of violating RA 5445. Being inpari delicto, Topweld was not entitled to the relief prayed for.
ANTAM CONSOLIDATED v CA
SUPER CORPO REVIEWER: Stokely Van Camp Inc. filed a complaint against Banahaw, Antam, Tambunting
and Unicorn for the collection of a sum of money for failure to deliver 500 tons of crude coconut oil. Antam et
al asked for dismissal of case on ground that Stokely was a foreign corporation not licensed to do business in
the Philippines and therefore had no personality to maintain the suit.
The SC held that the transactions entered into by Stokely with Antam et al (3 transactions, either as buyer or
seller) were not a series of commercial dealings which signify an intent on the part of the respondent to do
business in Philippines but constitute an isolated transaction. The records show that the 2ndand
3rdtransactions were entered into because Antam wanted to recover the loss it sustained from the failure of
the petitioners to deliver the crude oil under the first transaction and in order to give the latter a chance to
make good on their obligation. There was only one agreement between the parties, and that was the delivery
of the 500 tons of crude coconut oil.
CLAUDE NEON LIGHTS, FEDERAL INC, v PHILIPPINE ADVERTISING CORPORATION ET. AL,
PHILIPPINE PRODUCTS COMPANY v PRIMATERIA SOCIETE ANONYME POUR LE COMMERCE
EXTERIEUR: PRIMATERIA PHILIPPINES
XIX.

Special corporations
A. Educational corporations C 607-614
Educational corporations other than government-run institutions are governed first by special laws,
second, by the special provisions of the Corporation Code, and lastly, by the general provisions of the
Corporation Code. (Sec. 106)
At least 60% of the authorized capital stock of educational corporations must be owned by Filipino
citizens, and Congress may require increased Filipino equity participation therein. (With the exception
of educational institutions established by religious groups and mission boards, which are not subject
to this equity requirement.)However, control and administration of educational institutions must be

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

191

vested exclusively in citizens of the Philippines. (Art. XIV, Sec. 4 (2), 1987 Constitution)This means
that no alien may be elected as a member of the BOD nor appointed as Principal or officer thereof.
Once a school, college or university has been granted government recognition by the DECS, it must
incorporate within 90 days from the date of such recognition, unless it is expressly exempt by DECS
for special reasons. (Act 2706, Sec. 5)In addition, it must file a copy of its AOI and by-laws with the
DECS. Without the favorable recommendation of the DECS Secretary, the SEC will not accept or
approve such articles. (Sec. 107, Corporation Code)
B. Religious corporations C v2 612- 617 (Sec 109-116)
Religious corporations are governed by Title XIII, Chapter II of the Corporation Code and by the
general provisions of the Code on non-stock corporations insofar as they may be applicable. (Sec.
109)
Corporation sole(Sec. 110-115)
A corporation sole is an incorporated office, composed of a single individual who may be a bishop,
priest, minister or presiding officer of a religious sect, denomination or church. Its purpose is to
administer and manage as trustee the property and affairs of such religious sect, denomination or
church, within the territorial jurisdiction of such office. (Sec. 110; Sec. 111 (3))
In case of death, resignation, transfer or removal of the person in office, his successor replaces him
and continues the corporation sole. The property is not owned but is merely administered by the
corporation sole, and ownership pertains to the church or congregation he represents. On the other
hand, he is the person authorized by law as the administrator thereof and the court may take judicial
notice of such fact and of the fact that the parish priests have no control over such property.
In determining whether the constitutional provision requiring 60% Filipino capital for corporation
ownership of private agricultural lands, the Supreme Court has held that it is the nationality of the
constituents of the diocese, and not the nationality of the actual incumbent of the office, which must
be taken into consideration. Thus, where at least 60% of the constituents are Filipinos, land may be
registered in the name of the corporation sole, although the holder of the office is an alien. This ruling
is based on the fact that the corporation sole is not the owner but merely the administrator of the
property, and that he holds it in trust for the faithful of the diocese concerned. (See Gana v. Roman
Catholic Archbishop of Manila, 43 O.G. No. 8, 3225; 1947)
Religious societies(Sec. 116)
In contrast to a corporation sole, religious societies are composed of more than one person. The
requirements for incorporation of such societies are set forth in Sec. 116 of the Code.
C. Close corporations C V2 Sec 96-105
Section 96. Definition and applicability of Title. - A close corporation, within the meaning of this Code,
is one whose articles of incorporation provide that: (1) All the corporations issued stock of all classes,
exclusive of treasury shares, shall be held of record by not more than a specified number of persons,
not exceeding twenty (20); (2) all the issued stock of all classes shall be subject to one or more
specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any
stock exchange or make any public offering of any of its stock of any class. Notwithstanding the
foregoing, a corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its
voting stock or voting rights is owned or controlled by another corporation which is not a close
corporation within the meaning of this Code.
Any corporation may be incorporated as a close corporation, except mining or oil companies, stock
exchanges, banks, insurance companies, public utilities, educational institutions and corporations

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

192

declared to be vested with public interest in accordance with the provisions of this Code.
The provisions of this Title shall primarily govern close corporations: Provided, That the provisions of
other Titles of this Code shall apply suppletorily except insofar as this Title otherwise provides.
Section 97. Articles of incorporation. The articles of incorporation of a close corporation may
provide:
1. For a classification of shares or rights and the qualifications for owning or holding the same and
restrictions on their transfers as may be stated therein, subject to the provisions of the following
section;
2. For a classification of directors into one or more classes, each of whom may be voted for and
elected solely by a particular class of stock; and
3. For a greater quorum or voting requirements in meetings of stockholders or directors than those
provided in this Code.
The articles of incorporation of a close corporation may provide that the business of the corporation
shall be managed by the stockholders of the corporation rather than by a board of directors. So long
as this provision continues in effect:
1. No meeting of stockholders need be called to elect directors;
2. Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed
to be directors for the purpose of applying the provisions of this Code; and
3. The stockholders of the corporation shall be subject to all liabilities of directors.
The articles of incorporation may likewise provide that all officers or employees or that specified
officers or employees shall be elected or appointed by the stockholders, instead of by the board of
directors.
Section 98. Validity of restrictions on transfer of shares. Restrictions on the right to transfer shares
must appear in the articles of incorporation and in the by-laws as well as in the certificate of stock;
otherwise, the same shall not be binding on any purchaser thereof in good faith. Said restrictions shall
not be more onerous than granting the existing stockholders or the corporation the option to purchase
the shares of the transferring stockholder with such reasonable terms, conditions or period stated
therein. If upon the expiration of said period, the existing stockholders or the corporation fails to
exercise the option to purchase, the transferring stockholder may sell his shares to any third person.
Section 99. Effects of issuance or transfer of stock in breach of qualifying conditions. 1. If stock of a close corporation is issued or transferred to any person who is not entitled under any
provision of the articles of incorporation to be a holder of record of its stock, and if the certificate for
such stock conspicuously shows the qualifications of the persons entitled to be holders of record
thereof, such person is conclusively presumed to have notice of the fact of his ineligibility to be a
stockholder.
2. If the articles of incorporation of a close corporation states the number of persons, not exceeding
twenty (20), who are entitled to be holders of record of its stock, and if the certificate for such stock
conspicuously states such number, and if the issuance or transfer of stock to any person would cause

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

193

the stock to be held by more than such number of persons, the person to whom such stock is issued
or transferred is conclusively presumed to have notice of this fact.
3. If a stock certificate of any close corporation conspicuously shows a restriction on transfer of stock
of the corporation, the transferee of the stock is conclusively presumed to have notice of the fact that
he has acquired stock in violation of the restriction, if such acquisition violates the restriction.
4. Whenever any person to whom stock of a close corporation has been issued or transferred has, or
is conclusively presumed under this section to have, notice either (a) that he is a person not eligible to
be a holder of stock of the corporation, or (b) that transfer of stock to him would cause the stock of the
corporation to be held by more than the number of persons permitted by its articles of incorporation to
hold stock of the corporation, or (c) that the transfer of stock is in violation of a restriction on transfer
of stock, the corporation may, at its option, refuse to register the transfer of stock in the name of the
transferee.
5. The provisions of subsection (4) shall not be applicable if the transfer of stock, though contrary to
subsections (1), (2) or (3), has been consented to by all the stockholders of the close corporation, or if
the close corporation has amended its articles of incorporation in accordance with this Title.
6. The term "transfer", as used in this section, is not limited to a transfer for value.
7. The provisions of this section shall not impair any right which the transferee may have to rescind
the transfer or to recover under any applicable warranty, express or implied.
Section 100. Agreements by stockholders. 1. Agreements by and among stockholders executed before the formation and organization of a close
corporation, signed by all stockholders, shall survive the incorporation of such corporation and shall
continue to be valid and binding between and among such stockholders, if such be their intent, to the
extent that such agreements are not inconsistent with the articles of incorporation, irrespective of
where the provisions of such agreements are contained, except those required by this Title to be
embodied in said articles of incorporation.
2. An agreement between two or more stockholders, if in writing and signed by the parties thereto,
may provide that in exercising any voting rights, the shares held by them shall be voted as therein
provided, or as they may agree, or as determined in accordance with a procedure agreed upon by
them.
3. No provision in any written agreement signed by the stockholders, relating to any phase of the
corporate affairs, shall be invalidated as between the parties on the ground that its effect is to make
them partners among themselves.
4. A written agreement among some or all of the stockholders in a close corporation shall not be
invalidated on the ground that it so relates to the conduct of the business and affairs of the
corporation as to restrict or interfere with the discretion or powers of the board of directors: Provided,
That such agreement shall impose on the stockholders who are parties thereto the liabilities for
managerial acts imposed by this Code on directors.
5. To the extent that the stockholders are actively engaged in the management or operation of the
business and affairs of a close corporation, the stockholders shall be held to strict fiduciary duties to
each other and among themselves. Said stockholders shall be personally liable for corporate torts
unless the corporation has obtained reasonably adequate liability insurance.

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

194

Section 101. When board meeting is unnecessary or improperly held. - Unless the by-laws provide
otherwise, any action by the directors of a close corporation without a meeting shall nevertheless be
deemed valid if:
1. Before or after such action is taken, written consent thereto is signed by all the directors; or
2. All the stockholders have actual or implied knowledge of the action and make no prompt objection
thereto in writing; or
3. The directors are accustomed to take informal action with the express or implied acquiescence of
all the stockholders; or
4. All the directors have express or implied knowledge of the action in question and none of them
makes prompt objection thereto in writing.
If a directors meeting is held without proper call or notice, an action taken therein within the corporate
powers is deemed ratified by a director who failed to attend, unless he promptly files his written
objection with the secretary of the corporation after having knowledge thereof.
Section 102. Pre-emptive right in close corporations. The pre-emptive right of stockholders in close
corporations shall extend to all stock to be issued, including reissuance of treasury shares, whether
for money, property or personal services, or in payment of corporate debts, unless the articles of
incorporation provide otherwise.
Section 103. Amendment of articles of incorporation. Any amendment to the articles of
incorporation which seeks to delete or remove any provision required by this Title to be contained in
the articles of incorporation or to reduce a quorum or voting requirement stated in said articles of
incorporation shall not be valid or effective unless approved by the affirmative vote of at least twothirds (2/3) of the outstanding capital stock, whether with or without voting rights, or of such greater
proportion of shares as may be specifically provided in the articles of incorporation for amending,
deleting or removing any of the aforesaid provisions, at a meeting duly called for the purpose.
Section 104. Deadlocks. Notwithstanding any contrary provision in the articles of incorporation or
by-laws or agreement of stockholders of a close corporation, if the directors or stockholders are so
divided respecting the management of the corporations business and affairs that the votes required
for any corporate action cannot be obtained, with the consequence that the business and affairs of
the corporation can no longer be conducted to the advantage of the stockholders generally, the
Securities and Exchange Commission, upon written petition by any stockholder, shall have the power
to arbitrate the dispute. In the exercise of such power, the Commission shall have authority to make
such order as it deems appropriate, including an order: (1) cancelling or altering any provision
contained in the articles of incorporation, by-laws, or any stockholders agreement; (2) cancelling,
altering or enjoining any resolution or act of the corporation or its board of directors, stockholders, or
officers; (3) directing or prohibiting any act of the corporation or its board of directors, stockholders,
officers, or other persons party to the action; (4) requiring the purchase at their fair value of shares of
any stockholder, either by the corporation regardless of the availability of unrestricted retained
earnings in its books, or by the other stockholders; (5) appointing a provisional director; (6) dissolving
the corporation; or (7) granting such other relief as the circumstances may warrant.
A provisional director shall be an impartial person who is neither a stockholder nor a creditor of the
corporation or of any subsidiary or affiliate of the corporation, and whose further qualifications, if any,
may be determined by the Commission. A provisional director is not a receiver of the corporation and
does not have the title and powers of a custodian or receiver. A provisional director shall have all the
rights and powers of a duly elected director of the corporation, including the right to notice of and to

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

195

vote at meetings of directors, until such time as he shall be removed by order of the Commission or
by all the stockholders. His compensation shall be determined by agreement between him and the
corporation subject to approval of the Commission, which may fix his compensation in the absence of
agreement or in the event of disagreement between the provisional director and the corporation.
Section 105. Withdrawal of stockholder or dissolution of corporation. In addition and without
prejudice to other rights and remedies available to a stockholder under this Title, any stockholder of a
close corporation may, for any reason, compel the said corporation to purchase his shares at their fair
value, which shall not be less than their par or issued value, when the corporation has sufficient
assets in its books to cover its debts and liabilities exclusive of capital stock: Provided, That any
stockholder of a close corporation may, by written petition to the Securities and Exchange
Commission, compel the dissolution of such corporation whenever any of acts of the directors,
officers or those in control of the corporation is illegal, or fraudulent, or dishonest, or oppressive or
unfairly prejudicial to the corporation or any stockholder, or whenever corporate assets are being
misapplied or wasted.
WHAT ARE THE REQUISITES OF A CLOSE CORPORATION?(Sec. 96)
A close corporation, within the meaning of the Corporation Code, is one whose articles of
incorporation provide that:
1. All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of
record by not more than a specified number of persons not exceeding 20;
2. All the issued stock of all classes shall be subject to one or more specified restrictions on transfer
permitted by Title XII of the Code; and
3. The corporation shall not list in any stock exchange or make any public offering of any of its stock
of any class.
Notes:
A narrow distribution of ownership does not, by itself, make a close corporation. (San Juan Structural
and Steel Fabricators v. CA, 296 SCRA 631)
A corporation shall not be deemed a close corporation when at least 2/3 of its voting stock or voting
rights is owned or controlled by another corporation which is not a close corporation.
CAN A CORPORATION THAT IS NOT A CLOSE CORPORATION BE A STOCKHOLDER IN A
CLOSE CORPORATION? YES, provided that said corporation owns less than 2/3 of voting stock or
voting rights.
WHAT ENTITIES MAY NOT BE ORGANIZED AS CLOSE CORPORATIONS? (Sec. 96)
Mining
Oil
Stock Exchange
Bank
Insurance
Public Utilities
Educational Institutions
Corporations declared vested with public interest
XX.

Miscellaneous provisions - Sec 137-145


Section 137. Outstanding capital stock defined. The term "outstanding capital stock", as used in this Code,
means the total shares of stock issued under binding subscription agreements to subscribers or stockholders,
whether or not fully or partially paid, except treasury shares. (n)

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

196

Section 138. Designation of governing boards. The provisions of specific provisions of this Code to the
contrary notwithstanding, non-stock or special corporations may, through their articles of incorporation or their
by-laws, designate their governing boards by any name other than as board of trustees. (n)
Section 139. Incorporation and other fees. The Securities and Exchange Commission is hereby authorized
to collect and receive fees as authorized by law or by rules and regulations promulgated by the
Commission.1wphi1 (n)
Section 140. Stock ownership in certain corporations. Pursuant to the duties specified by Article XIV of the
Constitution, the National Economic and Development Authority shall, from time to time, make a
determination of whether the corporate vehicle has been used by any corporation or by business or industry
to frustrate the provisions thereof or of applicable laws, and shall submit to the Batasang Pambansa,
whenever deemed necessary, a report of its findings, including recommendations for their prevention or
correction.
Maximum limits may be set by the Batasang Pambansa for stockholdings in corporations declared by it to be
vested with a public interest pursuant to the provisions of this section, belonging to individuals or groups of
individuals related to each other by consanguinity or affinity or by close business interests, or whenever it is
necessary to achieve national objectives, prevent illegal monopolies or combinations in restraint or trade, or to
implement national economic policies declared in laws, rules and regulations designed to promote the general
welfare and foster economic development.
In recommending to the Batasang Pambansa corporations, businesses or industries to be declared vested
with a public interest and in formulating proposals for limitations on stock ownership, the National Economic
and Development Authority shall consider the type and nature of the industry, the size of the enterprise, the
economies of scale, the geographic location, the extent of Filipino ownership, the labor intensity of the activity,
the export potential, as well as other factors which are germane to the realization and promotion of business
and industry.
Section 141. Annual report or corporations. Every corporation, domestic or foreign, lawfully doing business
in the Philippines shall submit to the Securities and Exchange Commission an annual report of its operations,
together with a financial statement of its assets and liabilities, certified by any independent certified public
accountant in appropriate cases, covering the preceding fiscal year and such other requirements as the
Securities and Exchange Commission may require. Such report shall be submitted within such period as may
be prescribed by the Securities and Exchange Commission. (n)
Section 142. Confidential nature of examination results. All interrogatories propounded by the Securities
and Exchange Commission and the answers thereto, as well as the results of any examination made by the
Commission or by any other official authorized by law to make an examination of the operations, books and
records of any corporation, shall be kept strictly confidential, except insofar as the law may require the same
to be made public or where such interrogatories, answers or results are necessary to be presented as
evidence before any court. (n)
Section 143. Rule-making power of the Securities and Exchange Commission. The Securities and
Exchange Commission shall have the power and authority to implement the provisions of this Code, and to
promulgate rules and regulations reasonably necessary to enable it to perform its duties hereunder,
particularly in the prevention of fraud and abuses on the part of the controlling stockholders, members,
directors, trustees or officers. (n)
Section 144. Violations of the Code. Violations of any of the provisions of this Code or its amendments not
otherwise specifically penalized therein shall be punished by a fine of not less than one thousand ( P1,000.00)
pesos but not more than ten thousand (P10,000.00) pesos or by imprisonment for not less than thirty (30)
days but not more than five (5) years, or both, in the discretion of the court. If the violation is committed by a

AU BAYLON BORLAGDAN DIESTA FRANCISCO FLORES HUNG GUIAO MATIAS PILLENA//CORPORATION LAW REVIEWER 2014

197

corporation, the same may, after notice and hearing, be dissolved in appropriate proceedings before the
Securities and Exchange Commission: Provided, That such dissolution shall not preclude the institution of
appropriate action against the director, trustee or officer of the corporation responsible for said violation:
Provided, further, That nothing in this section shall be construed to repeal the other causes for dissolution of a
corporation provided in this Code. (190 1/2 a)
Section 145. Amendment or repeal. No right or remedy in favor of or against any corporation, its
stockholders, members, directors, trustees, or officers, nor any liability incurred by any such corporation,
stockholders, members, directors, trustees, or officers, shall be removed or impaired either by the subsequent
dissolution of said corporation or by any subsequent amendment or repeal of this Code or of any part thereof.
The SEC has the power to issue rules and regulations reasonably necessary to enable it to perform its duties
under the Code, particularly in the prevention of fraud and abuses on the part of the controlling stockholders,
members, directors, trustees or officers. (Sec. 143)
Whenever the SEC conducts any examination of the operations, books and records of any corporation, the
results thereof must be kept strictly confidential, unless the law requires them to be made public or where
they are necessary evidence before any court. (Sec. 142)
All domestic and foreign corporations doing business in the Philippines must submit an annual report to the
SEC of its operations, with a financial statement of its assets and liabilities and such other requirements as
the SEC may impose. (Sec. 141)
No right or remedy in favor of or against, nor any liability incurred by, any corporation, its stockholders,
members, directors, trustees or officers, may be removed or impaired by the subsequent dissolution of said
corporation or by any subsequent amendment or repeal of the Code. (Sec. 145)
Violations of the Corporation Code not otherwise specifically penalized therein are punishable by a fine of not
less than P 1,000.00 but not more than P 10,000.00 or by imprisonment for not less than 30 days but not
more than 5 years, or both, in the discretion of the court. If the violation is committed by a corporation, the
same may be dissolved in appropriate proceedings before the SEC. (Sec. 144)