JHEZ NOTES ON CORPORATION LAW

2015 ARELLANO UNIVERSITY SCHOOL OF LAW

ATTY. RUBEN C. LADIA

Saturday 1:00PM-4:00PM Voting Requirements in the Election of
Sunday 1:00PM-3:00PM Directors/Trustees

Majority of the outstanding capital stock

MIDTERM EXAMS LAST MINUTE TIPS (in person or proxy)
Viva voce; otherwise, by ballot, upon
Corporation by Estoppel;
1
Ostensible request by any voting stockholder
5
Corporation Cumulative voting for stock
corporations (not available in non-stock
corporations unless allowed by the
Section 21. Corporation by estoppel. All
articles of incorporation or by-laws
persons who assume to act as a corporation
knowing it to be without authority to do so shall
President must be a Director
be liable as general partners for all debts,
Treasurer may or may not be a Director
liabilities and damages incurred or arising as a
Secretary a resident and citizen of the
result thereof: Provided, however, That when
Philippines
any such ostensible corporation is sued on any
transaction entered by it as a corporation or on
Not Allowed:
any tort committed by it as such, it shall not be
allowed to use as a defense its lack of corporate President and Secretary
personality. President and Treasurer

On who assumes an obligation to an ostensible Reason for Cumulative Voting: to allow

corporation as such, cannot resist performance minority to have a rightful representation
thereof on the ground that there was in fact no
corporation.
Cash, Property, Stock dividends re Total
N.B. Assets;
The doctrine of corporation by estoppel applies
against a third party only when he tries to Section 43. Power to declare dividends. - The
escape liability on a contract from which he has board of directors of a stock corporation may
benefitted on the irrelevant ground of defective declare dividends out of the unrestricted
incorporation.
2 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:
3 4 Provided, That any cash dividends due on
Common Shares v. Founders Shares
delinquent stock shall first be applied to the
unpaid balance on the subscription plus costs
Common Shares Founders Shares
and expenses, while stock dividends shall be
One which entitle its May exercise exclusive
withheld from the delinquent stockholder until his
owner to an equal pro- right to vote and be
unpaid subscription is fully paid: Provided,
rata division of profits voted for in the election
without preference or of directors within a
further, That no stock dividend shall be issued
advantage over any limited period (not to without the approval of stockholders
other stockholder; May exceed five years) to representing not less than two-thirds (2/3) of the
be denied the right to the exclusion of the outstanding capital stock at a regular or special
vote in favor of others. meeting duly called for the purpose.
Founders shares

1
Ladia, The Corporation Code of the Philippines
(Annotated), Revised (2007) Edition, p.74
2
Supra, p.75
3 5
Supra, p.53 Total No. of Votes = [No. of Shares] x [No. of
4
Supra, p.58 Directors]; may be given to only one Director

Notes By: ENGR. JESSIE A. SALVADOR, MPICE | http://wordpress.com/engrjhez Page 1

 JHEZ NOTES ON CORPORATION LAW
2015 ARELLANO UNIVERSITY SCHOOL OF LAW

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.
Subscribed Capital Stock v. Subscribers
Subscription
Nationality v. Residency requirements, as to
incorporation
Nationality Residency
Relevant in determining Relevant in determining
the compliance with the qualification of
Constitution and incorporators (a majority
nationality laws as to of whom are residents of
minimum Filipino the Philippines)
ownership
Minimum Authorized Capital Stock
Section 12. Minimum capital stock required
of stock corporations. Stock corporations
incorporated under this Code shall not be
required to have any minimum authorized capital
stock except as otherwise specifically provided
for by special law, and subject to the provisions
of the following section.

Section 13. Amount of capital stock to be

subscribed and paid for the purposes of Minimum Paid-up Capital
incorporation. At least twenty-five percent
(25%) of the authorized capital stock as stated in Section 13. x x x Provided, however, That in no
the articles of incorporation must be subscribed case shall the paid-up capital be less than five
at the time of incorporation, and at least twenty- Thousand (P5,000.00) pesos.
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
Quorum
of subscription without need of call, or in the
absence of a fixed date or dates, upon call for
Section 25. Corporate officers, quorum. xxx
payment by the board of directors: Provided,
however, That in no case shall the paid-up
The directors or trustees and officers to be
capital be less than five Thousand (P5,000.00)
elected shall perform the duties enjoined on
pesos.
them by law and the by-laws of the corporation.
Unless the articles of incorporation or the by-
laws provide for a greater majority, a majority of
Section 61. Pre-incorporation subscription.
the number of directors or trustees as fixed in
A subscription for shares of stock of a
the articles of incorporation shall constitute a
corporation still to be formed shall be irrevocable
quorum for the transaction of corporate
for a period of at least six (6) months from the
business, and every decision of at least a
date of subscription, unless all of the other
majority of the directors or trustees present at a
subscribers consent to the revocation, or unless
meeting at which there is a quorum shall be
the incorporation of said corporation fails to
valid as a corporate act, except for the election
materialize within said period or within a longer
of officers which shall require the vote of a
period as may be stipulated in the contract of
majority of all the members of the board.
subscription: Provided, That no pre-
incorporation subscription may be revoked after
Directors or trustees cannot attend or vote by
the submission of the articles of incorporation to
proxy at board meetings.
the Securities and Exchange Commission.

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 JHEZ NOTES ON CORPORATION LAW
2015 ARELLANO UNIVERSITY SCHOOL OF LAW
Section 52. Quorum in meetings. Unless
otherwise provided for in this Code or in the by-
laws, a quorum shall consist of the stockholders
representing a majority of the outstanding
capital stock or a majority of the members in
the case of non-stock corporations. (n)
Section 97. Articles of incorporation. The
articles of incorporation of a close corporation
may provide:
xxx
3. For a greater quorum or voting
requirements in meetings of
stockholders or directors than those
provided in this Code.
Redeemable Shares
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.
Close Corporation
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
Notes By: ENGR. JESSIE A. SALVADOR, MPICE | http://wordpress.com/engrjhez
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 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.
Four (4) Liabilities of BOD, personally and
solidarily
willfully and knowingly vote for patently
unlawful acts of the corporation
willfully and knowingly assent to patently
unlawful acts of the corporation
gross negligence or bad faith in directing
the affairs of the corporation
acquire any personal or pecuniary
interest in conflict with their duty as such
directors or trustees
Section 31. Liability of directors, trustees or
officers. x x x
When a director, trustee or officer attempts to
acquire or acquire, in violation of his duty, any
interest adverse to the corporation in respect of
any matter which has been reposed in him in
confidence, as to which equity imposes a
disability upon him to deal in his own behalf, he
shall be liable as a trustee for the corporation
and must account for the profits which otherwise
would have accrued to the corporation.
Doctrine of Piercing the Veil of Corporate
Fiction
When the notion of legal entity is used to defeat
public convenience, justify wrong, protect fraud
or defend crime, the law will regard the
corporation as mere association of persons, or
in the case of two corporations, merge them into
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one, the one being mere dummy and serves no
business purpose and is intended only as a
blind, or an alter ego or business conduit for the
6
sole benefit of the stockholders.
Concept Builders v. NLRC
257 SCRA 149
It is a fundamental principle of corporation law that a
corporation is an entity separate and distinct from its
stockholders and from other corporations to which it may
be connected. But, this separate and distinct personality
of a corporation is merely a fiction created by law for
convenience and to promote justice. So, when the notion
of separate juridical personality is used to defeat public
convenience, justify wrong, protect fraud or defend crime,
or is used as a device to defeat the labor laws, this
separate personality of the corporation may be
disregarded or the veil of corporate fiction pierced. This is
true likewise when the corporation is merely an adjunct, a
business conduit or an alter ego of another corporation.
The conditions under which the juridical entity may be
disregarded vary according to the peculiar facts and
circumstances of each case. No hard and fast rule can
be accurately laid down, but certainly, there are some
probative factors of identity that will justify the application
of the doctrine of piercing the corporate veil, to wit:
1. Stock ownership by one or common ownership of both
corporations.
2. Identity of directors and officers.
3. The manner of keeping corporate books and records.
4. Methods of conducting the business.
The SEC en banc explained the instrumentality rule
which the courts have applied in disregarding the
separate juridical personality of corporations as follows:
Where one corporation is so organized and controlled
and its affairs are conducted so that it is, in fact, a mere
instrumentality or adjunct of the other, the fiction of the
corporate entity of the instrumentality may be
disregarded. The control necessary to invoke the rule is
not majority or even complete stock control but such
domination of finances, policies and practices that the
controlled corporation has, so to speak, no separate
mind, will or existence of its own, and is but a conduit for
its principal. It must be kept in mind that the control must
be shown to have been exercised at the time the acts
complained of took place. Moreover, the control and
breach of duty must proximately cause the injury or
unjust loss for which the complaint is made.
The test in determining the applicability of the doctrine of
piercing the veil of corporate fiction is as follows:
1. Control, not mere majority or complete stock control,
but complete domination, not only of finances but of
6 founded upon a presumption that directors /trustees
Supra, p.101
Notes By: ENGR. JESSIE A. SALVADOR, MPICE | http://wordpress.com/engrjhez
policy and business practice in respect to the transaction
attacked so that the corporate entity as to this transaction
had at the time no separate mind, will or existence of its
own;
2. Such control must have been used by the defendant
to commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty, or dishonest and
unjust act in contravention of plaintiffs legal rights; and
3. The aforesaid control and breach of duty must
proximately cause the injury or unjust loss complained of.
The absence of any one of these elements prevents
piercing the corporate veil. in applying the
instrumentality or alter ego doctrine, the courts are
concerned with reality and not form, with how the
corporation operated and the individual defendants
relationship to that operation.
Thus, the question of whether a corporation is a mere
alter ego, a mere sheet or paper corporation, a sham or a
subterfuge is purely one of fact.
Transferability of Shares
Advantage Disadvantage
Shares of stocks may Transfers of the shares
be transferred by the may result to uniting
owner without consent incompatible and
of the other conflicting interests
stockholders
Compensation of Directors
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 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.
Western Institute v. Salas
278 SCRA 216
There is no argument that directors or trustees, as the
case may be, are not entitled to salary or other
compensation when they perform nothing more than the
usual and ordinary duties of their office. This rule is
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render service gratuitously and that the return upon their
shares adequately furnishes the motives for service,
without compensation Under the foregoing section, there
are only two (2) ways by which members of the board
can be granted compensation apart from reasonable per
diems: (1) when there is a provision in the by-laws fixing
their compensation; and (2) when the stockholders
representing a majority of the outstanding capital stock at
a regular or special stockholders meeting agree to give it
to them.
This proscription, however, against granting
compensation to directors/trustees of a corporation is not
a sweeping rule. Worthy of note is the clear phraseology
of Section 30 which states: xxx [T]he directors shall not
receive any compensation, as such directors, xxx. The
phrase as such directors is not without significance for it
delimits the scope of the prohibition to compensation
given to them for services performed purely in their
capacity as directors or trustees. The unambiguous
implication is that members of the board may receive
compensation, in addition to reasonable per diems, when
they render services to the corporation in a capacity
other than as directors/trustees In the case at bench,
Resolution No. 48, s. 1986 granted monthly
compensation to private respondents not in their capacity
as members of the board, but rather as officers of the
corporation, more particularly as Chairman, Vice-
Chairman, Treasurer and Secretary of Western Institute
of Technology.
xxx
Clearly, therefore , the prohibition with respect to
granting compensation to corporate
directors/trustees as such under Section 30 is not
violated in this particular case.
Lyceum of the Philippines v. C.A.
219 SCRA 610
REGISTRATION OF PROPOSED NAME WHICH IS
IDENTICAL OR CONFUSINGLY SIMILAR TO THAT OF
ANY EXISTING CORPORATION, PROHIBITED;
CONFUSION AND DECEPTION EFFECTIVELY
PRECLUDED BY THE APPENDING OF GEOGRAPHIC
NAMES TO THE WORD "LYCEUM". The Articles of
Incorporation of a corporation must, among other things,
set out the name of the corporation. Section 18 of the
Corporation Code establishes a restrictive rule insofar as
corporate names are concerned: "Section 18. Corporate
name. No corporate name may be allowed by the
Securities an Exchange Commission if the proposed
name is identical or deceptively or confusingly similar to
that of any existing corporation or to any other name
already protected by law or is patently deceptive,
confusing or contrary to existing laws. When a change in
the corporate name is approved, the Commission shall
issue an amended certificate of incorporation under the
amended name." The policy underlying the prohibition in
Section 18 against the registration of a corporate name
which is "identical or deceptively or confusingly similar" to
that of any existing corporation or which is "patently
Notes By: ENGR. JESSIE A. SALVADOR, MPICE | http://wordpress.com/engrjhez
deceptive" or "patently confusing" or "contrary to existing
laws," is the avoidance of fraud upon the public which
would have occasion to deal with the entity concerned,
the evasion of legal obligations and duties, and the
reduction of difficulties of administration and supervision
over corporations. We do not consider that the corporate
names of private respondent institutions are "identical
with, or deceptively or confusingly similar" to that of the
petitioner institution. True enough, the corporate names
of private respondent entities all carry the word "Lyceum"
but confusion and deception are effectively precluded by
the appending of geographic names to the word
"Lyceum." Thus, we do not believe that the "Lyceum of
Aparri" can be mistaken by the general public for the
Lyceum of the Philippines, or that the "Lyceum of
Camalaniugan" would be confused with the Lyceum of
the Philippines.
DOCTRINE OF SECONDARY MEANING; USE OF
WORD "LYCEUM," NOT ATTENDED WITH
EXCLUSIVITY. It is claimed, however, by petitioner
that the word "Lyceum" has acquired a secondary
meaning in relation to petitioner with the result that word,
although originally a generic, has become appropriable
by petitioner to the exclusion of other institutions like
private respondents herein. The doctrine of secondary
meaning originated in the field of trademark law. Its
application has, however, been extended to corporate
names sine the right to use a corporate name to the
exclusion of others is based upon the same principle
which underlies the right to use a particular trademark or
trade name. In Philippine Nut Industry, Inc. v. Standard
Brands, Inc., the doctrine of secondary meaning was
elaborated in the following terms: " . . . a word or phrase
originally incapable of exclusive appropriation with
reference to an article on the market, because
geographically or otherwise descriptive, might
nevertheless have been used so long and so exclusively
by one producer with reference to his article that, in that
trade and to that branch of the purchasing public, the
word or phrase has come to mean that the article was his
product." The question which arises, therefore, is
whether or not the use by petitioner of "Lyceum" in its
corporate name has been for such length of time and
with such exclusivity as to have become associated or
identified with the petitioner institution in the mind of the
general public (or at least that portion of the general
public which has to do with schools). The Court of
Appeals recognized this issue and answered it in the
negative: "Under the doctrine of secondary meaning, a
word or phrase originally incapable of exclusive
appropriation with reference to an article in the market,
because geographical or otherwise descriptive might
nevertheless have been used so long and so exclusively
by one producer with reference to this article that, in that
trade and to that group of the purchasing public, the word
or phrase has come to mean that the article was his
produce (Ana Ang vs. Toribio Teodoro, 74 Phil. 56). This
circumstance has been referred to as the distinctiveness
into which the name or phrase has evolved through the
substantial and exclusive use of the same for a
considerable period of time. . . . No evidence was ever
presented in the hearing before the Commission which
sufficiently proved that the word 'Lyceum' has indeed
acquired secondary meaning in favor of the appellant. If
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there was any of this kind, the same tend to prove only
that the appellant had been using the disputed word for a
long period of time. . . . In other words, while the
appellant may have proved that it had been using the
word 'Lyceum' for a long period of time, this fact alone
did not amount to mean that the said word had acquired
secondary meaning in its favor because the appellant
failed to prove that it had been using the same word all
by itself to the exclusion of others. More so, there was no
evidence presented to prove that confusion will surely
arise if the same word were to be used by other
educational institutions. Consequently, the allegations of
the appellant in its first two assigned errors must
necessarily fail." We agree with the Court of Appeals.
The number alone of the private respondents in the case
at bar suggests strongly that petitioner's use of the word
"Lyceum" has not been attended with the exclusivity
essential for applicability of the doctrine of secondary
meaning. Petitioner's use of the word "Lyceum" was not
exclusive but was in truth shared with the Western
Pangasinan Lyceum and a little later with other private
respondent institutions which registered with the SEC
using "Lyceum" as part of their corporation names. There
may well be other schools using Lyceum or Liceo in their
names, but not registered with the SEC because they
have not adopted the corporate form of organization.
CORPORATE NAMES MUST BE EVALUATED IN
THEIR ENTIRETY TO DETERMINE WHETHER THEY
ARE CONFUSINGLY OR DECEPTIVELY SIMILAR TO
ANOTHER CORPORATE ENTITY'S NAME.
petitioner institution is not entitled to a legally enforceable
exclusive right to use the word "Lyceum" in its corporate
name and that other institutions may use "Lyceum" as
part of their corporate names. To determine whether a
given corporate name is "identical" or "confusingly or
deceptively similar" with another entity's corporate name,
it is not enough to ascertain the presence of "Lyceum" or
"Liceo" in both names. One must evaluate corporate
names in their entirety and when the name of petitioner is
juxtaposed with the names of private respondents, they
are not reasonably regarded as "identical" or "confusingly
or deceptively similar" with each other.
Pre-emptive Rights
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
Notes By: ENGR. JESSIE A. SALVADOR, MPICE | http://wordpress.com/engrjhez
outstanding capital stock, in exchange for
property needed for corporate purposes or in
payment of a previously contracted debt.
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.
Cumulative Shares in Favor of 1 Candidate
(See Footnote 5)
Issuance of Stocks
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
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be used for the issuance of bonds by the of the certificate or certificates and the number
corporation. of shares transferred.

The issued price of no-par value shares may be No shares of stock against which the corporation
fixed in the articles of incorporation or by the holds any unpaid claim shall be transferable in
board of directors pursuant to authority the books of the corporation.
conferred upon it by the articles of incorporation
or the by-laws, or in the absence thereof, by the
Section 86. Notation on certificates; rights of
stockholders representing at least a majority of
transferee. Within ten (10) days after
the outstanding capital stock at a meeting duly
demanding payment for his shares, a dissenting
called for the purpose.
stockholder shall submit the certificates of stock
representing his shares to the corporation for
Section 64. Issuance of stock certificates.
notation thereon that such shares are dissenting
No certificate of stock shall be issued to a
shares. His failure to do so shall, at the option of
subscriber until the full amount of his
the corporation, terminate his rights under this
subscription together with interest and expenses
Title. If shares represented by the certificates
(in case of delinquent shares), if any is due, has
bearing such notation are transferred, and the
been paid.
certificates consequently cancelled, the rights of
the transferor as a dissenting stockholder under
Section 65. Liability of directors for watered
this Title shall cease and the transferee shall
stocks. Any director or officer of a corporation
have all the rights of a regular stockholder; and
consenting to the issuance of stocks for a
all dividend distributions which would have
consideration less than its par or issued value or
accrued on such shares shall be paid to the
for a consideration in any form other than cash,
transferee.
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 Removal of Directors/Trustees
with the stockholder concerned to the
corporation and its creditors for the difference Section 28. Removal of directors or
between the fair value received at the time of trustees. Any director or trustee of a
issuance of the stock and the par or issued corporation may be removed from office by a
value of the same. vote of the stockholders holding or representing
at least two-thirds (2/3) of the outstanding capital
Better right Re Dividend at the time of stock, or if the corporation be a non-stock
corporation, by a vote of at least two-thirds (2/3)
declaration
of the members entitled to vote: Provided, That
such removal shall take place either at a regular
Section 63. Certificate of stock and transfer meeting of the corporation or at a special
of shares. The capital stock of stock
meeting called for the purpose, and in either
corporations shall be divided into shares for
case, after previous notice to stockholders or
which certificates signed by the president or vice
members of the corporation of the intention to
president, countersigned by the secretary or
propose such removal at the meeting. A special
assistant secretary, and sealed with the seal of
meeting of the stockholders or members of a
the corporation shall be issued in accordance
corporation for the purpose of removal of
with the by-laws. Shares of stock so issued are
directors or trustees, or any of them, must be
personal property and may be transferred by
called by the secretary on order of the president
delivery of the certificate or certificates indorsed
or on the written demand of the stockholders
by the owner or his attorney-in-fact or other
representing or holding at least a majority of the
person legally authorized to make the transfer.
outstanding capital stock, or, if it be a non-stock
No transfer, however, shall be valid, except as
corporation, on the written demand of a majority
between the parties, until the transfer is
of the members entitled to vote. Should the
recorded in the books of the corporation
secretary fail or refuse to call the special
showing the names of the parties to the
meeting upon such demand or fail or refuse to
transaction, the date of the transfer, the number
give the notice, or if there is no secretary, the

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 JHEZ NOTES ON CORPORATION LAW
2015 ARELLANO UNIVERSITY SCHOOL OF LAW
call for the meeting may be addressed directly to
the stockholders or members by any stockholder
or member of the corporation signing the
demand. Notice of the time and place of such
meeting, as well as of the intention to propose
such removal, must be given by publication or
by written notice prescribed in this Code.
Removal may be with or without cause:
Provided, That removal without cause may not
be used to deprive minority stockholders or
members of the right of representation to which
they may be entitled under Section 24 of this
Code.
Power to Dispose Property and Assets
Requirement of Stockholders
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.
Notes By: ENGR. JESSIE A. SALVADOR, MPICE | http://wordpress.com/engrjhez
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.
Power to Acquire own Shares
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
3. To pay dissenting or withdrawing
stockholders entitled to payment for
their shares under the provisions of this
Code.
GOOD LUCK ON THE MIDTERM EXAMS!
(As of 30 March 2015)
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 JHEZ NOTES ON CORPORATION LAW
2015 ARELLANO UNIVERSITY SCHOOL OF LAW

FINAL EXAMS LAST MINUTE TIPS priest, minister, rabbi or presiding elder
acting as corporation sole, and may be
opposed by any member of the religious
Foreign corporations capacity to sue
denomination, sect or church represented by
the corporation sole: Provided, That in cases
General Rule:
where the rules, regulations and discipline of
Foreign corporations capacity to sue must
the religious denomination, sect or church,
be affirmatively pleaded in order that it may
religious society or order concerned
proceed and effectively institute a case in a
represented by such corporation sole
case in Philippine courts. But if the case will
regulate the method of acquiring, holding,
be dismissed with prejudice on the ground of
selling and mortgaging real estate and
non-averment of foreign capacity to sue,
personal property, such rules, regulations
there will be no bar for re-institution of the
and discipline shall control, and the
same case.7
intervention of the courts shall not be
necessary.9
Exception:
Averment of capacity to sue is not necessary
Trustees vote by proxy
if the action involves a complaint for
violation of Revised Penal.8
The voting trustee or trustees may vote by
proxy unless the agreement provides
Corporation Sole to own and alienate
otherwise.10
real property
Educational corporation / institution
Acquisition and alienation of property.
Any corporation sole may purchase and hold
Educational institutions, other than those
real estate and personal property for its
established by religious groups and mission
church, charitable, benevolent or educational
boards, shall be owned solely by citizens of
purposes, and may receive bequests or gifts
the Philippines or corporations or
for such purposes. Such corporation may
associations at least sixty per centum of the
sell or mortgage real property held by it by
capital of which is owned by such citizens.
obtaining an order for that purpose from
The Congress may, however, require
the Court of First Instance of the province
increased Filipino equity participation in all
where the property is situated upon proof
educational institutions. The control and
made to the satisfaction of the court that
administration of educational institutions
notice of the application for leave to sell or
shall be vested in citizens of the
mortgage has been given by publication or
Philippines.11
otherwise in such manner and for such
time as said court may have directed, and
A director who has been declared
that it is to the interest of the corporation
delinquent
that leave to sell or mortgage should be
granted. The application for leave to sell or
The Corporation Code requires that the
mortgage must be made by petition, duly
director must own at least one (1) share
verified, by the chief archbishop, bishop,
7 9
Supra Note 1, p.573. B.P. Blg. 68, Section 113.
8 10
Le Chemise Lacoste, S.A. v. Fernandez, 129 SCRA B.P. Blg. 68, Section 59 (last paragraph).
11
377, 21 May 21 1984. Constitution (1987), Article XIV, Section 4(2).

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 JHEZ NOTES ON CORPORATION LAW
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which shall stand in his name in the books
of the corporation.12 Delinquency does not
deprive the director of ownership of shares.
The effects of delinquency are provided in
Section 71 of the Corporation Code.
By-Laws of a stock corporation
By-laws are rules and ordinances made by a
corporation for its own government; to
regulate the conduct and define the duties of
the stockholders or members towards the
corporation and among themselves.
Corporate Opportunity Doctrine
Corporate officers are not permitted to use
their position of trust and confidence to
further their private interests. The doctrine
recognizes that the fiduciary standards could
not be upheld where the fiduciary was acting
for two entities with competing interests.13
Religious Society
Religious society is not mandated by law to
register as a corporation but it may do so to
acquire juridical personality for the purpose
of administration of its temporalities and
properties and even to acquire properties of
its own.
Like a corporation sole, the articles of
incorporation of a religious society need not
contain a term of its existence as it is
supposed to exist in perpetuity.14
Doing business failure to file by-laws within the required
is continuing the body or substance of
business or enterprise for which it has
substantially retired from it and turned it
12
B.P. Blg. 68, Section 23.
13
Gokongwei, Jr. v. SEC, 89 SCRA 336
14
Ladia, p. 481.
Notes By: ENGR. JESSIE A. SALVADOR, MPICE | http://wordpress.com/engrjhez
over to another. The term implies a
continuity of commercial dealings and
arrangements and contemplates, to the
extent, the performance of acts or works or
the exercise of some functions normally
incident to and in progressive prosecution
of, the purpose and objects of its
organization.15
Doing Business, appointment of an
exclusive dealer
Doing business does not include mere
appointing a representative or distributor
domiciled in the Philippines which transacts
business in its own name and for its own
account. 16
Dissolved corporation in a merger
Although there is dissolution of the absorbed
corporation, there is no winding up of their
affairs or liquidation of their assets,
because the surviving corporation
automatically acquires all their rights,
privileges and powers, as well as their
liabilities.17
Non-Filing of by-laws in period
provided for (suspension)
Non-filing of by-laws will not result in
automatic dissolution of the corporation.
The SEC is empowered only to suspend or
revoke, after proper notice and hearing, the
franchise or certificate of registration of
corporation on the ground inter alia of
period.18
15
Ladia, p. 537.
16
Ladia, p. 538.
17
Associated bank v. CA, G.R. No. 123793, June 29,
1998 (also see Ladia, p.427)
18
Loyola Grand Villas Homeowners (South)
Association, Inc. v. CA, 276 SCRA 681, (also see
Ladia, p.305)
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 JHEZ NOTES ON CORPORATION LAW
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Effects of delinquency (to vote,
receive cash and stock)
No delinquent stock shall be voted.19
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.20
Three (3) methods of liquidation and
their effects
(1) By the Corporation itself through
the Board of Directors the Board will only
have 3 yrs to finish its task of liquidation,
claims for or against the corporation not
filed within the 3 year period will become
unenforceable as there exists no corporate
entity against which they can be enforced.
Actions pending for or against the
corporation when the 3 year period expires
are abated since after that period the
corporation ceases for all intents and
purposes and is no longer capable of suing
or being sued after that period.
(2) By a Trustee appointed by the
corporation the 3 year period will not
apply provided the designation of a trustee is
made within the 3 year period.
(3) By appointment of a receiver on
petition or motu proprio upon the
dissolution of the corporation the 3 year
period will not apply because the dissolved
19
B.P. Blg. 68, Section 24.
20
B.P. Blg. 68, Section 71.
Notes By: ENGR. JESSIE A. SALVADOR, MPICE | http://wordpress.com/engrjhez
corporation is substituted by the receiver
who may sue or be sued beyond the 3 year
period.
General requirements for a valid
stockholders meeting
(1) It must be held on the date fixed in
the by-laws or in accordance with
law.
(2) Prior notice must be given.
(3) It must be held at the proper place.
(4) It must be called by the proper party.
(5) Quorum and voting requirements
must be met.
Rights of stockholders to compel
corporation to pay value of his shares
is broader in a close corporation than
in ordinary stock
A stockholder of a close corporation, may,
for any reason compel the corporation to
purchase his shares at their fair value, which
shall not be less than their par or issued
value, with the limitation only that the
corporation has sufficient assets to cover its
liabilities exclusive of capital stock.21
In an ordinary stock corporation, unless a
stockholder sells his shares, a stockholder
cannot get back his investment nor compel
the corporation to buy his shares, except in
the exercise of his appraisal right.22
In case of deadlock in close
corporation the courts can interfere
The SEC is granted a wide discretion in
respect to the management of a close
corporation in the event of a deadlock. This
jurisdiction of the SEC has been transferred
21
B.P. Blg. 68, Section 105.
22
B.P. Blg. 68, Section 81.
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 JHEZ NOTES ON CORPORATION LAW
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to the regular courts under RA 8799 or the a license which bars a foreign corporation
Securities and Regulation Code.23 form access to our courts.

Cumulative voting in non-stock No foreign corporation transacting business

corporation
General Rule: Not allowed.
Exception:
The right of the members of any class or
classes to vote may be limited, broadened or
denied to the extent specified in the articles
of incorporation or the by-laws. Unless so
limited, broadened or denied, each member,
regardless of class, shall be entitled to one
vote.24
Voting by proxy in non-stock
corporations
General Rule: Allowed.
Exception:
Unless otherwise provided in the articles of
incorporation or the by-laws, a member
may vote by proxy in accordance with the
provisions of this Code.
Voting by mail or any other means in
non-stock corporations
Voting by mail or other similar means by
members of non-stock corporations may be
authorized by the by-laws of non-stock
corporations with the approval of, and
under such conditions which may be
prescribed by, the Securities and Exchange
Commission.
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.25
Dissolved corporation may undertake
any of the ways of liquidation:
(1) By the corporation itself though
Board of Directors;
(2) By a trustee/assignee appointed by
the corporation;
(3) By appointment of a
receiver/liquidator;
In a corporate controversy, service of
summons
Service upon domestic private juridical
entity. When the defendant is a
corporation, partnership or association
organized under the laws of the Philippines
with a juridical personality, service may be
made on the president, managing partner,
general manager, corporate secretary,
treasurer, or in-house counsel.26

Lack of requisite license, doing In an intra-corporate controversy,

business service of summons

The general rule is that it is not the lack of Service upon domestic private juridical
required license but doing business without entities. If the defendant is a domestic
corporation, service shall be deemed

23 25
B.P. Blg. 68, Section 104. B.P. Blg. 68, Section 133.
24 26
B.P. Blg. 68, Section 89. Rules of Court, Rule 14, Section 11

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 JHEZ NOTES ON CORPORATION LAW
2015 ARELLANO UNIVERSITY SCHOOL OF LAW
adequate is made upon any of the statutory
or corporate officers as fixed by the by-laws
or their respective secretaries. If the
defendant is a partnership, service shall be
deemed adequate if made upon any of the
managing or general partners or upon
their respective secretaries. If the defendant
is an association service shall be deemed
adequate if made upon any of its officers or
their respective secretaries.27
Issuance of certificate of stock
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.28
Subscriptions of Shares of Stock
(indivisible)
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.29
certificate of stock merely quasi-
negotiable
A certificate of stock is not regarded as
negotiable in the same sense that a bill or a
note is negotiable, even if it is endorsed in
blank. Thus, while it may be transferred by
endorsement coupled with delivery thereof,
and therefore merely quasi-negotiable, it is
nonetheless non-negotiable in that the
transferee takes it without prejudice to all
27
Interim Rules of Procedure Governing Intra-
Corporate Controversies under R.A. No. 8799,
Rule 2, Section 5
28
B.P. Blg. 68, Section 63.
29
B.P. Blg. 68, Section 64.
Notes By: ENGR. JESSIE A. SALVADOR, MPICE | http://wordpress.com/engrjhez
the rights and defenses which the true and
lawful owner may have except in so far as
the principles governing estoppel may
apply.30
Wash Sale
By effecting any transaction in such security
which involves no change in the beneficial
ownership thereof.31
Matched Order
By entering an order or orders for the
purchase or sale of such security with the
knowledge that a simultaneous order or
orders of substantially the same size, time
and price, for the sale or purchase of any
such security, has or will be entered by or
for the same or different parties;32
Short Sale
Refers to any sale of a security which the
seller does not own or any sale which is
consummated by the delivery of a security
borrowed by, or for the account of the seller.
This is not illegal per se.
No person shall use or employ, in
connection with the purchase or sale of any
security any manipulative or deceptive
device or contrivance. Neither shall any
short sale be effected nor any stop-loss
order be executed in connection with the
purchase or sale of any security except in
accordance with such rules and regulations
as the Commission may prescribe as
necessary or appropriate in the public
interest for the protection of investors.33
30
Ladia, p. 347.
31
R.A. No. 8799, Section 24.1(a)(i)
32
R.A. No. 8799, Section 24.1(a)(ii)
33
R.A. No. 8799, Section 24.2
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 JHEZ NOTES ON CORPORATION LAW
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Instances when a foreign corporation
with no license to do business can sue
in the country
Averment of a foreign corporations
capacity to sue is not necessary:34
if the action involves a complaint for
violation of the Revised Penal
Code;35
if not suing or maintaining a suit but
is merely defending itself from one
filed against it.36
Inspection of corporate books
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.37
Insider Trading
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) 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
34
Ladia, p.573
35
Le Chemise Lacoste, S.A. v. Fernandez, 129
SCRA 377, 21 May 21 1984.
36
Times, Inc. v. Reyes, 39 SCRA 303
37
B.P. Blg. 68, Section 74, par.2
Notes By: ENGR. JESSIE A. SALVADOR, MPICE | http://wordpress.com/engrjhez
otherwise is also in possession of the
information.xxx38
Material nonpublic information
Information is "material nonpublic" 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.39
Dissolution of Corporation
(1) by expiration of its term;
(2) by voluntary surrender of its primary
franchise (voluntary dissolution);
Modes :
(a) voluntary dissolution when there
are creditors affected;
(b) voluntary dissolution where
creditors are affected;
(c) shortening of corporate term;
(3) by revocation of its corporate
franchise (involuntary dissolution)
Exercise of appraisal rights
(1) In case amendment of the articles of
incorporation has the effect of
changing or restricting the rights of
any stockholder, or class of shares,
38
R.A No. 8799, Section 27.1
39
R.A No. 8799, Section 27.2
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 JHEZ NOTES ON CORPORATION LAW
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or of authorizing preferences in
respect superior to those outstanding
shares of any class, or extending or
shortening of the term of corporate
existence;
(2) In case of sale, lease, exchange ,
mortgage, pledge or other disposition
of all or substantially all of corporate
property and assets;
(3) In case of merger or consolidation;
Improperly held or called
stockholders meeting
All proceedings had and any business
transacted at any meeting of the
stockholders or members, if within the
powers or authority of the corporation, shall
be valid even if the meeting be improperly
held or called, provided all the stockholders
or members of the corporation are present or
duly represented at the meeting.40
Attending directors meeting by proxy
A director or trustee cannot attend or vote
by proxy at any board or meeting since he
was supposedly elected because of his
expertise in the management or his business
acumen such that he is expected to
personally attend and vote on matters
brought before the meeting.41
Requisites of voting trusts
(1) In writing
(2) Notarized
(3) Specified terms/conditions
(4) Certified copy filed with the
corporation and SEC
3-ways of becoming stockholder
40
B.P. Blg. 68, Section 51, par. 3
41
Ladia, p.326
Notes By: ENGR. JESSIE A. SALVADOR, MPICE | http://wordpress.com/engrjhez
(1) By contract of subscription
(2) Purchase of treasury shares
(3) Purchase or acquisition of shares
from existing stockholders
N.B. Acquisition of unissued shares of
stocks is always a subscription contract
notwithstanding the fact that parties refer to
it as purchase or some other contract.42
Meaning of Transfer
As used in the Code, refers to absolute and
unconditional transfer to warrant registration
in the books of the corporation in order to
bind the latter and other third persons.43
Interests on unpaid subscription
General Rule: No interest
Exception: If stated the by-laws.
Important effect of merger or
consolidation
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;44
42
B.P. Blg. 68, Section 60
43
Ladia, p. 350
44
B.P. Blg. 68, Section 80(4)
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 JHEZ NOTES ON CORPORATION LAW
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Grounds for dissolution of closed
corporation
[A]ny 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.45
Dissolution of corporation sole
A corporation sole may be dissolved and its
affairs settled voluntarily by submitting to
the Securities and Exchange Commission a
verified declaration of dissolution.xxx46
Grounds for involuntary dissolution
To suspend, or revoke, after proper notice
and hearing, the franchise or certificate of
registration of corporations, partnerships or
associations, upon any of the grounds
provided by law, including the following:
[1] Fraud in procuring its certificate of
registration;
[2] Serious misrepresentation as to what the
corporation can do or is doing to the great
prejudice of or damage to the general public;
[3] Refusal to comply or defiance of any
lawful order of the Commission restraining
commission of acts which would amount to
a grave violation of its franchise;
45
B.P. Blg. 68, Section 105
46
B.P. Blg. 68, Section 115
Notes By: ENGR. JESSIE A. SALVADOR, MPICE | http://wordpress.com/engrjhez
[4] Continuous inoperation for a period of at
least five (5) years;
[5] Failure to file by-laws within the
required period;
[6] Failure to file required reports in
appropriate forms as determined by the
Commission within the prescribed period;
Appointment of Management
Committee
A reading of the aforecited legal provision
reveals that for a minority stockholder to
obtain the appointment of an interim
management committee, he must do more
than merely make a prima facie showing of
a denial of his right to share in the concerns
of the corporation;
he must show that the corporate
property is in danger of being wasted
and destroyed; that the business of
the corporation is being diverted
from the purpose for which it has
been organized; and
that there is serious paralyzation of
operations all to his detriment.47
Marking the close
The placing of purchase or sale order, at or near
the close of the trading period. The person
making the order would thus post a higher or
lower price for the security just barely before the
close of the market.
Painting the tape
Akin to marking the close but the activity is
made during normal trading hours.
GOOD LUCK ON THE FINAL EXAMS!
(26 May 2015)
ENJOY THE MID-YEAR VACATION!
47
Sy Chim vs. Sy Siy Ho & Sons (480 SCRA 2006)
Page 16