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CORPORATION CODE
(BP 68, effective May 1, 1980)
GENERAL PROVISIONS
Q: What are the significance of the doctrine of
Q: What is a corporation? separate personality?
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CORPORATION CODE OF THE PHILIPPINES
5. Non-payment of separation benefits Test corporation owns. After a few years, S lost his
corporate positions but he refused to return the
motor vehicle claiming that as a stockholder
Q: What are the requisites of the control test? with a substantial equity share, he owns that
portion of the corporate assets now in his
A: possession. Is the contention of S valid?
1. Control, not mere majority or complete Explain.
stock control, but complete domination,
not only of finances but of policy and A: No. The contention of S is not valid. The Ford
business practice in respect to the Expedition is owned by the corporation. The
transaction attacked such that the corporation has a legal personality separate and
corporate entity as to this had at that time, distinct from that of its stockholder. What the
will or existence of its own; corporation owns is its own property and not the
2. Such control must have been used by the property of any stockholder even how substantial
defendant to commit fraud or wrong, to the equity share that stockholder owns. (2000 Bar
perpetuate the violation of a statutory or Question)
other positive legal duty, or dishonest or
unjust act in contravention of plaintiffs Q: What are the cases when the doctrine of
legal right; and piercing the veil of corporate fiction may be
used to disregard the personality of the
3. The control and breach of duty must
corporation?
proximately cause the injury or unjust loss
complained of. (Concept Builders, Inc. v.
A:
National Labor Relations Commission,
G.R. No. 108734, May 29, 1996) a. Where the corporation is a mere
alter ego or business conduit of a person;
Q: What are the effects of piercing the veil? or
b. `Where the corporation is so
A: Courts will look at the corporation as an organized and controlled and its affairs are
aggregation of persons undertaking the business so conducted as to make it merely an
as a group. instrumentality, agency, conduit or adjunct
of another person.
Note: When the veil of corporate fiction is pierced in
proper cases, the corporate character is not necessarily Note: Fraud is not an element in these cases.
abrogated. It continues for legitimate objectives. The
decision applies only for that particular case. (Reynoso Q: Plaintiffs filed a collection action against "X"
IV v. CA, G.R. Nos. 116124-25, November 22, 2000) Corporation. Upon execution of the court's
decision, "X" Corporation was found to be
Q: Is the alleged control of a proprietor over a without assets. Thereafter plaintiffs filed an
corporation enough in order that the separate action against its present and past stockholder
juridical personality of a corporation to be "Y" Corporation which owned substantially all
disregarded? of the stocks of "X" corporation. The two
corporations have the same board of directors
A: No. The alleged control of a corporation was not and "Y" Corporation financed the operations of
evident in any particular corporate acts of the "X" corporation. May "Y" Corporation be held
corporation wherein the proprietor using the liable for the debts of "X" Corporation? Why?
corporation executed acts and powers directly
involving the corporation. For the separate juridical A: Yes, "Y" Corporation may be held liable for the
personality of a corporation to be disregarded, the debts of "X" Corporation. The doctrine of piercing
wrongdoing must be clearly and convincingly the veil of corporation fiction applies to this case.
established. (Matuguina Integrated Wood The two corporations have the same board of
Products, Inc. v. CA, G.R. No. 98310, October 24, directors and "Y" Corporation owned substantially
1996) all of the stocks of "X" Corporation, which facts
justify the conclusion that the latter is merely an
Q: Nine individuals formed a private extension of the personality of the former, and that
corporation pursuant to the provisions of the the former controls the policies of the latter. Added
Corporation Code of the Philippines (Batas to this is the fact that "Y" Corporation controls the
Pambansa Blg. 68). Incorporator S was elected finances of "X" Corporation which is merely an
director and president-general manager. Part of adjunct, business conduit or alter ego of "Y"
his emolument is a Ford Expedition, which the
UNIVERSITY OF SANTO TOMAS 3
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Corporation. (Commissioner of Internal Revenue v. When management is not Power to do business
Norton & Harrison Company, L-17618, August 31, agreed upon, every and manage its affairs is
1964) (2001 Bar Question) partner is an agent of the vested in the BOD/BOT
partnership
Q: What are the requisites in Alter Ego or
Instrumentality Rule?
Effect of Mismanagement
A: CUP A partner as such can sue The suit against a
a co-partner who member of the BOD or
1. Control, not mere majority or complete mismanages BOT who mismanages
stock control, but complete domination, must be in the name of
not only of finances but of policy and the corporation
business practice; Extent of liability to Third persons
Partners are liable Stockholders are liable
2. Such control must have been used by the personally and subsidiarily only to the extent of the
defendant to commit fraud or wrong, to (sometimes solidarily) for shares subscribed by
perpetrate the violation of a statutory or partnership debts to third them whether paid or
other positive duty, or dishonest and persons not.
unjust act in contravention of plaintiffs
legal rights; XPN: Limited partner
Right of Succession
No right of succession Has right of succession
3. Such control and breach of duty must
Transferability of SHs interest
proximately cause the injury or unjust loss Partner cannot transfer his Stockholder has the
complained of. (Velarde v Lopez, Inc. G.R. interest in the partnership right to transfer his
No. 153886, January 14, 2004) without the consent of all shares without prior
the other existing consent of the other
Q: What are the distinctions between partners. stockholders unless the
partnership and corporation? right of first refusal is
embodied in the articles
PARTNERSHIP CORPORATION of incorporation.
As to creation Term of existence
Created by mere Created by law or by May be established for May not be formed for a
agreement of the parties operation of law any period of time term in excess of 50
Commencement of juridical personality stipulated by the partners years. May be
from the moment of from the date of extendible to not more
meeting of minds of the issuance of the than 50 years in any
partners certificate of one instance
incorporation by the Firm Name
SEC In a limited partnership it May adopt any name
Number of Incorporators is required by law to add provided:
May be organized by at Requires at least 5 the word Ltd. to its name 1. it is not identical or
least two persons incorporators but not deceptively similar to
more than 15 any registered firm
XPN: corporation sole name;
2. not contrary to
Powers
existing law.
GR: May exercise any May exercise only such
Dissolution
power authorized by the powers as may be
partners. granted by law and its May be dissolved at any Can only be dissolved
articles of incorporation, time by the will of any or with the consent of the
XPN: Acts which are implied therefrom or all of the partners. State
contrary to: - law, incidental thereto.
morals, good customs, Death, civil interdiction Death or insolvency of
public order, public policy and insolvency of a shareholders cant
partner dissolves the dissolve the corporation.
Management
partnership.
Governing Law
Governed by the Civil Governed by the
Code Corporation Code
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CORPORATION CODE OF THE PHILIPPINES
Q: What are the advantages and disadvantages 5. Can only be organized where there is a
of a business corporation? law authorizing its organization;
6. Both are taxable as corporation, subject to
A: Advantages income taxation.
1. Limited liability;
2. Shareholders are not general agents of Q: May a corporation enter into a contract of
the business; partnership?
3. Easy transferability of shares;
4. Continuity of existence; A:
5. Its credit is strengthened by such GR: Corporations have no power to enter
continuity of existence; into partnership. Reason: Public policy.
6. Standardized methods for the creation, In a partnership, the corporation would be
organization, management and dissolution bound by the acts of the persons who are
under corporation code; not its duly appointed and authorized agents
7. Centralized management in the and officers, which would be entirely
BOD/BOT; inconsistent with the policy of the law that
8. Feasibility of great undertakings; the corporation shall manage its own affairs
9. The corporation has legal capacity to act separately and exclusively.
as a legal unit.
XPN: The SEC allowed corporations to enter
Disadvantages into partnerships with other corporations and
1. Relatively complicated in formation and individuals provided:
management; a. The authority to enter into partnership
2. Entails high cost of formation and relation is expressly conferred by the
operation; Charter or the AOI and the nature of the
3. Limited liability of shareholder serves as a business venture to be undertaken by the
limitation to corporate creditor because partnership is in line with the business
shareholders are not personally liable; authorized by the charter or the AOI. (SEC
4. There is ordinarily lack of personal Opinions, Feb. 29, 1980, Dec. 1, 1993,
element in view of the transferability of and Feb. 23, 1994.);
shares; b. The partnership must be a limited
5. There is greater degree of governmental partnership and the corporation must be a
control and supervision that in any limited partner;
other forms of business organizations; c. If it is a foreign corporation, it must obtain
6. In large corporations, holding rights have a license to transact business in the
become largely theoretical because of the country.
use of proxies and widespread ownership;
7. Stockholders have little voice in the Q: Does a defective incorporation result into a
conduct of the business; partnership?
8. In large group, management and control
has been separated from ownership; A: The answer depends on whether or not there is
9. Double taxation on corporate system. a clear intent to participate in the management of
the business affairs on the part of the investor.
Q: Give the similarities between a partnership Parties who intends to participate or has actually
and a corporation. participated in the business affairs of the
proposed corporation would be considered as
A: partners under a de facto partnership. On the
1. Has juridical personality separate and other hand, parties who took no part
distinct from that of the individuals notwithstanding their subscriptions do not become
composing it; partners with other subscribers. (Pioneer
2. Can act only through agents; Insurance v. CA, G.R. No. 84197, July 28, 1989)
3. Organization composed of an aggregate
of individuals; Q: May a corporation enter into a joint venture?
XPN: corporation sole;
4. Distributes its profits to those who A: Yes. It may enter into a joint venture with
contribute capital; another where the nature of that venture is in line
XPN: The case of an industrial partner with the business authorized by its charter.
who also shares in partnership profits;
4. As to existence of stocks
a. Stock Corporation With capital
Q: What are the distinctions between joint
stock divided into shares and is
account and partnership?
authorized to distribute to holders
thereof of such shares dividends or
A:
allotments of the surplus profits on
JOINT ACCOUNT PARTNERSHIP
the basis of the shares held.
Has none and is Has a firm name.
conducted In the b. Non-stock corporation Does not
name of the issue stocks and does not distribute
ostensible partner. dividends to their members
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CORPORATION CODE OF THE PHILIPPINES
Q: What are the tests in determining the 2. Incorporators - They are those mentioned
nationality of corporations? in the Articles of Incorporation as originally
forming and composing the corporation
A: and who are signatories thereof.
1. Incorporation Test - Determined by the
state of incorporation, regardless of the Q: What are the qualifications of incorporators?
nationality of the stockholders. A:
1. Natural person;
2. Control Test Determined by the 2. Not less than 5 but not more than 15;
nationality of the controlling stockholders or 3. Of legal age;
members. This test is applied in times of
war. 4. Majority must be residents of the
Philippines; and
3. Grandfather Rule Nationality is attributed 5. Each must own or subscribe to at least
to the percentage of equity in the one share. (Sec.10)
corporation used in nationalized or partly
nationalized area. Q: Who can be incorporators?
A: No. Promoters are not agents of the corporation Q: What is stated capital?
before it comes into existence. Upon incorporation,
the practice is for the BOD to pass a resolution A: The capital stock divided into no par value
ratifying the contracts entered into by the shares.
incorporators with the promoter. Then, they
become agents of the corporation. Q: What is paid-up capital?
6. Subscriber persons who have agreed to A: The portion of the authorized capital stock
take and pay for original, unissued shares which has been subscribed and actually paid.
of a corporation formed or to be formed.
Q: What is legal capital?
7. Underwriter a person who guarantees
A: Is the portion of the paid in capital arising from
on a firm commitment and/ or declared
the issuance of capital stock which cannot be
best effort basis the distribution and sale
returned to the stockholders in any form during the
of securities of any king by another
lifetime of the corporation.
company. (Sec. 3 R.A. 8799)
Q: What is authorized capital stock?
Q: What are the distinctions between
corporators and incorporators?
A: Amount fixed in the Articles of Incorporation to
be subscribed and paid by the stockholders of the
A:
corporation.
INCORPORATORS CORPORATORS
Necessarily a corporator Not necessarily an
incorporator
Q: What is subscribed capital stock?
Signatory of the Articles of Not signatory of the
Incorporation Articles of A: The portion of the authorized capital stock that
Incorporation has been subscribed but not yet fully paid and
Does not cease to be an Cease to be a therefore still unissued.
incorporator upon sale of his corporator by sale
shares of his shares Q: What is outstanding capital stock?
5 to 15 natural persons No limit
XPN: in case of cooperative, A: Refers to the total shares of stock issued to
incorporator of rural bank subscribers or stockholders, whether or not fully or
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CORPORATION CODE OF THE PHILIPPINES
partially paid except treasury shares so long as A: Shares having no par value but have issued
there is a binding subscription agreement. value stated in the certificate or articles of
incorporation.
Q: What is additional paid in capital?
Q: What are the limitations on no par value
A: Is the portion in capital representing excess shares?
over the par or stated value.
A:
Q: What are retained earnings? 1. No par value shares cannot have an
issued price of less than P5.00;
A: Represent the cumulative balance of periodic 2. The entire consideration for its issuance
earnings, dividends distributions, fundamental constitutes capital so that no part of it
errors and other capital adjustments. should be distributed as dividends;
3. They cannot be issued as preferred
Q: What is market value?
stocks;
A: The price at which shares of capital stock are 4. They cannot be issued by banks, trust
bought and sold by investors in the market. companies, insurance companies, public
utilities and building and loan association;
Q: What is book value? 5. The articles of incorporation must state
the fact that it issued no par value shares as well
A: The amount per share that each shareholder as the number of said shares;
would receive if the corporation were liquidated 6. Once issued, they are deemed fully paid
without incurring any further expenses and if and non-assessable. (Sec. 6)
assets were sold and liabilities liquidated at their
recorded amounts. Q: What are common shares?
Q: What are the kinds or classifications of A: These are ordinarily and usually issued stocks
share? without extraordinary rights and privileges, and
entitle the shareholder to a pro rata division of
A: profits.
1. Par value shares
2. No par value shares Q: What are preferred shares?
3. Common shares
4. Preferred shares A: These entitle the shareholder to some priority
5. Redeemable shares on dividends and asset distribution.
6. Treasury shares
7. Founders share Q: Are holders of preferred shares creditors?
8. Voting shares
9. Non-voting shares A: No. Holders thereof cannot compel the
10. Convertible shares corporation to give them dividends. The preference
11. Watered stock only applies once dividends are declared.
12. Fractional share
13. Shares in escrow Q: What are the kinds of preferred shares?
Note: A corporation cannot sell less than the par value a. Participating preferred shares Entitled
but a shareholder may sell the same less than the par to participate with the common shares
value because it is his.
in excess distribution.
Q: What are no par value shares? b. Non-participating preferred shares
Not entitled to participate with the
common shares in excess distribution.
A: A share with a value of less than one full share. A: It is the performance of conditions, acts, deeds,
and writings by incorporators, and the official acts,
Q: What are shares in escrow? certification or records, which give the corporation
its existence.
A: Subject to an agreement by virtue of which the
share is deposited by the grantor or his agent with Q: What is the term of corporate existence?
UNIVERSITY OF SANTO TOMAS 11
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A: A:
GR: A corporation shall exist for a period not A. Zero percent (0%) Foreign Equity
exceeding fifty (50) years from the date of 1. Mass Media except recording;
incorporation 2. Practice of all professions
a. Law
XPN: unless sooner dissolved or unless said b. Medicine and Allied
period is extended. Professions
c. Accountancy, etc.
Note: Extension may be made for periods not exceeding 3. Retail trade enterprises with paid-
(50) years in any single instance by an amendment of the up capital of less than US$2.5 M
articles of incorporation. Provided, That no extension can
(Sec. 5 of RA 8762);
be made earlier than five (5) years prior to expiration
date unless there are justifiable reasons as may be 4. Cooperatives (Ch. III, Art. 26 of
determined by the SEC. (Sec. 11) RA 6938);
5. Private Security Agencies (Sec. 4
Q: What are the limitations on extension of of RA 5487);
corporate term? 6. Small-scale Mining (Sec. 3 of RA
7076);
A:
1. Should not be made earlier than 5 years
7. Utilization of Marine Resources
prior to the original or subsequent expiry (Art. XII, Sec. 2 of the Constitution);
dates unless there are justifiable reasons 8. Cockpits (Sec. 5 of PD 449);
for earlier extension to be determined by 9. Manufacture, repair, stockpiling
SEC. and/or distribution of nuclear weapons
2. Should be made before the expiry date. (Art. II, Sec. 8 of the Constitution);
3. Extension shall not exceed 50 years. 10. Manufacture, repair, stockpiling
4. Extension must comply with procedural and/or distribution of biological,
requirements for amendment of AOI. chemical and radiological weapons
and anti-personnel mines (Various
Q: When must the amendment be made? treaties to which the Philippines is a
signatory and conventions supported
A: Before the expiration of corporate term, for after by the Philippines);
dissolution by expiration of the corporate term 11. Manufacture of firecrackers and
corporation ceases ipso facto. other pyrotechnic devices (Sec. 5 of
RA 7183).
Q: What are the capital stock requirements? B. Up to Sixty Percent (60%) Foreign Equity
1. Financing companies regulated by the
A: SEC (Sec. 6 of RA 5980 as amended
GR: No minimum authorized capital stock as by RA 8556);
long as the paid-up capital is not less than P5, 2. Investment houses regulated by the
000.00 SEC (Sec. 5 of PD 129 as amended
by RA 8366).
XPN:
a. As provided by special law C. Up to Forty Percent (40%) Foreign Equity
b. As provided by corporation code - that at 1. Exploration, development and utilization
least 25% of the authorized capital stock has of natural resources (Art. XII, Sec. 2
been subscribed and at least 25% of the total of the Constitution);
subscription must be paid. 2. Ownership of private lands (Art. XII,
Sec. 7 of the Constitution; Ch. 5, Sec.
Q: Is it required that each subscriber pay 25% 22 of CA 141; Sec. 4 of RA 9182);
of each subscribed share? 3. Operation and management of public
utilities (Art. XII, Sec. 11 of the
A: No. It is only required that at least 25% of the Constitution; Sec. 16 of CA 146);
subscribed capital must be paid. 4. Ownership/establishment and
administration of educational
Q: What businesses are nationalized and partly
nationalized?
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CORPORATION CODE OF THE PHILIPPINES
institutions (Art. XIV, Sec. 4 of the Q: What are the contents of AOI?
Constitution);
5. Culture, production, milling, processing, A: NaPuP- TIDUA-ONO
trading excepting retailing, of rice and 1. Name of corporation;
corn and acquiring, by barter, 2. Purpose/s, indicating the primary and
purchase or otherwise, rice and corn secondary purposes;
and the by-products thereof (Sec. 5 of
3. Place of principal office;
PD 194;Sec. 15 of RA 8762);
6. Contracts for the supply of materials, 4. Term of existence;
goods and commodities to GOCC, 5. Names, nationalities and residences of
agency or municipal corporation (Sec. incorporators;
1 of RA 5183) 6. Number of directors or trustees, which
7. Project Proponent and Facility Operator shall not be less than 5 nor more than 15;
of a BOT project requiring a public 7. Names, nationalities, and residences of
utilities franchise (Art. XII, Sec. 11 of the persons who shall act as directors or
the Constitution; Sec. 2a of RA 7718); trustees until the first regular ones are
8. Ownership of condominium units where elected and qualified;
the common areas in the 8. If a stock corporation, the amount of its
condominium project are co-owned by authorized capital stock, number of shares
the owners of the separate units or and in case the shares are par value
owned by a corporation (Sec. 5 of RA shares, the par value of each share;
4726).
9. Names, nationalities, number of shares,
D. Up to Thirty Percent (30%) Foreign Equity and the amounts subscribed and paid by
1. Advertising (Art. XVI, Sec. 11 of the each of the original subscribers which
Constitution). shall not be less than 25% of authorized
capital stock;
E. Up to Twenty-Five Percent (25%) Foreign 10. If non-stock, the amount of capital, the
Equity names, residences, and amount paid by
1. Private recruitment, whether for local each contributor, which shall not be less
or overseas employment (Art. 27 of than 25% of total subscription; name of
PD 442); treasurer elected by subscribers; and
2. Contracts for the construction and 11. Other matters as are not inconsistent with
repair of locally-funded public works law and which the incorporators may
(Sec. 1 of CA 541, LOI 630) except: deem necessary and convenient. (Sec.
a. infrastructure/development 14)
projects covered in RA 7718;
and Q: What are the limitations in adopting
b. projects which are foreign corporate name?
funded or assisted and
required to undergo A:
international competitive 1. The proposed name is identical or
bidding (Sec. 2a of RA 7718); deceptively or confusingly similar to that of
3. Contracts for the construction of any existing corporation;
defense-related structures (Sec. 1 of 2. Any other name protected by law; or
CA 541).
3. Patently deceptive, confusing or contrary
F. Up to Twenty Percent (20%) Foreign Equity to existing laws. (Sec. 18).
1. Private radio communications network 4. The corporate name shall contain the
(RA 3846). word Corporation or its abbreviation
Corp. or Incorporated, or Inc.
Q: Define Articles of Incorporation. 5. The partnership name shall contain the
word Company or Co..
A: Articles of Incorporation (AOI) is one that 6. For limited partnership, the word Limited
defines the charter of the corporation and the or Ltd. Shall be included.
contractual relationships between the State and 7. If the name or surname of a person is
the corporation, the stockholders and the State, used as part of a corporate or partnership
and between the corporation and its stockholders. name, the consent of said person or his
heirs must be submitted except if that
UNIVERSITY OF SANTO TOMAS 13
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person is a stockholder, member, partner required by law to be set out in the articles
or a declared national hero. of incorporation. Such articles, as
8. The name of a dissolved firm shall not be amended, shall be indicated by
allowed to be used by other firms within 3 underscoring the change/s made;
years after the approval of the dissolution 5. Certification under oath by corporate
of the corporation by SEC, unless allowed secretary and a majority of the BOD/BOT
by the last stockholders representing at stating the fact that said amendment/s
least majority of the outstanding capital have been duly approved by the required
stock of the dissolved firm. (SC vote of the stockholders or members, shall
Memorandum Circular 14) be submitted to the SEC;
6. Must be approved by SEC. (Sec. 16);
Q: If a corporation changes its corporate name, 7. Must be accompanied by a favorable
is it considered a new corporation? recommendation of the appropriate
government agency in cases of:
A: No, it is the same corporation with a different a. Banks;
name, and its character is in no respect changed. b. Banking and quasi-banking
(Republic Planters Bank v CA, G.R. No. 93073, institutions;
December 21, 1992) c. Building and loan associations;
d. Trust companies and other
Q: What are the basic requirements for a stock financial intermediaries;
corporation? e. Insurance companies;
f. Public utilities;
A: g. Educational institutions; and
1. Name verification slip; h. Other corporations
2. AOI and By-laws; governed by special laws [Sec. 17
3. Treasurers affidavit; (2)]
4. Registration data sheet;
5. Proof of payment of subscription like Bank Q: When does corporate existence commence?
Certificate of Deposit if the paid-up capital
is in cash; A: From the date the SEC issues a certificate of
6. Favorable endorsement from proper incorporation under its official seal. (Sec. 19)
government agency in case of special
corporations. Q: When does amendment of AOI take effect?
Q: What is the content of a treasurers A: Upon approval by the SEC. That is upon
affidavit? issuance of amended certificate of incorporation.
A: That at least 25% of the authorized capital stock Q: Is it necessary that the approval of SEC be
of the corporation has been subscribed, and at express?
least 25% of the total subscription has been fully
paid in actual cash and/or property. Such paid-up A: No, implied approval of SEC is also allowed.
capital being not less than P 5,000. Thus amendment may also take effect from the
date of filing with SEC if not acted upon within 6
Q: What are the requirements for the months from the date of filing for a cause not
amendment of AOI? attributable to the corporation.
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CORPORATION CODE OF THE PHILIPPINES
4. Treasurer elected by the original A: No, SEC is of the opinion that there should be
subscribers; proper proceedings for the revocation of AOI in
5. Members who contributed to the compliance with due process.
initial capital of the non-stock corporation;
and BOARD OF DIRECTORS/TRUSTEES/OFFICERS
6. Witnesses to and
acknowledgement with AOI. Q: What are the qualifications of a
director/trustee?
Q: What are the grounds for the rejection or
disapproval of AOI or amendment thereto by A:
the SEC?
A. Director
A:
1. If such is not substantially in accordance 1. Must own at least 1 share of the
with the form prescribed; capital stock;
2. The purpose/s of the corporation are 2. Must be a natural person;
patently unconstitutional, illegal, immoral, 3. Ownership of stock shall stand in
or contrary to government rules and his name on the books of the
regulations; corporation.
3. The Treasurers Affidavit concerning the
Note: What is material is the legal title, not beneficial
amount of capital stock subscribed and/or
ownership of the stock as appearing on the books of the
paid is false corporation.
4. The required percentage of ownership of
the capital stock to be owned by Filipino B. Trustee
citizens has not been complied with. (Sec. 1. Must be a member of the non-stock
17) corporation.
16
CORPORATION CODE OF THE PHILIPPINES
terminated respondent employees. (Uichico v. Q: What are the limitations on the stockholders
NLRC, G.R. No.121434, June 2, 1997) right to vote?
2. Cumulative voting for one candidate a XPN: The election of officers which shall require
stockholder is allowed to concentrate his the vote of a majority of all the members of the
votes and give one candidate, as many board. [Sec. 25 (2)]
votes as the number of directors to be
elected multiplied by the number of his Q: Who are corporate officers?
shares shall equal.
A:
3. Cumulative voting by distribution - a President Must be a director at the time the
stockholder may cumulate his shares by assumes office not at the time of appointment;
multiplying the number of his shares by
the number of directors to be elected and Treasurer May or may not be a director; as a
distribute the same among as many matter of sound corporate practice, must be a
candidates as he shall see fit. resident
Q: May a suit be dismissed by virtue of lack of Q: What are the requisites for removal of
authority of the general manager/treasurer to directors or trustees?
sign the certificate of non-forum shopping from
the BOD at the time of filing the complaint but A:
subsequently designated by the board as the 1. It must take place either at a regular
corporations attorney-in-fact? meeting or special meeting of the
stockholders or members called for the
A: No. Although the general manager/treasurer purpose;
initially failed to show that he had the capacity to 2. Previous notice to the stockholders or
sign the verification and institute the case on behalf members of the intention to remove a
of the corporation, when confronted with such director;
question, he immediately presented the 3. A vote of the stockholders representing 2/3
Secretarys Certificate confirming her authority to of outstanding capital stock or 2/3 of
represent the company. (Pasricha v Don Luis members;
Dison Realty Inc., G.R. No. 136409, March 14, 4. If the director was elected by the minority,
2008) there must be cause for removal; (Sec.
28)
Note: A board resolution appointing an attorney-in-fact to
represent the corporation in the pre-trial is not necessary Q: In 1999, Corporation "A" passed a board
where the by-laws authorizes an officer of the corporation resolution removing "X" from his position as
to make such appointment. (Citibank, N.A. v. Chua, G.R. manager of said corporation. The by-laws of
No. 102300 March 17, 1993)
"A" corporation provides that the officers are
the president, vice-president, treasurer and
Q: What are the distinctions between a
secretary. Upon complaint filed with the SEC, it
corporate officer and a corporate employee?
held that a manager could be removed by mere
resolution of the board of directors. On motion
A:
for reconsideration, "X" alleged that he could
CORPORATE OFFICER CORPORATE
only be removed by the affirmative vote of the
EMPLOYEE
stockholders representing 2/3 of the
Position is provided for in Employed by the action
18
CORPORATION CODE OF THE PHILIPPINES
outstanding capital stock. Is "X's" contention 1. Willfully and knowingly voting for
legally tenable. Why? and assenting to patently unlawful acts of
the corporation; (Sec. 31)
A: No. Stockholders' approval is necessary only for 2. Gross negligence or bad faith in
the removal of the members of the Board. For the directing the affairs of the corporation;
removal of a corporate officer or employee, the (Sec. 31)
vote of the Board of Directors is sufficient for the
3. Acquiring any personal or
purpose. (2001 Bar Question)
pecuniary interest in conflict of duty; (Sec.
31)
Q: What are the ways in filling up of vacancies
in the board? 4. Consenting to the issuance of
watered stocks, or, having knowledge
A: thereof, failing to file objections with the
1. Vacancies filled up by stockholders or secretary;(Sec. 65)
members, if it is due to (a) removal; (b) 5. Agreeing or stipulating in a
expiration of term; (c) grounds other than contract to hold himself liable with the
removal or expiration of term (e.g. death, corporation; or
resignation) where the remaining directors 6. By virtue of a specific provision of
do not constitute a quorum; or (d) increase law.
in the number of directors;
2. Vacancies filled up by the remaining Q: What is the doctrine of limited liability?
directors constituting a quorum, if it is due
to causes other than those specified A: Shields the corporators from corporate liability
above. (Sec. 29) beyond their agreed contribution to the capital or
shareholding in the corporation.
Note: A director elected to fill vacancy shall serve the
unexpired term. (Sec. 29) Q: Give the rules on contracts entered into by
directors/trustees of or officers.
Q: How are directors compensated?
A:
A: 1. Contracts which are entered into by the
GR: They shall be entitled as such directors to corporation with one or more of its own
reasonable per diems only. directors/trustees, or officers. (Sec. 32);
XPN: Voidable, unless:
1. When their compensation is fixed in the by- a. The presence of such director/trustee
laws; in the board meeting approving the
2. When granted by the vote of stockholders contract was not necessary to
representing at least a majority of the constitute a quorum;
outstanding capital stock at a regular or b. The vote of such director/trustee in the
special meeting; board meeting approving the contract
3. When they are also officers of the was not necessary for the approval of
corporation. the contract;
c. The contract is fair and reasonable
XPN to XPN: under the circumstances;
In no case shall the total yearly compensation of d. In the case of an officer, there was
directors, as such directors exceed 10% of the previous authorization by the board of
net income before income tax of the corporation directors.
during the preceding year. (Sec. 30)
2. Contracts entered into between corporations
Q: What are the instances when directors are with interlocking directors (interest of said
personally liable? directors is substantial, meaning,
exceeding 20% of the outstanding capital
A: stock). (Sec. 33)
GR: Directors and officers are not solidarily
liable with the corporation. Valid, provided that:
a. The contract is not fraudulent; and
XPN: AGIWAL b. The contract is fair and reasonable
under the circumstances.
UNIVERSITY OF SANTO TOMAS 19
Facultad d
e Derecho Civil
UST GOLDEN NOTES 2009
loan of P500, 000.00, from PBCom Bank, for
Note: If the interlocking directors interest in one the purpose of opening Fort Patio Cafe. This
corporation or corporations is nominal (not exceeding loan was secured by the assets of Patio
20% of the outstanding capital stock) and in the other
substantial, then all the first 3 conditions prescribed in
Investments and personally guaranteed by
Sec. 32 must be present with respect to the corporation Schiera and Jaz.
in which he has nominal interest.
Malyn then filed a corporate derivative action
Where any of the first two conditions is absent, said before the Regional Trial Court of Makati City
contract must be ratified by the vote of the stockholders against Schiera and Jaz, alleging that the two
representing at least 2/3 of the outstanding capital stock
or 2/3 of the members in a meeting called for the directors had breached their fiduciary duties
purpose, provided: by misappropriating money and assets of
1. That full disclosure of the adverse interest of the Patio Investments in the operation of Fort
director/ trustee involved is made at such Patio Cafe.
meeting;
2. The contract is fair and reasonable under the
Did Schiera and Jaz violate the principle of
circumstances.
corporate opportunity? Explain.
Q: What is doctrine of corporate opportunity?
A: Sciera and Jaz violated the principle of
A: Unless his act is ratified by stockholders corporate opportunity, because they used Patio
representing 2/3 of the outstanding capital stock, a Investments to obtain a loan, mortgaged its
director shall refund to the corporation all the assets and used the proceeds of the loan to
profits he realizes on a business opportunity (Sec. acquire a coffee shop through a corporation they
34) which: formed. (Sec. 34) (2005 Bar Question)
a. The corporation is financially able to
undertake; Q: Suppose that the by-laws of "X"
b. From its nature, is in line with corporations Corporation, a mining firm, provides that "The
business and is of practical advantage to directors shall be relieved from all liability for
it; and any contract entered into by the corporation
c. The corporation has an interest or a with any firm in which the directors may be
reasonable expectancy. (2005 Bar interested." Thus, director "A" acquired claims
Question) which overlapped with "X's" claims and were
necessary for the development and operation
Note: The rule shall be applied notwithstanding the fact of "X's" mining properties.
that the director risked his own funds in the venture.
Is the by-law provision valid? Why?
Q: Malyn, Schiera and Jaz are the directors
of Patio Investments, a close corporation A: No. It is in violation of Sec. 32 of the
formed to run the Patio Cafe, an al fresco Corporation Code.
coffee shop in Makati City. In 2000, Patio
Cafe began experiencing financial reverses, What happens if director "A" is able to
consequently, some of the checks it issued consummate his mining claims over and above
to its beverage distributors and employees that of the corporation's claims? (2001 Bar
bounced. Question)
In October 2003, Schiera informed Malyn that A: "A" should account to the corporation for the
she found a location for a second cafe in profits which he realized from the transaction. He
Taguig City. Malyn objected because of the grabbed the business opportunity from the
dire financial condition of the corporation. corporation. (Sec. 34)
22
CORPORATION CODE OF THE PHILIPPINES
a. That the foregoing requirements have a. By increasing/decreasing the number of
been complied with; shares and retaining the par value;
b. The amount of increase or diminution b. By increasing/decreasing the par value of
of the capital stock; existing shares without
c. If an increase of the capital stock, the increasing/decreasing the number of shares;
amount of capital stock or number of c. By increasing/decreasing the number of
shares of no par stock actually shares and increasing/decreasing the par
subscribed, the names, nationalities value.
and residences of the persons
subscribing, the amount of capital Incur, create or increase bonded indebtedness
stock or number of no par stock
subscribed by each, and the amount Q: What is bonded indebtedness?
paid by each on his subscription in
cash or property, or the amount of A: it is a long term Indebtedness secured by real or
capital stock or number of shares of personal property.
no par stock allotted to each
stockholder if such increase is for the Note: Nature of indebtedness determines if it needs
purpose of making effective stock stockholders approval. The requirements are basically
dividend authorized; the same as the requirements for increase and decrease
d. The amount of stock represented at the of capital stock as it likewise requires the same approvals
by the directors and the stockholders.
meeting; and
e. The vote authorizing the increase or
Sell, lease, exchange, mortgage, pledge or
diminution of the capital stock
other disposition (SLEMPO) of all or
Note: The increase or decrease in the capital stock or
substantially all of corporate assets;
the incurring, creating or increasing bonded
indebtedness shall require prior approval of the SEC. Q: What are the procedural requirements?
A:
1. Majority vote of the BOD or BOT;
Q: What is the additional requirement with 2. Stockholders representing at least 2/3 of
respect to the increase of capital stock? the outstanding capital stock or by at least
2/3 of the members in case of non-stock
corporation;
A: The application to be filed with the SEC shall be
3. Written notice of the proposed action and
accompanied by the sworn statement of the
of the time and place of the meeting
treasurer of the corporation, showing that at least
addressed to each stockholder or
25% of the amount subscribed has been paid
member at his place of residence as
either in cash or property or that there has been
shown on the books of the corporation and
transferred to the corporation property the
deposited to the addressee in the post
valuation of which is equal to 25% of the
office with postage prepaid, or
subscription.
served personally. (Sec. 40)
24
CORPORATION CODE OF THE PHILIPPINES
Q: What if there is a wrongful or illegal
Q: In case of mortgaged or pledged shares? declaration of dividends?
XPN: When the mortage or pledge is recorded Q: What are the sources of dividends?
in the books of the corporation, in such a case
then the mortgagee or pledgee is entitled to A:
receive the dividends. GR: Dividends can only be declared and aid
out of actual and bona fide unrestricted retained
Q: What are the forms of dividends? earnings.
The right to dividends is based on duly recorded b. Revaluation surplus - Increase in the value
stockholdings. of a fixed asset as a result of its
revaluation. It cannot be declared as
Stockholders are entitled to dividends PRO-RATA based
dividend unless the asset is sold.
on the total number of shares and not on the amount
paid on shares.
c. Paid-in surplus - Dividends can be
Q: When may corporation declare dividends? declared out of the amount received in
excess of the par value of shares when
A: (SEC Opinion):
GR: Even if there are existing profits, BOD has 1. That they be declared only as stock
discretion to determine WON dividends are dividends and not cash;
declared. 2. No creditors are prejudiced; and
3. There is no impairment of capital.
XPN: Stock corporations are prohibited from
retaining surplus profits in excess of 100% of d. Reduction surplus - can be a source of
their paid-in capital stock. dividends. Rule on paid-in surplus
is applicable.
XPN to the XPN:
a. Definite corporate expansion projects e. No dividends can be declared out of
approved by the board of directors capital except only in two instances:
b. Corporation is prohibited under any 1. Liquidating dividends; and
loan agreement with any financial 2. Dividends from investments in
institution or creditor from declaring Wasting Asset Corporation.
dividends without its/his consent and
such consent has not yet been f. Treasury shares Can be
secured declared as property dividends.
c. The retention is necessary under
special circumstances obtaining in the Q: Distinguish cash and stock dividends.
corporation, such as when there is a
need for special reserve for probable A:
contingencies. CASH DIVIDENDS STOCK DIVIDENDS
Part of general fund Part of capital
Results in cash outlay No cash outlay
Not subject to levy Once issued, can be
Q: What are the requirements? A: No. The resolutions are not binding on the
corporation and its stockholders including Jimmy
A: Morato. While these resolutions were approved by
1. Contract must be approved by the BOD or the stockholders, the directors' approval, which is
BOT and by the stockholders owning at required by law in such case, does not exist.
least the majority of the outstanding
capital stock, or members in case of a What remedies, if any, are available to Morato?
26
CORPORATION CODE OF THE PHILIPPINES
Q: What are the remedies in case of ultra vires
A: Jimmy Morato can petition the Securities and act?
Exchange Commission to declare the two (2)
resolutions, as well as any and all actions taken by A:
the Board of Directors thereunder, null and void. 1. State
(1998 Bar Question) a. Obtain a judgment of forfeiture; or
b. The SEC may suspend or revoke the
Q: What are ultra vires acts? certificate of registration
28
CORPORATION CODE OF THE PHILIPPINES
stockholders/ members the 2/3 of the outstanding 2. As provided in the by-laws laws
to the board of capital stock or 2/3 of the 2. If no provision in
directors/ trustees members in the case of non- the by-laws 1
stock corporation week prior to the
meeting
Q: What are the ways of amending, repealing or
Note: Whenever for any cause, there is no person
adopting new by-laws?
authorized to call the meeting, the SEC, upon petition of
any stockholder or member on showing of good cause,
A: may issue an order to the petitioning stockholder or
1. Amendment may be made by stockholders member directing him to call a meeting of the corporation
together with the Board by majority vote by giving proper notice
of directors and owners of at least a
majority of the outstanding capital Q: Where will stockholders/members meeting
stock/members; or be held?
2. By the board only after due delegation by
the stockholders owning 2/3 of the A: Whether regular or special, the meeting shall be
outstanding capital stock/members. held in the city or municipality where the principal
Provided, that such power delegated to office of the corporation is located, and if
the board shall be considered as revoked practicable, in the principal office of the
whenever stockholders owning at least corporation. (Sec. 51)
majority of the outstanding capital stock or
members, shall vote at a regular or special Note: All proceedings had and any business transacted
meeting. (Sec. 48) at any meeting of the stockholders or members, if within
the powers or authority of the corporation, shall be valid
MEETINGS 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.
Q: What are the requirements for a valid
meeting whether stockholders/members or the Q: When will BOD/BOT meetings be held?
board?
A:
A: DATE OF MEETING REQUIRED WRITTEN
1. Required notice (Sec. 50 for /VERBAL NOTICE
stockholders/members) and (Sec. 1. The date fixed in the 1. Within the period
53 for BOD/BOT) by-laws; or provided in the by-laws
2. In the absence of
No meeting can be validly held unless there is 2. If there is no date in provision in the by-laws 1
notice. However it may be waived. the by-laws shall be day prior to the scheduled
held monthly meeting
2. Call by authorized person; 1. Any time upon the 1. Within the period
3. Presided by the president unless call of the president; or provided in the by-laws
otherwise provided in the by-laws (Sec. 2. As provided in the 2. If no provision in the by-
54); by-laws laws 1 day prior to the
4. Required quorum (Secs. 52 & 53) scheduled meeting
30
CORPORATION CODE OF THE PHILIPPINES
2. Purchased with public funds or 3. By-laws may provide for a shorter duration
those affected with public interest. of a continuing proxy.
In such cases, the government shall vote the Q: When may the right to vote by proxy be
shares. (Republic of the Philippines v. exercised?
Sandiganbayan, G.R. No. 152154, July, 15, 2003)
A:
Q: What is a proxy? 1. Election of the BOD/BOT;
2. Voting in case of joint ownership of stock;
A: A written authorization given by one person to 3. Voting by trustee under VTA;
another so that the second person can act for the 4. Pledge or mortgage of shares;
first such as that given by the shareholder to 5. As provided for in its by-laws.
someone else to represent him and vote his shares
at a shareholders meeting. Q: What is the extent of authority of a proxy?
A: Yes. The right to vote is inseparable from the A: It is an agreement whereby one or more
right of ownership of stock. Therefore, to be valid, stockholders transfer their shares of stocks to a
a proxy must have been given by the person who trustee, who thereby acquires for a period of time
is the legal owner of the stock and is entitled to the voting rights (and/or any other rights) over such
vote. (SEC Opinion, Sept. 9, 1991) shares; and in return, trust certificates are given to
the stockholder/s, which are transferable like stock
Q: What is the duration of proxy? certificates, subject, to the trust agreement.
32
CORPORATION CODE OF THE PHILIPPINES
notwithstanding the fact that the parties refer to it has not fully paid the fulfillment of the terms of
as purchase or some other contract. (Sec. 60) subscription the sale and registration
thereof in the books of
Q: What are the kinds of subscription the corporation
contracts? Cannot be released from The corporation may
his subscription unless all rescind or cancel the
A: stockholders agree contract for non-
thereto and no creditor is fulfillment of the contract
1. Pre-incorporation subscription entered
thereby prejudiced by the buyer
into before the incorporation and
Corporate creditors may Creditors may not
irrevocable for a period of six (6) months proceed against the proceed against the
from the date of subscription unless all subscriber for his unpaid buyer for the unpaid
other subscribers consent or if the subscription in case the price as there is no
corporation failed to materialize. It cannot assets f the corporation privity of contract
also be revoked after filing the Articles of are not sufficient to pay between them
Incorporation with the SEC (Sec. 61) their claims
May be in any form, In purchase amounting to
2. Post-incorporation subscription entered written or oral, express or more than 500 pesos,
into after incorporation. implied, and therefore, the Statute of Frauds
not covered by the shall apply
Q: What are valid considerations in a Statute of Frauds
subscription agreement? Subscription price are Purchase price does not
considered assets of the become assets of the
A: corporation, hence, corporation unless fully
1. Cash; creditors may go after paid
them
2. Property;
3. Labor or services actually rendered to the
corporation; Q: What is the Doctrine of Individuality of
4. Prior corporate obligations; Subscription?
5. Amounts transferred from unrestricted
retained earnings to stated capital (in case A: A subscription is one entire and indivisible
of declaration of stock dividends); whole contract. It cannot be divided into portions.
6. Outstanding shares in exchange for stocks (Sec. 64)
in the event of reclassification or
conversion. Q: What is the rule on pre-incorporation
subscription agreements?
Note: Promissory notes or future services are not valid
considerations. A:
GR: Subscription of shares of stock of a
Q: Janice rendered some consultancy work for corporation still to be formed shall be irrevocable
XYZ Corporation. Her compensation included for a period of at least 6 months from date of
shares of stock therein. Can XYZ Corporation subscription.
issue shares of stock to pay for the services of
Janice as its consultant? Discuss your answer. XPN:
1. All of the other subscribers consent to the
A: The corporation can issue shares of stock to revocation; and
pay for actually performed services to the 2. Incorporation of said corporation fails to
corporation, but not for future services or services materialize within said period or within a
yet to be performed. [Sec. 62(3]) (2005 Bar longer period as may be stipulated in the
Question) contract of subscription; provided that no
pre-incorporation subscription may be
Q: What are the distinctions between revoked after the submission of the articles
subscription and purchase? of incorporation to the SEC. (Sec. 61)
2. In case of no-par value shares, they are Q: What if the transfer is not recorded, is it
deemed fully paid and non-assessable. valid?
Q: Is a stockholder entitled to the shares of A: Only insofar as the parties to the transfer are
stock subscribed although not fully paid? concerned.
A: Yes. As long as the shares are not considered Note: Hence, the corporation has the right to refuse to
delinquent, they are entitled to all rights granted to recognize any transfer of shares which has not been duly
registered in the stock and transfer book. (Sec. 63)
it whether or not the subscribed capital stocks are
fully paid.
Q: When may the corporation validly refuse to
register the transfer of shares?
Q: What are the distinctions between capital
stock from shares of stock?
A: No shares of stock against which the
corporation holds any unpaid claim shall be
A:
transferable in the books of the corporation. The
CAPITAL STOCK SHARES OF STOCK
unpaid claim refers to the unpaid subscription on
The amount paid in or It is an interest or right
the shares transferred and not to any other
secured to be paid in which an owner has in the
by the stockholders management of the
indebtedness that the transferor may have to the
upon which the corporation, and its surplus corporation. (Sec. 63)
corporation is to profits, and, on dissolution,
conduct its operation. in all of its assets remaining Q: "A" is the registered owner of Stock
It is the property of the after payment of its debt. Certificate No. 000011. He entrusted the
corporation itself The stockholder may own possession of said certificate to his best friend
(monetary value). the shares even if he is not "B" who borrowed the said endorsed certificate
holding a certificate of stock. to support B's application for passport (or for a
purpose other than transfer). But "B" sold the
certificate to "X", a bona fide purchaser who
Q: How are shares of stock transferred? relied on the endorsed certificates and believed
him to be the owner thereof.
A:
1. If represented by a certificate, the Can "A" claim the shares of stocks from "X"?
following must be strictly complied with: Explain.
a. Delivery of the certificate;
34
CORPORATION CODE OF THE PHILIPPINES
A: No. Since the shares were already transferred
to "B", "A" cannot claim the shares of stock from Q: What is the effect of failure to pay the
"X". The certificate of stock covering said shares subscription on the date it is due?
have been duly endorsed by "A" and entrusted by
him to "B". By his said acts, "A" is now estopped A: It shall render the entire balance due and
from claiming said shares from "X", a bona fide payable and shall make the SH liable for interest at
purchaser who relied on the endorsement by A of the legal rate on such balance, unless a different
the certificate of stock. rate of interest is provided in the by-laws.
Would your answer be the same if "A" lost the Q: When will the share become delinquent?
stock certificate in question or if it was stolen
from him? A: If within 30 days from the date of payment
specified in the contract of subscription or from the
A: Yes. In the case where the certificate of stock date stated in the call made by the board, no
was lost or stolen from "A", "A" has a right to claim payment is made, all stocks covered by said
the certificate of stock from the thief who has no subscription shall thereupon become delinquent
right or title to the same. "One who has lost any and shall be subject to sale unless the BOD orders
movable or has been unlawfully deprived thereof, otherwise.
may recover it from the person in possession of the
same." (Art. 559, NCC) (2001 Bar Question) Q: What does the term unpaid claim mean (for
purposes of declaring the shareholder of
Q: What if there is no certificate of stock, how delinquent?
can shares be transferred?
A: It refers to any unpaid subscription, and not to
A: It can be transferred by deed of any indebtedness which a subscriber or
sale/assignment. stockholder may owe the corporation arising from
any other transaction. (China Banking Corporation
Q: When may a certificate of stock be issued? v. Court of Appeals, et. al., G.R. No. 117604,
March 26, 1997)
A: It shall be issued until the full amount of his
subscription together with interest and expenses Q: What are the remedies of corporations to
has been paid. (Sec. 64) enforce payment of stocks?
Note: Notice shall state the amount due on each For how many shares is Ace Cruz entitled to be
subscription plus accrued interest, and the date, time and paid cash dividends? Explain.
place of the sale which shall not be less than 30 days nor
more than 60 days from the date the stocks become
delinquent. A: Ace is entitled to be paid in cash dividends to
the extent of his 100,000 shares of stock. Shares
5. Sale such number of shares as may be of stock become delinquent if the stockholder fails
necessary to pay the amount due on to pay within 30 days from the date provided in the
subscription, plus interest and other subscription contract. Before the stocks are
amounts due, will be sold at public declared delinquent, he is entitled to the exercise
auction. of all his rights including the right to receive cash
dividends.
Note: The highest bidder is the person offering to pay full
amount of the balance on the subscription and other On December 1, 2008, can Ace Cruz compel JP
amount that are due for the smallest number of shares or Development Corporation to issue to him the
fraction of a share. (Secs. 67-70) stock certificate corresponding to the P25,000
paid by him?
Q: When may delinquency sale be
discontinued? A: No. The stock certificates will be issued only if
and when the full amount of his subscription
A: If the delinquent SH pays the unpaid balance together with interests if any has been paid. (2008
plus interest, costs and expenses on or before the Bar Question)
date specified for the sale or when the BOD orders
otherwise. Q: Who is the highest bidder in a public auction
sale of delinquent sale?
Q: What are the effects of stock delinquency?
A: The one who offers to pay the full amount of the
A: Deprives the stockholder the right:
balance of the subscription together with accrued
interest, costs, and expenses of sale, for the
1. To be voted for; or smallest number of shares.
2. To be entitled to vote; or
3. To representation at any stockholders' Q: What is an underwriting agreement?
meeting.
A: It is an agreement between a corporation and a
Delinquent stockholder shall not be entitled to any third person, termed the underwriter, by which the
of the rights of a stockholder but he shall still be latter agrees, for a certain compensation, to take a
entitled to receive dividends. stipulated amount of stocks or bonds, specified in
the underwriting agreement, if such securities are
Note: If the delinquent stockholder is a director, he shall not taken by those to whom they are first offered.
continue be a director but he cannot run for re-election.
Q: What are the distinctions between
Q: Are delinquent shares entitled to dividends? underwriting agreement and stock subscription
agreement?
A: Yes, provided that any cash dividends due on
delinquent stocks shall first be applied to the A:
unpaid balance on the subscription plus costs and
36
CORPORATION CODE OF THE PHILIPPINES
UNDERWRITING STOCK SUBSCRIPTION f. Issuance of stock dividends;
AGREEMENT AGREEMENT g. Corporate mergers or consolidation;
The signers obligate The obligation of the h. Voluntary dissolution of the
themselves to take the signer to the purchasers corporation whether or not creditors
shares of stock which and to the public is are prejudiced.
cannot be sold. absolute.
Underwriters are usually There is no commission. 2. 2/3 of outstanding stocks
allowed a commission. a. Removal of directors;
In pure underwriting He becomes a stockholder b. Ratification of contract with director or
agreement, the signer of the company and is officer where first two requisites of
can refuse to become a liable to pay the amount Sec. 32 are lacking;
stockholder/ member of due on the stock. c. Where stockholders of managed
the company in
corporation own more than 1/3 of
pursuance of his
outstanding capital stock entitled to
contract with the
promoter. vote of the managing corporation are
also the majority of the board of
STOCKHOLDERS managed corporation, such 2/3 vote is
required to approve management
contract;
Q: What are the rights of a stockholder?
d. Delegation to the board to amend,
A: repeal by-laws or adopt new by-laws.
1. To vote at the stockholders meetings either
in person or by proxy; (Sec. 58) 3. Majority of Outstanding stocks with
2. To receive his proportionate share of the majority of the board
profits of the corporation by way of a. Approval of management contract;
dividends; (Sec. 43) b. Amendment to by-laws, repeal of by-
3. To approve the declaration of stock laws, adoption of new by-laws.
dividends; (Sec. 43)
4. Pre-emptive right; (Sec. 39) 4. Majority of outstanding stock
5. To inspect corporate books and records; a. For quorum in electing members of
(Sec. 74 par. 2) the board by cumulative voting;
6. To financial statements; (Sec. 75) b. Grant of compensation to members of
7. Appraisal right; (Sec. 81) the board;
8. To participate proportionately in the c. Adoption of original by-laws;
distribution of the corporate assets upon d. Revocation of delegated authority to
corporate liquidation following the the board of directors to amend or
dissolution and winding up; (Sec. 122) repeal or adopt new by-laws.
9. To file a derivative actions.
10. To the issuance of a certificate of stock 5. The right to vote of non-voting
upon compliance with the conditions which stockholders may be limited or broadened
entitle him to one. (SEC Opinion January to the extent specified in the AI or by-laws,
8, 1987) however, they may still vote in instances
specified in the code.
Q: Give the summary of vote requirements for
stockholders Q: What are the limitations on the
stockholders right to vote?
A:
1. 2/3 of Outstanding Stock along with A:
majority of the board: a. Where the articles of incorporation
a. Amendment of AOI; provides for classification of shares
b. Extending and Shortening Corporate pursuant to Sec.6, non-voting shares are
Term not entitled to vote except as provided for
c. Increasing / Decreasing capital stock / in the last paragraph of Sec.6.
bonded indebtedness; b. Preferred or redeemable shares may be
d. Sale or disposition of all, substantially deprived of the right to vote unless
all of corporate assets; otherwise provided in the Code. (Sec. 6)
e. Investment of corporate funds in c. Fractional shares of stock cannot be voted
another corporation or for a purpose unless they constitute at least one full
other than main purpose; share. (Sec. 41)
UNIVERSITY OF SANTO TOMAS 37
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d. Treasury shares have no voting rights as corporate purposes or in payment of a
long as they remain in the treasury (Sec. previously contracted debt;
57) c. Shall not take effect if denied in the
e. Holders of stock declared delinquent by Articles of Incorporation or an amendment
the board of directors for unpaid thereto.
subscription are not entitled to vote or a d. It does not apply to shares that are being
representation at any stockholders reoffered by the corporation after they
meeting. (Sec. 67) were initially offered together with all the
f. A transferee of stock cannot vote if his shares. (Benito v. SEC, L-56655, July 25,
transfer is not registered in the stock and 1983)
transfer book of the corporation. (Sec. 63)
g. Stock held in escrow cannot be voted until Note: Includes not only new shares in pursuance of an
the performances of a certain condition or increase of capital stock but would cover the issue of
the happening of a certain event as previously unissued shares which form part of the
contained in the agreement. (SEC existing capital stock as well as treasury shares. (SEC
2000 Opinion).
Opinion)
Q: Suppose that "X" Corporation has already
Q: What is a pooling agreement?
issued the 1000 originally authorized shares of
the corporation so that its Board of Directors
A: This is an agreement, also known as voting
and stockholders wish to increase "X's"
agreement, entered into by and between 2 or
authorized capital stock. After complying with
more stockholders to make their shares vote in
the requirements of the law on increase of
the same manner. This usually relates to
capital stock, "X" issued an additional 1000
election of directors where parties often
shares of the same value.
provide for arbitration in case of disagreement.
This does not involve a transfer of stocks but is
Assume that stockholder "A" presently holds
merely a private agreement. (Sec. 100)
200 out of the 1000 original shares. Would "A"
Note: Parties thereto remain the legal owners of their
have a pre-emptive right to 200 of the new
stocks with the right to vote them, although contractually issue of 1000 shares? Why?
they each have bound themselves to vote in accordance
with the decision of the majority in the pool. A: Yes, "A" would have a pre-emptive right to 200
of the new issue of 1000 shares. "A" is a
Q: When are pooling agreements valid? stockholder of record holding 200 shares in "X"
Corporation. According to the Corporation Code,
A: As long as they do not limit the discretion of the each stockholder has the pre-emptive right to all
BOD in the management of corporate affairs or issues of shares made by the corporation in
work any fraud against stockholders not party to proportion to the number of shares he holds on
the contract. record in the corporation.
Q: What is a pre-emptive right? When should stockholder "A" exercise the pre-
emptive right?
A: It is the right of SH to subscribe to the issuance
or disposition of shares in proportion to their A: Pre-emptive right must be exercised in
respective shareholding so that their interest in the accordance with the Articles of Incorporation or the
corporation will be maintained, before said shares By-Laws. When the Articles of Incorporation and
are offered to a non-stockholder. the By-Laws are silent, the Board may fix a
reasonable time within which the stockholders may
Q: When is the pre-emptive right not available? exercise the right.
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decided to offer to the public all the authorized A: No, the stockholder may not exercise appraisal
shares of the Corporation at their market value. right because the matter that he dissented from is
not one of those where right of appraisal is
Would Mr. X, a stockholder holding 4,000 available under the Corporation Code. (1999 Bar
shares, have pre-emptive rights to the Question)
remaining 10,000 shares?
Q: The Board of Directors of ABC, Inc., a
A: Yes. Mr. X, a stockholder holding 4,000 shares, domestic corporation, passed a resolution
has pre-emptive right to the remaining 10,000 authorizing additional issuance of shares of
shares. All stockholders of a stock corporation shall stocks without notice nor approval of the
enjoy pre-emptive right to subscribe to all issues or stockholders. DX, a stockholder, objected to
disposition of shares of any class, in proportion to the issuance, contending that it violated his
their respective shareholdings. The ruling in Benito right of pre-emption to the unissued shares. Is
v. Datu and Tan v. SEC to the effect that pre- his contention tenable? Explain briefly.
emptive right applies only to issuance of shares in
connection with an increase in capital is no longer A: Yes. DXs contention is tenable. Under Sec.39
a valid rule under the Corporation Code. The facts of the Corporation Code, all stockholders of ABC,
in those cases happened during the regime of the Inc. enjoy pre-emptive right to subscribe to all
old Corporation Law. issues of shares of any class, including the
reissuance of treasury shares in proportion to their
Alternative answer: respective shareholdings. (2004 Bar Question)
No, Mr. X does not have pre-emptive right over the
remaining 10,000 shares because these shares Q: What is the right of first refusal?
have already been offered at incorporation and he
chose not to subscribe to them. He, therefore, has A: A stockholder who may wish to sell or assign his
waived his right thereto and the corporation may shares must first offer the shares to the corporation
offer them to anyone. or to the other existing stockholders of the
corporation, under terms and considerations which
Would Mr. X have pre-emptive rights to the are reasonable, and only when the corporation or
50,000 preferred shares? the other stockholders do not or fail to exercise
their option, is the offering stockholder at liberty to
A: Yes. Mr. X would have pre-emptive rights to the dispose of his shares to third parties.
50,000 preferred shares. All stockholders of a
stock corporation shall enjoy pre-emptive right to Q: What is the right of first option?
subscribe to all issues or disposition of shares of
any class, in proportion to their respective A: A right that grants to the corporation the right to
shareholdings. buy the shares at a fixed price and only valid if
made on reasonable terms and consideration.
Alternative answer:
Yes, Mr. X has preemptive right over the 50,000 Q: What is the difference between pre-emptive
preferred shares because they were not offered right and right of first refusal?
before by the corporation for subscription.
A: In pre-emptive right, it is the corporation that
Assuming that the existing stockholders are offers the shares to stockholders. It is exercised
entitled to pre-emptive rights, at what price will with or without a provision in the AOI. The objective
the shares be offered? is to preserve and maintain unimpaired and
undiluted the SHs relative and proportionate voting
A: The shares will be offered to existing stock- strength and control.
holders, who are entitled to pre-emptive right, at a
price fixed by the Board of Directors, which shall In right of first refusal, it is the SH who shall offer
not be less than the par value of such shares. his shares to the other SH before the same are
offered to the public or non-stockholders. It is a
Assuming a stockholder disagrees with the right available to SH to be offered the shares of
issuance of new shares and the pricing for the another SH before it is offered to other party. The
shares, may the stockholder invoke his right to be exercised must be indicated in the AOI
appraisal rights and demand payment for his and printed in the stock certificate.
shareholdings?
Q: Is there pre-emptive right on the re-issuance
of treasury shares?
UNIVERSITY OF SANTO TOMAS 39
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be termed equitable, beneficial or quasi-ownership.
A: Yes. When a corporation reacquires its own It is predicated upon the necessity of self-
shares which thereby become treasury shares, all protection.
shareholders are entitled to pre-emptive right when
the corporation reissues or sells these treasury Q: What books are required to be kept by a
shares. The re-issuance of treasury shares is not corporation?
among the exception provided by Sec. 39 when
pre-emptive right does not exist. A:
1. Book for the minutes of SH and BOD
Q: May pre-emptive right be waived by the meetings
stockholder? 2. Record of transactions
3. Stock and transfer book
A: Yes when the stockholder fails to exercise his 4. Other books required to be kept
pre-emptive right after being notified and given an
opportunity to avail of such right. Q: What are the contents of a stock and
transfer book?
Note: The shareholder must either exercise the right and
increase the investment, or dispose of the right by sale or A:
it will lapse and the shareholders proportionate interest 1. All stocks in the name of the stockholders
will be diluted. alphabetically arranged;
2. Amount paid and unpaid on all stocks and
Q: Is a provision stating that the consent of the the date of payment of any installment;
board must be obtained before transfer of 3. Alienation, sale or transfer of stocks;
shares valid? 4. Other entries as the by-laws may
prescribe.
A: No. A provision that requires any stockholder
who wishes to sell, assign or dispose of his shares
Q: What are the limitations on the right of
in the corporation to first obtain the consent of the
inspection of a stockholder?
board of directors or other stockholders of the
corporation is void as it unduly restrains the
A:
exercise of the stockholder of his right to transfer.
1. The inspection should only be for a
purpose germane to his interest as a SH.
Q: What is a buy-back agreement?
2. It must be exercised in good faith.
3. It should be done during reasonable office
A: This exists in situations when shares are given
hours on business days.
or assigned to officers or employees under the
4. It should follow the formalities that may be
condition that should they resign or be terminated
required in the by-laws.
from employment, the corporation shall be granted
5. The right does not extend to trade secrets.
the right to buy-back the shares. It is valid only on
6. It is subject to limitations under special
reasonable terms and consideration.
laws.
ex. Secrecy of Bank Deposits.
Q: May a provision in the articles of
incorporation validly grant a right of first
Q: Who is authorized to make entries in the
refusal in favor of other stockholders?
stock and transfer book?
A: Yes, the SEC, as a matter of policy, allows
A: The corporate secretary. Hence, entries made
restrictions on transfer of shares in the articles of
by the Chairman or President are invalid. (Torres,
incorporation if the same is necessary and
Jr. v. Court of Appeals, G.R. No. 120138,
convenient to the attainment of the objective for
September 5, 1997)
which the company was incorporated, unless
palpably unreasonable under the circumstances. Q: Who may make proper entries?
(SEC Opinion, February 20, 1995)
A: The obligation and duty to make entries on the
Q: What is the basis of SHs right of STB falls on the Corporate Secretary. If the
inspection? corporate secretary refuses to comply, the
stockholder may rightfully bring suit to compel
A: Their ownership of the assets and property of performance. The stockholder cannot take the law
the corporation whether this ownership or interest on to his hands; otherwise such entry shall be void.
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CORPORATION CODE OF THE PHILIPPINES
(Torres, Jr. v. Court of Appeals, G.R. No. 120138, demand within such period shall be
September 5, 1997) deemed a waiver of the appraisal right.
3. Existence of unrestricted retained
Q: What is the probative value of the stock and earnings or surplus profits.
transfer book? XPN: In case of a close corporation which
only requires that it has assets and the
A: The stock and transfer book is the best payment of the fair value of the shares to
evidence of the transactions that must be entered the dissenting SH will not result to its
or stated therein. However, the entries are insolvency.
considered prima facie evidence only and may be 4. Within ten (10) days after demanding
subject to proof to the contrary (Bitong v. Court of payment for his shares, a dissenting
Appeals, G.R. No. 123553, July 13, 199). stockholder shall submit the certificates of
stock representing his shares to the
Q: What is appraisal right? corporation for notation thereon that such
shares are dissenting shares. (Sec. 86)
A: The right to withdraw from the corporation and His failure to do so shall, at the option of
demand payment of the fair value of his shares the corporation, terminate his rights.
after dissenting from certain corporate acts 5. After payment, certificate of stock of said
involving fundamental changes in corporate shares shall be cancelled and acquired as
structure. (Sec. 81) treasury shares.
Q: In what instances may the right of appraisal Q: When will the dissenting stockholder lose
be exercised? his right of appraisal?
A: A:
GR: Costs of appraisal shall be borne by the 1. The party bringing suit should be
corporation a shareholder as of the time of the act or
transaction complained of;
XPN: The costs shall be borne by the 2. He has exhausted intra-corporate
stockholder, when the fair value ascertained remedies; and
by the appraisers is approximately the same 3. The cause of action actually
as the price which the corporation may have devolves on the corporation, the
offered to pay the stockholder. (Sec. 85) wrongdoing or harm having been caused
to the corporation and not to the particular
stockholder bringing the suit.
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CORPORATION CODE OF THE PHILIPPINES
committed the breach of trust against the interests
Note: A person who is merely holding in trust the shares of the corporation would be to emasculate the right
of stock in her name cannot file a derivative suit, since of the minority stockholders to seek redress for the
she is not a stockholder in her own right. (Bitong v. Court corporation. Filing such action as a derivative suit
of Appeals, G.R. No. 123553, July 13, 1998)
even by a lone stockholder is one of the
protections extended by law to minority
Personal injury suffered by the stockholders cannot
stockholders against abuses of the majority.
disqualify them from filing a derivative suit on
behalf of the corporation. It merely gives rise to an
additional cause of action for damages against the Q: What is the nature of a certificate of stock?
erring directors. (Gochan v. Young, G.R. No.
131889, March 12, 2001) A: A certificate of stock is the paper representative
or tangible evidence of the stock itself and of the
Q: What are individual actions? various interests therein. (Tan v. SEC, G.R. No.
95696, March 3, 1992)
A: Those brought by the shareholder in his own
name against the corporation when a wrong is
directly inflicted against him.
Q: What are shares of stock?
Q: What are representative actions?
A: It is an interest or right which an owner has in
A: These brought by the stockholder in behalf of the management of the corporation and its surplus
himself and all other stockholders similarly situated profits, and, on dissolution, in all of its assets
when a wrong is committed against a group of remaining after the payment of its debt. The
stockholders. stockholder may own the share even if he is not
holding a certificate of stock
Q: AA, a minority stockholder, filed a suit
against BB, CC, DD, and EE, the holders of Q: What are the distinctions between shares of
majority shares of MOP Corporation, for stock from certificates of stock?
alleged misappropriation of corporate funds.
The complaint averred, inter alia, that MOP A:
Corporation is the corporation in whose behalf CERTIFICATE OF
SHARE OF STOCK
and for whose benefit the derivative suit is STOCK
brought. In their capacity as members of the Unit of interest in a Evidence of the
corporation holders ownership of
Board of Directors, the majority stockholders
the stock and of his
adopted a resolution authorizing MOP
right as a shareholder
Corporation to withdraw the suit. Pursuant to and of his extent
said resolution, the corporate counsel filed a specified therein.
Motion to Dismiss in the name of the MOP It is an incorporeal or It is concrete and
Corporation. Should the motion be granted or intangible property tangible
denied? Reason briefly.
It may be issued by the It may be issued only
A: No. The requisites for a valid derivative suit corporation even if the if the
exist in this case. First, AA was exempt from subscription is not fully paid. subscription is fully
exhausting his remedies within the corporation and paid.
did not have a demand on the Board of Directors Situs is generally the state 4. The situs may be
for the latter to sue. Here, such a demand would where the corporation has the place where it is
its domicile located or at the
be futile, since the directors who comprise the
a. For purposes of domicile of the owner
majority (namely BB, CC, DD and EE are the ones
taxation, situs is the state even though the
guilty of the wrong complained of. Second, AA in which they are domicile of the owner,
appears to be a stockholder at the time of the permanently kept except when
alleged misappropriation of corporate funds. Third, regardless of the domicile corporation is
the suit is brought on behalf and for the benefit of of the owner or where the domiciled elsewhere.
MOP Corporation. In this connection, it was held in corporation was
Conmart (Phils.) Inc. vs SEC, 198 SCRA 73 that to organized. (see also sec.
grant to the corporation concerned the right of 104 of R.A. No. 8424)
withdrawing or dismissing the suit, at the instance b. To register the chattel
of the majority stockholders and directors who mortgages over the
themselves are the persons alleged to have shares of stock the situs is
Note: The SEC may, by specific rule or regulation, allow Q: May a stockholder bring suit to compel the
corporations to provide in their AOI and by-laws for the corporate secretary to register valid transfer of
use of uncertified securities. (Sec.43.2 of RA 8799 (May stocks? To be valid and binding on the
2000) also known as the Securities Regulation Code) corporation and third parties, is the attachment
or mortgage of shares of stock required to be
Q: What are the special rules on registered or registered in the corporations stock and
listed shares? transfer book?
A: Notwithstanding Sec. 63 of the Corporation A: Yes, it is the corporate secretarys duty and
Code, under Sec. 43.1 of the Securities Regulation obligation to register transfers of stocks.
Code, a corporation whose shares of stock are
registered pursuant to the Code or listed on a stock Note: An attachment or mortgage of shares of stock
exchange may: need not be registered in the corporations stock and
a. If so resolved by its BOD and agreed by a transfer book inasmuch as a chattel mortgage over
shareholder, issue shares to, or record the shares of stock does a transfer of shares and that only
absolute transfers of shares of stock are required to be
transfer of some or all of its shares into the recorded in the corporations stock and transfer book in
name of said shareholders, investors or, order to have force and effect as against third persons.
securities intermediary in the form of (Chemphil Export and Import Corporation v. Court
uncertificated securities; of Appeals, G.R. Nos. 112438-39, December 12,
b. The use of uncertificated securities shall 1995)
be without prejudice to the rights of the
securities intermediary subsequently to Q: What is the rule on right to issuance?
require the corporation to issue a
certificate in respect of any shares A: A corporation may now, in the absence of
recorded in its name; and provisions in their by-laws to the contrary, apply
c. If so provided in its articles of payments made by subscribers-stockholders,
incorporation and by-laws, issue all of the either as:
shares of a particular class in the form of a. Full payment for the corresponding
uncertificated securities and subject to a number of shares of stock, the par value
condition that investors may not require of each of which is covered by such
the corporation to issue a certificate in payment; or
respect of any shares recorded in their b. Payment pro-rata to each and all the
name.
entire number of shares subscribed for.
(Baltazar v. Lingayen Gulf Electric Power
Q: Is a stock certificate negotiable?
Co., Inc, L-16236-38, June 30, 1965)
A: No. It is regarded as quasi-negotiable in the
Q: What is the rule on illegal transfer?
sense that it may be transferred by endorsement,
coupled with delivery.
A: Since certificates of stock are only quasi-
negotiable, they do not afford the same protection
Q: Why is a stock certificate not negotiable?
to a holder in good faith and for value who receives
them in the course of their being negotiated, and
A: Because the holder thereof takes it without
that the ownership of the true owner would be
prejudice to such rights or defenses as the
preferred, except only when the circumstances
44
CORPORATION CODE OF THE PHILIPPINES
showed that the true owner was guilty of circumstances as to how it was lost, stolen
negligence in causing the loss. or destroyed, number of shares
represented by the certificate, serial
Q: Four months before his death, PX assigned number of the certificate, and name of the
100 shares of stock registered in his name in corporation that issued it.
favor of his wife and his children. They then 2. The corporate secretary shall verify the
brought the deed of assignment to the proper same. A notice shall also be published
corporate officers for registration with the once a week for 3 consecutive weeks in a
request for the transfer in the corporation's newspaper of general circulation.
stock and transfer books of the assigned 3. If after 1 year from the last publication, no
shares, the cancellation of the stock contest has been presented or made
certificates in PX's name, and the issuance of against the issuance of new certificate, the
new stock certificates in the names of his wife old certificates shall be cancelled and new
and his children as the new owners. The ones be issued. Exception to the 1 year
officers of the Corporation denied the request period: if the registered owner files a bond
on the ground that another heir is contesting or other security effective for period of 1
the validity of the deed of assignment. May the year, in which case, new certificate may
Corporation be compelled by mandamus to be issued even before expiration of 1 year
register the shares of stock in the names of the but still upon the discretion of the
assignees? Explain briefly. corporation.
A: Yes. The corporation may be compelled by Q: A stockholder claimed that his stock
mandamus to register in the shares of stock in the certificate was lost. After going through with
name of the assignee. The only legal limitation the procedure for the issuance of lost
imposed by Sec. 63 of the Corporation Code is certificate, and no contest was presented
when the Corporation holds any unpaid claim within 1 year from the last publication, the
against the shares intended to be transferred. The corporation issued a new certificate of stock in
alleged claim of another heir of PX is not sufficient lieu of the supposed lost certificate. The
to deny the issuance of new certificates of stock to stockholder immediately sold his shares and
his wife and children. It would be otherwise if the endorsed the replacement certificate to a
transferees title to the shares has no prima facie buyer. It turned out that the original certificate
validity or is uncertain. was not lost, but sold and endorsed to another
person. (a) May the corporation be made liable
Q: What is the rule with regard to lost or by the aggrieved party? (b) Who will have a
destroyed Certificates? better right over the shares, the endorsee of the
original certificate or the endorsee of the
A: While Sec. 73 of the Corporation Code appears replacement certificate?
to be mandatory, the same admits of exceptions,
such that a corporation may voluntarily issue a new A:
certificate in lieu of the original certificate of stock a. No, the corporation cannot be made liable.
which has been lost without complying with the Except in cases of fraud, bad faith, or
requirements under Sec. 73 of the Corporation negligence on the part of the corporation
Code, provided that the corporation is certain as to and its officers, no action may be brought
the real owner of the shares to whom the new against any corporation which have issued
certificate shall be issued. It would be an internal certificates of stock in lieu of those lost,
matter for the corporation to find measures in stolen, or destroyed pursuant to the
ascertaining who are the real owners of stock for procedure prescribed by law.
purposes of liquidation. It is well-settled that
unless proven otherwise, the STB of the b. The endorsee of the replacement
corporation is the best evidence to establish stock certificate has a better right to the shares.
ownership. (SEC Opinion, January 28, 1999) After expiration of 1 year form he date of
the last publication, and no contest has
Q: What is the procedure for the issuance of been presented to said corporation
new certificate of stock for certificate that was regarding said certificate, the right to make
lost, destroyed or stolen? such contest has been barred and said
corporation already cancelled in its books
A: the certificate which have been lost,
1. The registered owner must make an
affidavit in triplicate stating the
UNIVERSITY OF SANTO TOMAS 45
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stolen, or destroyed and issued in lieu Q: What are the distinctions between merger
thereof new certificate. and consolidation?
Q: What if there are oppositions on the A: In both merger and consolidation, 2 or more
issuance of new certificates, what may the corporations are involved and merged or
corporation do? consolidated into one corporation. Their
distinctions are as follows:
A: The corporation may file an interpleader
proceeding to compel the parties to litigate among Merger Consolidation
themselves. All of the constituent All consolidated
corporations involved corporations are
Q: May the corporation be sued for the are dissolved except dissolved without
issuance of new certificates of stock? one exception
No new corporation is A single new
A: No action shall prosper against the corporation created corporation emerges
for the issuance of new certificates unless there is The surviving All assets, liabilities,
bad faith, fraud or negligence present. corporation acquires and capital stock of all
all the assets, consolidated
Q: When will the issuance of new certificate of liabilities, and capital corporations are
stock in lieu of the one lost be suspended? stock of all transferred to the new
constituent corporation
A: corporations
a. if a contest has been presented to the
corporation; or Q: What is the procedure for merger or
b. if an action is pending in court regarding consolidation?
the ownership of the lost certificate. (Sec.
73 par. 2) A:
1. Board of each corporation shall draw
Q: What are the obligations of stockholders? up a plan of merger or consolidation,
setting forth:
A: a. Names of corporations involved
1. Liability to the corporation for unpaid (constituent corporations)
subscription; (Secs. 67-70) b. Terms and mode of carrying it out
2. Liability to the corporation for interest on c. Statement of changes, if any, in the
unpaid subscription if so required by the present articles of surviving
by-laws; (Sec. 66) corporation; or the articles of the new
3. Liability to the creditors of the corporation corporation to be formed in case of
for unpaid subscription; (Sec. 60) consolidation.
4. Liability for watered stock; (Sec. 65) 2. Plan for merger or consolidation shall
5. Liability for dividends unlawfully paid; be approved by majority vote of each board
(Sec. 43) of the concerned corporations at separate
6. Liability for failure to create corporation. meetings.
(Sec. 10) 3. The same shall be submitted for
approval by the stockholders or members
MERGER AND CONSOLIDATION of each such corporation at separate
corporate meetings duly called for the
Q: What is merger? purpose. Notice should be given to all
stockholders or members at least two (2)
A: One where a corporation absorbs the other and weeks prior to date of meeting, either
remains in existence while others are dissolved. personally or by registered mail.
(Sec. 76) 4. Affirmative vote of 2/3 of the
outstanding capital stock in case of stock
Q: What is consolidation? corporations, or 2/3 of the members of a
non-stock corporation shall be required.
A: One where a new corporation is created, and 5. Dissenting stockholders may exercise
consolidating corporations are extinguished. (Sec. the right of appraisal. But if Board
76)
46
CORPORATION CODE OF THE PHILIPPINES
abandons the plan to merge or consolidate, undertake dissolution and the winding up
such right is extinguished. procedures? Explain your answer.
6. Any amendment to the plan must be
approved by the same votes of the board A: No. There is no need for the absorbed corpo-
members of trustees and stockholders or ration to undertake dissolution and winding up
members required for the original plan. procedure. As a result of the merger, the absorbed
7. After such approval, Articles of Merger corporation is automatically dissolved and its
or Articles of Consolidation shall be assets and liabilities are acquired and assumed by
executed by each of the constituent the surviving corporation.
corporations, signed by president or VP
and certified by secretary or assistant Pending the approval of the merger by the
secretary, setting forth: Securities and Exchange Commission, may the
a. Plan of merger or consolidation surviving corporation already institute suits to
b. In stock corporation, the number of collect all receivables due to the absorbed
shares outstanding; in non-stock, the corporation from its customers? Explain your
number of members answer.
c. As to each corporation, number of
shares or members voting for and A: No. The merger does not become effective until
against such plan, respectively and unless approved by the Securities and
8. Four copies of the Articles of Merger Exchange Commission. Before the approval by the
or Consolidation shall be submitted to the SEC of the merger, the surviving corporation has
SEC for approval. Special corporations no legal personality with respect to receivables due
like banks, insurance companies, building to the absorbed corporation.
and loan associations, etc., need the prior
approval of the respective government A case was filed against a customer to collect
agency concerned. on the promissory note issued by him after the
9. If SEC is satisfied that the merger or date of the merger agreement. The customer
consolidation is legal, it shall issue the raised the defense that while the receivables as
Certificate of Merger or the Certificate of of the date of the merger agreement were
Incorporation, as the case may be. transferred to the surviving corporation, those
10. If the SEC is not satisfied, it shall set a receivables which were created after the
hearing, giving due notice to all the merger agreement remained to be owned by
corporations concerned. (Secs. 76-79) the absorbed corporation. These receivables
would be distributed to the stockholders
Q: When shall the merger or consolidation conformably with the dissolution and
become effective? liquidation procedures under the New
Corporation Code? Discuss the merits of this
A: Upon issuance by the SEC of the certificate of argument.
merger and consolidation. In the case of merger or
consolidation of banks or banking institutions, A: Whether the receivable was incurred by the
building and loan associations, trust companies, absorbed corporation before or after the merger
insurance companies, public utilities, educational agreement, or before or after the approval thereof
institutions and other special corporations by the SEC, the said receivable would still belong
governed by special laws, the favorable to the surviving corporation under Sec.80 of the
recommendation of the appropriate government Corporation Code which does not make any
agency shall first be obtained. distinction as to the assets and liabilities of the
absorbed corporation that the surviving corporation
Q: Two corporations agreed to merge. They would inherit. (1999 Bar Question)
then executed an agreement specifying the
surviving corporation and the absorbed Q: What are the limitations on corporate
corporation. Under the agreement of merger combinations?
dated November 5, 1998, the surviving
corporation acquired all the rights, properties A:
and liabilities of the absorbed corporation. 1. Should not create monopolies
2. Should not eliminate free and healthy
What would happen to the absorbed competition
corporation? Must the absorbed corporation 3. Should not create illegal combinations such
as banks combined with insurance
companies
UNIVERSITY OF SANTO TOMAS 47
Facultad d
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corporation. However, this is without being subject
Q: What are the effects of merger or to giving them the same positions.
consolidation?
Q: What are the types of acquisitions and
A: transfers?
1. Transfer of Legal Title to corporate
property - Dissolution results in the A:
transfer of legal title to properties in the 1. Assets-Only Transfers - The purchaser is
stockholder who become co-owners only interested in the raw assets and
thereof; properties of the business. The
transferee is not liable for the debts and
2. On Continuation of Corporate Business liabilities of his transferor, except where
The corporation ceases as a body the transferee expressly or impliedly
corporate to continue the business for agrees to assume such debts.
which it was established;
2. Business-Enterprise Transfers - The
3. Creation of a New Corporation The purchasers interest goes beyond the
assets of the business enterprise. The
stockholders are not prevented from
primary interest is essentially to obtain the
conveying their respective shareholdings
earning capability of the venture. The
toward the creation of a new corporation
transferee is liable for the debts and
to continue the business of the old;
liabilities of his transferor.
4. Reincorporation of Dissolved Corporation- 3. Equity Transfers - The transferee is not
Though dissolved a corporation cannot be liable for the debts and liabilities of the
revived, those interested may transferor, except where the transferee
reincorporate by re re-filing the new expressly or impliedly agreed otherwise.
Articles of Incorporation and by-laws; What the purchaser has actually
purchased is the ability to elect the
5. Continuation of a Body Corporation The members of the board of the corporation
corporation continues as a body corporate who run the business.
for 3 years for purposes of winding up or
liquidation; Q: What is a spin-off?
6. Cessation of Corporate Existence for All A: It has the opposite effect of merger or
Purposes Upon the expiration of the 3 consolidation, whereby a department, division or
year-winding up period, the corporation portions of the corporate business enterprise is
ceases to exist for all purposes. sold-off or assigned into a new corporation that will
arise by the process which may constitute it into a
Q: What if there are properties under the subsidiary of the original corporation. The validity
absorbed corporations name and the surviving of spin-offs depends upon valid business cause
corporation wants to sell the same, is there a and good faith. (San Miguel Corp. Employees
need to obtain a new title or sign a deed of sale Union-PTGWO v. Confesor, G. R. No. 111262,
between the two corporations? September 19, 1996)
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CORPORATION CODE OF THE PHILIPPINES
a. Where no creditors are affected
Procedure: As an additional requirement, the SEC
1. Majority vote of the board of requires to submit the final audited
directors or trustees; and financial statement not older than 60 days
2. Resolution duly adopted by the before the application for shortening the
affirmative vote of the corporate term.
stockholders owning at least 2/3
of the outstanding capital stock or d. In case of a corporation sole, by
at least 2/3 of the members at a submitting to the SEC for approval, a
meeting duly called for that verified declaration of dissolution
purpose. (Sec.115). This merely needs the affidavit
3. A copy of the resolution of the presiding elder. No need for a
authorizing the dissolution shall board resolution.
be certified by a majority of the
board of directors or trustees and e. By merger or consolidation, whereby the
countersigned by the secretary of constituent corporations automatically
the corporation. cease upon issuance by the SEC of the
4. Such copy shall be filed with certificate of merger or consolidation,
SEC. (Sec. 118) except the surviving or consolidated
corporation which shall continue to exist.
b. Where creditors are affected (Secs. 79 and 80)
Procedure:
1. Filing a petition for dissolution f. Expiration of the corporate term (Sec. 11).
with the SEC
2. Such petition must be signed by 2. Involuntary
majority of the board of directors a. Failure to organize and commence
or trustees transaction of its business within 2 years
3. Must also be verified by the from date of incorporation. (Sec. 22)
president or secretary or one of
its directors b. Continuous inoperation for a period of at
4. The dissolution was resolved least 5 years.
upon by the affirmative vote of the
stockholders representing at least c. Failure to file by-laws within the required
2/3 of the outstanding capital period but, according to a SEC Opinion,
stock or at least 2/3 of the SEC will give it the opportunity to explain
members at a meeting duly called such failure an not automatically dissolve
for that purpose. the corporation.
5. If there is no sufficient objection,
and the material allegations of the d. By order of the SEC upon a verified
petition are true, a judgment shall petition and after proper notice and
be rendered dissolving the hearing on the ground of serious
corporation and directing such misrepresentation as to what the
disposition of its assets as justice corporation can do or is doing to the great
requires, and may appoint a prejudice of or damage to the general
receiver to collect such assets public.
and pay the debts of the
corporation. (Sec. 119) e. Revocation or forfeiture of the franchise or
certificate of incorporation due to its
c. By shortening the corporate term - A misuse or non-use pursuant to quo
voluntary dissolution may be effected by warranto proceedings filed by the Solicitor
amending the AOI to shorten its corporate General.
term pursuant to the provisions of the
Code. A copy of the amended AOI shall Q: Name three (3) methods by which a stock
be submitted to the SEC. Upon approval corporation may be voluntarily dissolved.
of the amended AOI of the expiration of Explain each method.
the shortened term, the corporation shall
be deemed dissolved without any further A:
proceedings, subject to the provisions of 1. Voluntary Dissolution where no creditors are
the Code on liquidation. affected. This Is done by a majority vote of
UNIVERSITY OF SANTO TOMAS 49
Facultad d
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the directors, and resolution of at least 2/3 Corp. had expired, it could no longer opt to
vote of stockholders, submitted to the renew the lease. XYZ Corp. countered that
Securities and Exchange Commission. withstanding the lapse of its corporate term it
2. Voluntary dissolution where creditors are still has the right to renew the lease because no
affected. This Is done by a petition for quo warranto proceedings for involuntary
dissolution which must be filed with the dissolution of XYZ Corp. has been instituted by
Securities and Exchange Commission, the Office of the Solicitor General. Is the
signed by a majority of the members of the contention of XYZ Corp. meritorious? Explain
board of directors, verified by the president briefly.
or secretary, and upon affirmative vote of
stockholders representing at least 2/3 of the A: XYZ Corporations contention is not meritorious
outstanding capital stock. based on the ruling of the Supreme Court in PNB
3. Dissolution by shortening of the corporate v. CFI of Rizal, 209 SCRA. XYZ Corp. was
term. This is done by amendment of the dissolved ipso facto upon the expiration of its
articles of incorporation. (2002 Bar original term. It ceased to be a body corporate for
Question) the purpose of continuing the business for which it
was organized, except only for purposes
Q: What are the effects of dissolution of a connected with its winding up or liquidation.
corporation? Extending the lease is not an act to wind up or
litigate XYZs affairs. It is contrary to the idea of
A: winding up the affairs of the corporation. (2004 Bar
1. It shall be continued as a corporate body Buestion)
for 3 years after dissolution, for the
purpose of liquidation but not for Q: What is liquidation?
continuing the business for which it was
established. A: It is the process by which all the assets of the
2. At any time during said 3 years, the corporation are converted into liquid assets (cash)
corporation is authorized and empowered in order to facilitate the payment of obligations to
to convey all of its properties to trustees creditors, and the remaining balance if any is to be
for the benefit of stockholders, members, distributed to the stockholders.
creditors, and other interested persons.
Q: What are the modes of liquidation?
3. After conveyance of corporate property, all
interests the corporation had in the said
A:
property terminates, and legal title shall
1. Liquidation by a duly appointed receiver;
vest in the transferee.
(Sec. 119)
4. Upon winding up of the corporate affairs,
2. Liquidation by the corporation itself or its
any asset distributable to any creditor or
board of directors; (Sec. 122)
stockholder or member who is unknown or
3. Liquidation by trustees to whom the assets
cannot be found shall be escheated to the
of the corporation had been conveyed.
city or municipality where such assets are
(Sec. 122); (Board of Liquidators v. Kalaw,
located.
L-18805, August 14, 1967)
5. Distribution of its assets or property shall
be done only after payment of all its debts
Q: The Securities and Exchange Commission
and liabilities. (Sec. 122)
approved the amendment of the articles of
incorporation of GHQ Corporation shortening
Q: XYZ Corporation entered into a contract of
its corporate life to only 25 years in accordance
lease with ABC, Inc., over a piece of real estate
with Sec.120 of the Corporation Code. As
for a term of 20 years, renewable for another 20
shortened, the corporation continued its
years, provided that XYZ's corporate term is
business operations until May 30, 1997, the last
extended in accordance with law. Four years
day of its corporate existence. Prior to said
after the term of XYZ Corporation expired, but
date, there were a number of pending civil
still within the period allowed by the lease
actions, of varying nature but mostly money
contract for the extension of the lease period,
claims filed by creditors, none of which was
XYZ Corp. notified ABC, Inc., that it is
expected to be completed or resolved within
exercising the option to extend the lease. ABC,
five years from May 30, 1997. If the creditors
Inc., objected to the proposed extension,
had sought your professional help at that time
arguing that since the corporate life of XYZ
about whether or not their cases could be
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CORPORATION CODE OF THE PHILIPPINES
pursued beyond May 30, 1997, what would have defend suits by or against the corporation
been your advice? beyond the 3-year period. Where no trustee
is appointed, its counsel who prosecuted
A: The cases can be pursued even beyond May and represented the interest of the
30. 1997, the last day of the corporate existence of corporation may be considered as trustee of
GHQ Corporation. The Corporation is not actually said corporation, at least with respect to the
dissolved upon the expiration of its corporate term. matter in litigation (Gelano v. CA, L-39050,
There is still the period for liquidation or winding February 24, 1981). The directors may also
up. (2000 Bar Question) be permitted to continue as trustees to
complete the liquidation. (Clemente v. CA ,
Q: "X" Corporation shortened its corporate life G.R. No. 82407, March 27, 1995)
by amending its articles of incorporation. It has 4. The creditors of the corporation who were
no debts but owns a prime property located in not paid may follow the property of the
Quezon City. How would the said property be corporation that may have passed to its
liquidated among the five stockholders of said stockholders unless barred by prescription
corporation? Discuss two methods of or laches or disposition of said property in
liquidation. favor of a purchaser in good faith.
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CORPORATION CODE OF THE PHILIPPINES
c. The stockholders are liable for tort. burdened with
2. Despite the presence of the requisites, the limitation that it
corporation shall not be deemed a close cant be
corporation if at least 2/3 of the voting dispensed unless
stocks or voting rights belong to a these limitations
corporation which is not a close were complied
corporation. with
c. Plan of
3. NON-STOCK CORPORATION dissolution must
be approved by
Q: What is a non-stock corporation? the majority vote
of BOT and 2/3
members
A: It is a corporation organized primarily for
Members are called Members are called
charitable, religious, educational, fraternal, literary,
corporators members
trade, industry and agriculture chambers or any
Termination: according to Termination: governed by
combination thereof. stockholders the AOI
It cannot be organized for political purposes.
54