CORPO NOTES - JUDE

Notes on the Corporation Code

Corporation defined A corporation is an artificial being created by operation of law,

having the right of succession and the powers, attributes and
properties expressly authorized by law or incident to its
existence.

Attributes of a corporation:

(1) It is an artificial being;

(2) It is created by operation of law;

(3) It has the right of succession; and

(4) It has only the powers, attributes, and properties expressly

authorized by law or incident to its existence.

Corporation as an artificial A corporation is a legal or juridical person with a personality

personality separate and apart from its individual members or stockholders
who, as natural persons, are merged in the corporate body.

As a consequence of this legal concept of a corporation:

(1) As a rule, a corporation is not liable for the debts of its

stockholders, and the latter are not individually liable for the
corporation’s debts. They can lose no more than their investment
on the corporation.

(2) It may acquire and possess property of all kinds, as well as

incur obligations and bring civil and criminal actions (Arts. 44,
46, Civil Code.) in its own name in the same manner as a natural
person.

(3) Property conveyed to or acquired by the corporation is in law

the property of the corporation itself as a distinct legal entity and
not that of the members or stockholders as such.

(4) All contracts entered into in its name by its regular appointed
officers and agents are the contracts of the corporation and not
those of the members or stockholders. A corporation cannot be
held liable for the personal indebtedness or obligation of a
stockholder even if he should be its president. (Smith & Co., Inc.
vs. Ford, 63 Phil. 786.) Neither is the latter liable for the
indebtedness of the former.

(5) A tax exemption granted to a corporation cannot be extended

1
 CORPO NOTES - JUDE

to include the dividends paid by such corporation to its

stockholders (Manila Gas Corporation vs. Collector of Revenue,
71 Phil. 513.) if such dividends are not exempted from tax.

(6) A corporation has no personality to bring an action for and in

behalf of its stockholders or members for the purpose of
recovering property which belongs to said stockholders or
members in their personal capacities. (Sulo ng Bayan, Inc. vs. G.
Araneta, Inc., 72 SCRA 347.)

(7) Likewise, as an entity distinct from its members or

stockholders, a corporation remains unchanged and unaffected
in its identity by changes in its individual membership. It has
continuous existence since it would exist even if all the
stockholders die.

Disregarding fiction of Being a mere creature of the law, a corporation may be allowed to
corporate entity. exist solely for lawful purposes but where the fiction of corporate
entity is being used as a cloak or cover for fraud or illegality, this
fiction will be disregarded and the individuals composing it will be
treated as identical.

In other words, the law will not recognize separate corporate

existence. This non-recognition is sometimes referred to as
the doctrine of piercing the veil of corporate entity or disregarding
the fiction of corporate entity. (see Claparols vs. Court of
Industrial Relations, 65 SCRA 613; Republic vs. Razon, 20 SCRA
234.) or the doctrine of corporate alter ego. (9-A Words and
Phrases, 377.) Creditors of financially troubled corporations
benefit when they succeed in piercing the corporate veil for they
can go after the assets of the individual stockholders.

Powers, attributes, and
properties of a corporation
A corporation, being a mere creation of law, may exercise only
such powers as are granted by the law of its creation. An express
grant, however, is not necessary. All powers which may be
implied from those expressly provided by law and those which are
incidental or essential to the corporation’s existence may also be
exercised.

(1) Thus, a corporation incorporated as a railroad corporation has

the incidental power to build railroads because such power is
necessary for the accomplishment of the purpose for which the
corporation is created.

(2) Similarly, a corporation expressly authorized to engage in

agriculture has implied authority to buy agricultural lands
because such authority is reasonably appropriate to carry out its
2
CORPO NOTES - JUDE

express authority.

(3) Likewise, a corporation engaged in the manufacture of cement

could operate and maintain an electric plant for the purpose
exclusively of supplying electricity to its cement factory and to its
employees living within its factory compound where it appears
that the operation of such plant is necessarily connected with the
business of the manufacturing of cement. (Teresa Electric and
Power Co., Inc. vs. Public Service Commission, 21 SCRA 252.)

(4) But a corporation organized for the purpose of supplying

electricity to the public has no power to buy and sell agricultural
lands because it is not within the power expressly or impliedly
authorized by law or incidental to its existence. (see Secs. 36 and
45.)

(5) Neither may a corporation be authorized under its articles of

incorporation to operate and otherwise deal in automobiles and
accessories and to engage in water transportation, engage in the
business of land transportation by operating a taxicab service
because such would have no necessary connection with the
corporation’s legitimate business. (Luneta Motor Co. vs. A.D.
Santos, Inc., 5 SCRA 809.)

Advantages and The advantages are the following:

disadvantages
(1) The corporation has a legal capacity to act as a legal unit;

(2) It has continuity of existence because of its non-dependence

on the lives of those who compose it;

(3) Its credit is strengthened by such continuity of existence;

(4) Its management is centralized in the board of directors;

(5) Its creation, organization, management and dissolution are

standardized as they are governed under one general
incor-poration law;

(6) It makes feasible gigantic financial enterprises since it enables

many individuals to invest their separate funds in the enterprise;

(7) The shareholders have limited liability;

(8) They are not general agents of the business; and

(9) The shares of stocks can be transferred without the consent of

the other stockholders.

3
CORPO NOTES - JUDE

Disadvantages of a business corporation.

(1) The corporation is relatively complicated in formation and

management;

(2) It entails relatively high cost of formation and operation;

(3) Its credit is weakened by the limited liability of the

stockholders;

(4) There is ordinarily lack of personal element in view of the

transferability of shares;

Except general professional partnerships or “partnerships

formed by persons for the sole purpose of exercising their
common profession, no part of the income of which is derived
from engaging in any trade or business.” (Sec. 20[a], NIRC.)

(5) There is a greater degree of governmental control and

supervision than in any other forms of business organization;

(6) The stockholders’ voting rights have become theoretical

particularly in large corporations because of the use of proxies
(Sec. 58.) and widespread ownership;

(7) The stockholders have little voice in the conduct of the

business; and

(8) In large corporations, management and control are separate

from ownership.

Classification of The Corporation Code classifies private corporations into

corporations under the stock and non-stock corporations, according to whether their
Code membership is represented by shares of stock or not.

(1) A stock corporation is the ordinary business corporation

created and operated for the purpose of making a profit which
may be distributed in the form of dividends to stockholders on the
basis of their invested capital.

(2) Unlike stock corporations, non-stock corporations do not

issue stock and are created not for profit but for the public good
and welfare. Of this character are most of the religious, social,
literary, scientific, civic and political organizations and societies.
Non-stock corporations are primarily governed by Title XI (Secs.
87-95.) of the Code.

Other classifications of corporations.

4
CORPO NOTES - JUDE

(1) As to number of persons who compose them:

(a) Corporation aggregate or a corporation consisting of more

than one member or corporator; or

(b) Corporation sole or a religious corporation which consists of

one member or corporator only and his successors, such as a
bishop.

(2) As to whether they are for religious purpose or not:

(a) Ecclesiastical corporation or one organized for religious

purposes; or

(b) Lay corporation or one organized for a purpose other than for
religion. Lay corporations, in turn, may be either eleemosynary or
civil.

(3) As to whether they are for charitable purposes or not:

(a) Eleemosynary corporation or one established for charitable

purposes; or

(b) Civil corporation or one established for business or profit.

(4) As to state or country under or by whose laws they have been

created:

(a) Domestic corporation or one incorporated under the laws of

the Philippines; or

(b) Foreign corporation or one formed, organized, or existing

under any laws other than those of the Philippines. (see Sec.
123.)

(5) As to their legal right to corporate existence:

(a) De jure corporation or a corporation existing in fact and in

law; or

(b) De facto corporation or a corporation existing in fact but not

in law. (see Sec. 21.)

(6) As to whether they are open to the public or not:

(a) Close corporation or one which is limited to selected persons

or members of a family (see Secs. 96-105.); or

(b) Open corporation or one which is open to any person who may
wish to become a stockholder or member thereto.

5
CORPO NOTES - JUDE

(7) As to their relation to another corporation:

(a) Parent or holding corporation or one which is so related to

another corporation that it has the power either, directly or
indirectly to, elect the majority of the directors of such other
corporation; or

(b) Subsidiary corporation or one which is so related to another

corporation that the majority of its directors can be elected either,
directly or indirectly, by such other corporation.

(8) As to whether they are corporations in a true sense or only in a

limited sense:

(a) True corporation or one which exists by statutory authority;

or

(b) Quasi-corporation or one which exists without formal

legislative grant. It is an exception to the general rule that a
corporation can exist only by authority of law; and it may be:

1) Corporation by prescription or one which has

exercised corporate powers for an indefinite period
without interference on the part of the sovereign power and
which, by fiction of law, is given the status of a corporation; or

2) Corporation by estoppel or one which in reality is not a

corporation, either de jure or de facto, because it is so defectively
formed, but is considered a corporation in relation to those only
who, by reason of their acts or admissions, are precluded from
asserting that it is not a corporation.

(9) As to whether they are for public (government) or private

purpose:

(a) Public corporations or those formed or organized for the

government of a portion of the State; or

(b) Private corporations or those formed for some private

purpose, benefit, or end; it may be either a stock or non-stock
corporation, government-owned or -controlled corporation or
quasi-public corporation.

Components of a The four classes of persons composing a corporation are the

corporation following:

(1) Corporators or those who compose the corporation, whether

stockholders or members. Hence, the term includes

6
CORPO NOTES - JUDE

incorporators, stockholders, or members;

(2) Incorporators or those corporators mentioned in the arti-cles

of incorporation as originally forming and composing the
corporation and who executed and signed the articles of
incorpo-ration as such. So, all incorporators are corporators but
a corporator is not necessarily an incorporator. The principal
function of the incorporator is to incorporate the corporation and
to enable it to become a body politic and corporate under the law
(see Sec. 10.);

(3) Stockholders or the owners of shares of stock in a stock

corporation. They are the owners of the corporation. They are also
called shareholders. They are the corporators in a stock
corporation. Stockholders may be natural or juridical persons
but only natural persons can be incorporators (Sec. 10.); and

(4) Members or corporators of a corporation which has no capital

stock.

All incorporators in a stock corporation must now own or at least

be a subscriber to at least one (1) share of the capital stock of
such corporation. (Sec. 10.)

Shares Stock or share of stock is one of the units into which the capital
stock is divided. It represents the interest or right which the
owner has —

(1) In the management of the corporation in which he takes part

through his right to vote5 (if voting rights are permitted for that
class of stock by the articles of incorporation);

(2) In a portion of the corporate earnings, if and when segregated

in the form of dividends; and

(3) Upon its dissolution and winding up, in the property and
assets thereof remaining after the payment of corporate debts
and liabilities to creditors.

Classifying shares The shares of stock corporations may be divided into classes or
series of shares, or both, any of which classes or series of shares
may have such rights, privileges or restrictions as may be stated
in the articles of incorporation

Rules:

(1) No share may be deprived of voting rights except those

classified and issued as “preferred” or “redeemable” shares,

7
 CORPO NOTES - JUDE

unless oth-erwise provided in this Code.

(2) There shall always be a class or series of shares which have

complete voting rights.

(3) Any or all of the shares or series of shares may have a par
value or have no par value as may be provided for in the articles of
incorporation: Provided, however, That banks, trust companies,
insurance companies, public utilities, and building and loan
associations shall not be per-mitted to issue no-par value shares
of stock.

Classes of shares in general Shares of stock may be:

(1) Par value or no par value;

(2) Voting or non-voting;

(3) Common or preferred, and preferred shares may be voting,

convertible, or redeemable. (infra.) They may be:

(a) Preferred as to assets in case of liquidation; or

(b) Preferred as to dividends, and which, in turn, may be either:

1) Cumulative or non-cumulative; or

2) Participating or non-participating;

(4) Promotion share;

(5) Share in escrow;

(6) Convertible stock;

(7) Founders’ share (see Sec. 7.);

(8) Redeemable share (see Sec. 8.); and

(9) Treasury share. (see Sec. 9.)

Par and no par value shares (1) Par value share is one with a specific money value fixed in the
articles of incorporation and appearing in the certificate of stock
for each share of stock of the same issue.

(a) The primary purpose of par value is to fix the minimum issue
price of the shares thus assuring creditors that the corporation
would receive a minimum amount for its stock.

(b) It is not usually the price at which investors buy or sell the
stock.

8
CORPO NOTES - JUDE

(2) No par value share is one without any stated or par value
appearing on the face of the certificate of stock. In other words, it
is a stock which does not state how much money it represents.

(a) While a no par value share has no par value, it has always an
“issued value,” i.e., the consideration fixed by the corporation for
its issuance. (see Sec. 62, last par.)

(b) A corporation may issue no par value shares only, or together

with par value shares.

(c) No par value stockholders have the same rights as holders of

par value stock.

Shares of capital stock issued without par value

Shall be:

(1) Deemed fully paid

(2) Non-assessable

(3) The holder of such shares shall not be liable to the corporation
or to its creditors in respect thereto

Provided, That shares without par value may not be issued for a
consideration less than the value of Five pesos (P5.00) per
share: Provided, further, That the entire consideration received
by the corporation for its no-par value shares shall be treated as
capital and shall not be available for distribution as dividends.

Voting and non-voting (3) Voting share is share with right to vote.

(a) It is generally customary to give the right to vote to the

common stock and to withhold it from the preferred.

(b) Under the Code, whenever a vote is necessary to approve a

particular corporate act, such vote refers only to stocks with
voting rights except in certain cases when even non-voting shares
may also vote. (Sec. 6, par. 5, last par.)

(c) The rule is not “one stockholder, one vote’’ but “one share, one
vote’’ because representation in a corporation is commensurate
to extent of ownership.

(4) Non-voting share is share without right to vote.

(a) If stock is originally issued as voting stock, it cannot thereafter

be deprived of the right without the consent of the holder.

(b) Under the Code, no share may be deprived of voting rights

9
CORPO NOTES - JUDE

except those classified and issued as “preferred” or “redeemable”

shares, unless otherwise provided in the Code. (Sec. 6, par. 1.)
The proviso refers to fundamental matters enumerated in Section
6 (par. 5[1-8].) on which holders of non-voting shares shall
nevertheless be entitled to vote.

(c) Note that the enumeration in Section 6 does not include the
election of directors or trustees (see Sec. 24.) as one of the
matters on which non-voting shares may vote.

(d) Where non-voting shares are provided for, the Code requires
that there shall always be a class or series of shares which have
complete voting rights. (Ibid., par. 1.)

Non-voting Shares

Where the articles of incorporation provide for non-voting shares

in the case allowed by this Code, the holders of such shares shall
nevertheless be entitled to vote on the following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

3. Sale, lease, exchange, mortgage, pledge or other disposition of

all or substantially all of the corporate property;

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with another

corporation or other corporations;

7. Investment of corporate funds in another corporation or

business in accordance with this Code; and

8. Dissolution of the corporation.

Common and Preferred (5) Common share of stock is stock which entitles the holder
thereof to pro rata division of the profits, if there are any, without
any preference or advantage in that respect over other
stockholder or class of stockholders. (2 Fletcher 43.)

(a) It is so-called because it is the stock which private

corporations ordinarily issue; hence, the name.

(b) Common stocks are the residual owners of the

corporation, i.e., they get only the assets left over in case of
liquidation after all other securities holders are paid.

10
CORPO NOTES - JUDE

(c) A corporation may issue more than one class of common

stock, being designated class A, class B, etc.

(6) Preferred share of stock is stock which entitles the holder

thereof to certain preferences over the holders of common stock.

(a) The preferences may consist in the payment of dividends or

the distribution of the assets of a corporation in case of its
dissolution, or such other preferences as may be stated in the
articles of incorporation which are not violative of the provisions
of the Code. (Sec. 6, par. 2.)

(b) As already stated, each share shall be in all respects equal to

every other share except as otherwise provided in the articles of
incorporation and stated in the certificate of stock. (Ibid., par. 5.)

(c) Preferred shares are rarely given voting privileges.

(d) More than one class of preferred shares may be issued,

usually designated “first preferred,” “second preferred,” etc.

Common and preferred stocks are the two main classes or forms
of stock.

“Preference” given to Preferred Shares

Preferred shares of stock issued by any corporation may be given

preference in:

(1) The distribution of the assets of the corporation in case of

liquidation

(2) The distribution of dividends

(3) Such other prefer-ences as may be stated in the articles of

incorpora-tion which are not violative of the provisions of this
Code.

Provided, That preferred shares of stock may be issued only with

a stated par value.

The Board of Directors, where authorized in the articles of

incorpo-ration, may fix the terms and conditions of preferred
shares of stock or any series thereof: Provided, That such terms
and conditions shall be effective upon filing of a certificate thereof
with the Securities and Exchange Commission.

Other kinds of shares (7) Promotion share is such share as is issued to promoters, or
those in some way interested in the company, for incorporating
the company, or for services rendered in launching or promoting
11
CORPO NOTES - JUDE

the welfare of the company, such as advancing the fees for

incorporating, advertising, attorney’s fees, surveying, etc. (11
Fletcher 48; Enright vs. Heckscher, 240 F. 863.)

(8) Share in escrow is share subject to an agreement by virtue of

which the share is deposited by the grantor or his agent with a
third person to be kept by the depositary until the performance of
a certain condition or the happening of a certain event contained
in the agreement. (Cannon vs. Handley, 12 P. 315.)

(a) The escrow deposit makes the depository a trustee under an

express trust. (see Arts. 1440, 1441, Civil Code.)

(b) The issuance of the shares is thus subject to a suspen-sive

condition.

(c) Before the fulfillment of the condition, the grantee is not yet
the owner of the shares and consequently, he is not entitled to the
rights belonging to a regular stockholder.

(9) Convertible stock is stock which is convertible or changeable

by the stockholder from one class to another class, such as from
preferred to common, at the conversion ratio, i.e., the price at
which the common is to be valued as against the preferred.

(a) Except as may be restricted by the articles of incorpo-ration,

the stockholder may demand conversion at his pleas-ure.

(b) The conversion ratio is the price at which the common is to be

valued as against the preferred.

Capital stock Capital stock is the amount fixed in the articles of incorporation,
to be subscribed and paid in by the shareholders of a corporation,
either in money or property, labor or services, at the organization
of the corporation or afterwards and upon which it is to conduct
its operation. (2 Fletcher 12.) It represents the equity of the
stockholders in the corporate assets.

Capital stock requirement.

The Code does not set a minimum authorized capital stock except
as otherwise provided by special law as long as the paid-up
capital, as required by Section 13, is not less than P5,000.00.

Special laws may require a higher paid-up capital, as in the case

of commercial banks, insurance companies, and investment
houses.

12
CORPO NOTES - JUDE

Minimum subscription and paid-up capital

(1) Pre-incorporation. — Section 13 requires that at least 25% of

the amount of the capital stock has been actually subscribed and
that at least 25% of such subscription paid.

Special laws may require a higher paid-up capital.

(2) Post incorporation. — The 25% subscription and 25% paid-up

capital is required not only during the incorporation period but
also in case of increase of the authorized capital stock. (Sec. 38,
par. 4.)

ILLUSTRATION:

Suppose it be desired that Corporation X be incorporated with a

capital stock of P100,000.00 divided into 1,000 shares with a par
value of P100.00 per share.

In such case, there must be subscribed 250 shares of the par

value of P25,000.00 which “shares represent twenty-five percent
(25%) of the authorized capital stock” and of the subscription,
there must be paid to the corporation “at least twenty-five percent
(25%)” thereof or P6,250.00 in actual cash and/or property the
fair valua-tion of which equals P6,250.00. (see Sec. 14, last par.)

If the amount of the authorized capital stock is only P75,000.00,

the 25% subscription would be P18,750.00 and if 25% of the
latter amount is paid, the paid-up capital would only be
P4,687.50. Sec-tion 13 requires that the paid-up capital be not
less than P5,000.00.

It is not required for purposes of incorporation that each and

every subscriber shall pay 25% of his subscription. The paid-up
re­quirement is met as long as “25% of the total subscription” is
paid although some subscribers have paid less than 25%, or even
have not paid any amount.

Computation of the 25% subscription requirement.

(1) Where the capital stock consists only of par value shares, the
minimum subscription should be 25% of the amount of the
authorized capital stock or 25% of the aggregate value of all the
shares of stock the corporation is authorized to issue.

In par value stock corporations, the percentage subscription

requirement shall always be based on the amount of the
authorized capital stock irrespective of the class, number, and

13
 CORPO NOTES - JUDE

par value of the shares.

(2) Where the capital stock consists only of no par value

shares, the 25% requirement shall be computed on the basis of
the entire number of authorized shares. Corporations whose
shares have no par value have no authorized capital stock. (see
Sec. 15 [seventh].) The issued price of no par shares need not be
fixed in the articles of incorporation. (see Sec. 62, last par.)

(3) Where the capital stock is divided into par value shares and no
par value shares, the requirement as to par value shares is as
indicated above and for the no par value shares, the 25% is based
on the number of said no par value shares.

Authorized capital stock Authorized capital stock is synonymous with capital stock where
the shares of the corporation have par value. (see Secs. 14[8], 15
[seventh].) If the shares of stock have no par value, the
corporation has no authorized capital stock, but it has capital
stock, the amount of which is not specified in the articles of
incorporation as it cannot be determined until all the shares have
been issued. (Ibid.) In this case, the two terms are not
synonymous.

Subscribed capital stock Subscribed capital stock is the amount of the capital stock
subscribed whether fully paid or not. It connotes an original
subscription contract for the acquisition by a subscriber of
unissued shares in a corporation (see Secs. 60, 61.) and would,
therefore, preclude the acquisition of shares by reason of
subsequent transfer from a stockholder or resale of treasury
shares. (Sec. 9.)

Outstanding capital stock Outstanding capital stock is the portion of the capital stock
which is issued and held by persons other than the corporation
itself. The Code defines the term as “the total shares of stock
issued to subscribers or stockholders, whether fully or partially
paid (as long as there is a binding subscription agreement),
except treasury shares.” (Sec. 137.) It is thus broader than
“subscribed” capital stock.

The terms “subscribed capital stock” and “issued” or

“outstanding” capital stock are used synonymously since
subscribed capital stock, as distinguished from the certificate of
stock, can be issued even if not fully paid. But while every
subscribed share (assuming there is a binding subscription
agreement) is “outstanding,” an issued share may not have the
status of outstanding share. This is true in the case of treasury

14
 CORPO NOTES - JUDE

shares. (Sec. 9.)

Paid-up capital stock Paid-up capital stock is that portion of the subscribed or
outstanding capital stock that is paid.

Unissued capital stock Unissued capital stock is that portion of the capital stock that is
not issued or subscribed. It does not vote and draws no
dividends.

Legal capital Legal capital is the amount equal to the aggregate par value
and/or issued value of the outstanding capital stock.

Par value When par value shares are issued above par, the premium or
excess is not to be considered as part of the legal capital. (see Sec.
43.) In the case of no par value shares, the entire consideration
received forms part of legal capital and shall not be available for
distribution as dividends. (see Sec. 6, par. 3.)

ILLUSTRATION:

Suppose the articles of incorporation of X Corporation provides

that the authorized capital stock of said corporation is
P1,000,000.00 divided into 10,000 shares of the par value of
P100.00 per share. At its incorporation, only P250,000.00 of the
authorized capital stock was subscribed.

Under Section 13, at least 25% of the subscription is required to

be paid; thus, only P62,500.00 was paid to the treasurer of the
corporation.

Therefore, the authorized capital stock of corporation X is

P1,000,000.00, the subscribed, outstanding, or issued capital
stock is P250,000.00, the paid-up capital stock is P62,500.00
and the unis-sued capital stock is P750,000.00. The legal capital
is P250,000.00.

(2) Capital is used broadly to indicate the entire property or

assets of the corporation. It includes the amount invested by the
stockholders plus the undistributed earnings less losses and
expenses.

In the strict sense, the term refers to that portion of the net assets
paid by the stockholders as consideration for the shares issued to
them, which is utilized for the prosecution of the business of the
corporation.

Capital and capital stock (1) Capital is the actual corporate property. It is, therefore, a
distinguished concrete thing. Capital stock is an amount. It is, therefore,

15
 CORPO NOTES - JUDE

something abstract.

(2) Capital fluctuates or varies from day to day accordingly as

there are profits or losses or appreciation or depreciation of
corporate assets. Capital stock is an amount fixed in the articles
of incorporation and is unaffected by profits and losses.

(3) It is said that capital belongs to the corporation and capital

stock when issued belongs to the stockholders, and that capital
may be either real or personal property but capital stock is always
personal. (18 Am. Jur. 2d. 736.)

The term “capital,” however, is frequently used loosely in the

sense of capital stock.

Capital stock and legal Like capital stock, legal capital is merely an amount and remains
capital distinguished unchanged except as outstanding shares are increased or
reduced in number or amount. But while capital stock limits the
maximum amount or number of shares that may be issued
without formal amendment of the articles of incorporation (see
Sec. 38.), legal capital sets the minimum amount of the corporate
assets which for the protection of corporate creditors, may not be
lawfully distributed to stockholders.

ILLUSTRATION:

In the previous illustration, the payment of the subscription of

2,500 shares in the amount of P250,000.00 whether in cash or
prop-erty or any consideration allowed by law (see Sec. 62.)
constitutes the original capital of corporation X.

If the corporation makes a profit of P50,000.00, the capital would

become P300,000.00. On the other hand, the capital would be
reduced to P200,000.00 if there is a loss of P50,000.00. Suppose
the corporation borrows P150,000.00 from a bank. The capital of
the corporation would then be P450,000.00 or P350,000.00
accordingly as there are profits or losses.

In any case, the capital stock of P1,000,000.00 and the legal

capital of P250,000.00 remain constant unless, of course, the
arti-cles of incorporation is amended, either increasing or
decreasing the capital stock, or the number or amount of
outstanding shares is increased by the issuance of more shares
out of the unissued au-thorized shares or decreased by the
acquisition of previously issued shares. (see Secs. 9, 41.)

A decrease of the capital stock may also result in the reduction of

16
 CORPO NOTES - JUDE
Capital stock and share of As distinguished from capital stock, the term “stock” or “share of
stock distinguished stock” is commonly used in a distributive sense to refer to the
stock in the hands of the stockholders. Therefore, it belongs to
Certificate of stock defined
Founders’ shares.
legal capital. (see Sec. 38.)
them. On the other hand, the former is used in a collective sense
to signify the whole body of shares of stock in the corporation. (11
Fletcher 18 [1971].)
Certificate of stock is a written acknowledgment by the
corporation of the interest, right, and participation of a person in
the management, profits, and assets of a corporation.
It is a formal written evidence of the holder’s ownership of one or
more shares and is a convenient instrument for the transfer of
title. (see Sec. 63.)
Share of stock and certificate of stock distinguished.
(1) Share of stock is incorporeal or intangible property, while
certificate of stock is tangible;
(2) Share of stock represents the right or interest of a person in a
corporation, while certificate of stock is the written evidence of
that right or interest; and
(3) Share of stock may be issued even if the subscription is not
fully paid except in no par shares. (Sec. 6, par. 3.) As a general
rule, a certificate of stock may not be issued unless the
subscription is fully paid. (Sec. 64.)
The possession of a certificate of stock is not essential to
own-ership of stock because the right to stock may exist
independ-ently of the certificate.
Founders’ shares have been defined as “shares issued to the
organizers and promoters of a corporation in consideration of
some supposed right or property. Such shares usually share in
profits only after a certain percentage has been paid upon the
common stock, but are often given special privileges over other
stock as to voting and as to division of profits in excess of a
minimum dividend on the common stock.” (Webster’s Second
International Dictionary, p. 997.)
(1) Special rights and privileges. — The shares of stock of a
corporation, close or non-close (see Title XII.), may include
17
 CORPO NOTES - JUDE

founders’ shares classified as such in the articles of

incorporation. Such shares may be given special rights and
privileges not enjoyed by the owners of other stocks, such as
preference in the payment of dividends.

(2) Exclusive right to vote and be voted. — Where, however, the

exclusive right to vote and be voted for in the election of directors
is granted, such right must be for a limited period not exceeding
five (5) years and must be approved by the Securities and
Exchange Commission, the period to commence from the date of
said approval.

Redeemable shares Redeemable or callable share is share, usually preferred, which

by its terms is redeemable at a fixed date or at the option of either
the issuing corporation or the stockholder or both at a certain
redemption price.

(1) When redeemable shares may be issued. — Redeemable

shares may be issued only when expressly so provided in the
articles of incorporation. In the absence of provisions on
redemption of preferred shares in the articles of incorporation
and the by-laws, they are deemed irredeemable. Common shares
are never “redeemed.”

(2) Redemption regardless of existence of unrestricted retained

earnings. — Upon the expiration of the period fixed, they may be
taken up or purchased by the corporation, regardless of the
existence of unrestricted retained earnings (see Sec. 43.) in the
books of the corporation.

(a) The rule in Section 41 is different. The power of the

corporation to acquire its own shares for the purposes stated
therein is subject to the condition that there be unrestricted
retained earnings in its books to cover the shares, purchased or
acquired. In the case of redeemable shares, the shareholder is
conferred the right of a creditor to attract corporate financing.

(b) The issuance of shares may be likened to the issuance of

bonds and debt papers. Since the terms and conditions of the
purchase are stated in the articles of incorporation and as well as
in the corresponding certificates of stock, corporate creditors and
other shareholders are supposed to be aware of the same.

(3) Where corporation insolvent. — Redeemable shares may be

redeemed regardless of the existence of unrestricted retained
earnings, provided that the corporation has, after such
redemption, sufficient assets to cover debts and liabilities
18
 CORPO NOTES - JUDE

inclusive of capital stock. (Sec. 5, par. 5, SEC Rules Governing

Redeemable Shares.) Be that as it may, the rights of the holders of
redeem-able shares should be deemed subordinate to the rights
of cor-porate creditors. Therefore, redemption may not be made
where the corporation is insolvent or if such redemption would
cause insolvency or inability of the corporation to meet its debts
as they mature.

(4) Terms and conditions. — Section 8 requires that all the terms
and conditions affecting such shares must be stated not only in
the articles of incorporation but also in the certificate of stock
representing said shares. Except as otherwise provided therein,
the redemption rests entirely with the corporation, and the
stockholder is without right to either compel or refuse the
redemption of his stock.

(5) Voting rights. — Redeemable shares may be deprived of voting

rights in the articles of incorporation, unless otherwise provided
in the Code. (see Sec. 6, pars. 1, 6[1-8].)

Treasury shares. Treasury share is share which has been lawfully issued by the
corporation and fully paid for and later reacquired by it either by
purchase, redemption (Sec. 8.), donation, forfeiture or other
lawful means.

(1) Status. — Section 41 expressly empowers a stock corporation,

in the absence of a qualified bidder, to purchase or acquire its
own shares for legitimate corporate purposes. Only surplus
earnings may be used for the purchase of treasury shares. Under
Section 68 (last par.), the corporation, in the absence of a
qualified bidder, may bid at the public sale of delinquent shares
and title to the shares purchased shall be vested in the
corporation as treasury shares. The purchase by the corporation
operates, in effect, as a forfeiture of the shares.

(a) Treasury shares are not retired shares. They do not revert to
the unissued shares of the corporation but are regarded as
property acquired by the corporation which may be reissued or
resold by the corporation at a price to be fixed by the board of
directors. (SEC Rules Governing Redeemable and Treasury
Shares [CCP] No. 1-1982.) Hence, the price paid out of retained
earnings for the value of reacquired shares should be treated in
the corporate books as payment for the purchase of the shares
(SEC Opinion, Feb. 20, 1991.) and an investment on such
property.

19
 CORPO NOTES - JUDE

(b) Treasury shares are issued shares but being in the treasury
they do not have the status of outstanding shares (Comm. vs.
Manning, 66 SCRA 14.), in the sense that they do not constitute a
liability of the corporation. (see Sec. 137.)

(2) Resale. — They may be resold by the corporation at any price

the board of directors sees fit to accept, even at less than par,
having once been legally issued as fully paid, provided such price
is reasonable under the circumstances.

(a) Stockholders may rightfully complain if the price is lower than

reasonable.

(b) In case of sale or reissue, it again becomes outstanding stock

and regains whatever dividends and voting rights it originally
held.

(c) Section 36(6) expressly authorizes stock corporations to sell

treasury shares subject to the provisions of Section 9.

(3) Declaration as property dividend. — Treasury shares being

unrealized income, are not considered as part of earned or
surplus profits, and, therefore, not distributable as dividends,
either in cash or stock. But if there are retained earnings arising
from the business of the corporation, treasury shares, being the
property of the corporation, may properly be distributed as
property dividend. (SEC Opinion, April 24, 1979.)

(4) Voting rights. — Treasury shares have no voting rights as long

as they remain in the treasury (Sec. 57.), i.e., uncancelled and
subject to reissue. A corporation cannot in any proper sense be a
stockholder in itself, and shares of its own stock, therefore, held
by it cannot be voted or be entitled to vote for otherwise the
directors could be able to perpetuate control of the corporation.
(Comm. vs. Manning, supra.)

(5) Right to dividends. — Neither are treasury shares entitled to

dividends or assets because dividends cannot be declared by a
corporation to itself as such distribution would be like taking
money or stock from one of its pockets and putting the same in
another, which would be pointless. Hence, stock dividend (see
Sec. 43.) may not be declared on treasury stock even on the
express condition that such dividend will also be treated as
treasury stocks. (SEC Opinion, Nov. 2, 1966.)

Requirements for Incorporators: number and qualifications.

organization
Section 10 provides that the incorporators must not be less than
20
 CORPO NOTES - JUDE

five but not more than fifteen, all of legal age, and a majority of
whom are residents of the Philippines.

Notes:

(1) These five or more persons must be natural persons.

Consequently, a corporation cannot be an incorporator of
another corporation.

(2) As an exception to this rule, Section 4 of Republic Act No. 720

provides that duly established cooperatives may organize rural
banks and/or subscribe to shares of stock of any rural
bank.

(3) The incorporators must have the capacity to enter into a valid
contract, the act of forming a cor-poration as between the parties
being contractual.

(4) A majority of the incorporators must be residents of the

Philippines; the rest may be persons who are neither residents
nor citizens of the Philippines.

(5) Citizens of the Philippines. — By specific constitutional and

legal provisions, citizenship is a necessary qualification for
incorporators in corporations in which a certain of
the capital stock is required to be owned by Filipino citizens.

(6) Owners of or subscribers to at least one share. — The Code

now expressly requires that “each of the incorporators of
a stock corporation must own or be a subscriber to at least one (1)
share of the capital stock of the corporation.”

(7) The requirement of the law regarding the minimum number of

incorporators is mandatory and a corporation cannot be legally
formed by less than the prescribed number except in the case of a
corporation sole.

Term of corporate The corporation shall exist for the term specified in the articles of
existence. incorporation not exceeding fifty years, unless sooner legally
dissolved (Secs. 19, 22, 117-122, 144, 145.) or unless its
registration is revoked upon any of the grounds provided by law.
(see Sec. 6, Pres. Decree No. 902-A; see Sec. 22.)

The corporate life may be reduced (see Sec. 120.) or extended by

amendment of the articles of incorporation.

Articles of incorporation. The articles of incorporation is the document prepared by the

persons establishing a corporation and filed with the Securities

21
CORPO NOTES - JUDE

and Exchange Commission containing the matters required by

the Code.

A copy of the articles filed which is returned with the certificate of

incorporation issued by the Commission under its official seal
becomes its corporate charter enabling the corporation to exist
and function as such. (see Sec. 19.)

Contents:

(1) The name of the corporation;

(2) The specific purpose or purposes for which the corporation is

being incorporated.;

(3) The place where the principal office of the corporation is to be

located, which must be within the Philippines;

(4) The term for which the corporation is to exist;

(5) The names, nationalities and residences of the incorporators;

(6) The number of directors or trustees, which shall not be less

than five (5) nor more than fifteen (15);

(7) The names, nationalities and residences of the persons who

shall act as directors or trustees until the first regular directors or
trustees are duly elected and qualified in accordance with this
Code;

(8) If it be a stock corporation, the amount of its authorized

capital stock in lawful money of the Philippines, the number of
shares into which it is divided, and in case the shares are par
value shares, the par value of each, the names, nationalities and
residences of the original subscribers, and the amount
subscribed and paid by each on his subscription, and if some or
all of the shares are without par value, such fact must be stated;

(9) If it be a non-stock corporation, the amount of its capital, the

names, nationalities and residences of the contributors and the
amount contributed by each; and

(10) Such other matters as are not inconsistent with law and
which the incorporators may deem necessary and convenient.

(11) The Securities and Exchange Commission shall not accept

the articles of incorporation of any stock corporation unless
accompanied by a sworn state-ment of the Treasurer elected by
the subscribers showing that at least twenty-five percent (25%) of

22
 CORPO NOTES - JUDE
Filipino ownership
requirement
regarding corporate capital
the authorized capital stock of the corporation has been
subscribed, and at least twenty-five percent (25%) of the total
subscription has been fully paid to him in actual cash and/or in
property the fair valuation of which is equal to at least twenty-five
percent (25%) of the said subscription, such paid-up capital
being not less than Five thousand pesos (P5,000.00).
By specific constitutional and legal provisions, Filipino ownership
of a certain percentage of the capital stock or capital is required in
certain cases, such as:
(1) Corporations for exploration, development and utilization of
natural resources. — at least 60% of the capital of which is owned
by citizens of the Philippines. (Constitution of the Philippines,
Art. XII, Sec. 2.) The word “capital” in the above constitutional
provision should be understood to mean “outstanding capital
stock” in case of stock corporations;
(2) Public service corporations. — at least 60% of the capital of
which is owned by citizens of the Philippines (Ibid., Art. XII, Sec.
11.);
(3) Educational corporations. — Other than those established by
religious orders and mission boards, at least 60% of the capital of
which is owned by citizens of the Philippines (Ibid., Art. XIV, Sec.
4[2].);
(4) Banking corporations. — at least 60% of the capital stock of
any bank or banking institution which may be established after
the approval of the General Banking Act (July 24, 1948) shall be
owned by citizens of the Philippines (Rep. Act No. 377, Sec. 2.);
(5) Corporations engaged in retail trade. — the capital of which
must be wholly owned by citizens of the Philippines (R.A. No.
1180, Sec. 1.);
(6) Rural banks. — at least 60% of the capital stock of which is
owned by Filipino citizens (Rep. Act No. 7353, Sec. 4.);
(7) Corporations engaged in coastwise shipping. — at least 60%
of the capital stock of which or of any interest in said capital is
totally owned by citizens of the Philippines (Sec. 806, Pres. Decree
No. 1464 [Tariff and Customs Code].);
(8) Corporations engaged in the pawnshop business. — at least
70% of the voting capital stock shall be owned by citizens of the
Philippines (Sec. 8, Pres. Decree No. 114.); and
23
 CORPO NOTES - JUDE

(9) Under the Flag Law. — In the purchase of articles for the
Government, preference shall be given to materials and supplies
produced, made, or manufactured in the Philippines, and to
domestic entities. The term “domestic entities” means any citizen
of the Philippines or any corporate body or commercial company
at least 75% of the capital of which is owned by citizens of the
Philippines. (C.A. No. 138.)

Powers of a corporation Every corporation incorporated under this Code has the power
and capacity:

1. To sue and be sued in its corporate name;

2. Of succession by its corporate name for the period of time

stated in the articles of incorporation and the certificate of
incorporation;

3. To adopt and use a corporate seal;

4. To amend its articles of incorporation in accordance with the

provisions of this Code;

5. To adopt by-laws, not contrary to law, morals, or public policy,

and to amend or repeal the same in accordance with this Code;

6. In case of stock corporations, to issue or sell stocks to

subscribers and to sell treasury stocks in accordance with the
provisions of this Code; and to admit members to the corporation
if it be a non-stock corporation;

7. To purchase, receive, take or grant, hold, con-vey, sell, lease,

pledge, mortgage and otherwise deal with such real and personal
property, including secu-rities and bonds of other corporations,
as the trans-action of the lawful business of the corporation may
reasonably and necessarily require, subject to the limitations
prescribed by law and the Constitution;

8. To enter into with other corporations, merger or consolidation

as provided in this Code;

9. To make reasonable donations, including those for the public

welfare or for hospital, charitable, cultural, scientific, civic, or
similar purposes: Pro-vided, That no corporation, domestic or
foreign, shall give donations in aid of any political party or
candidate or for purposes of partisan political activity;

10. To establish pension, retirement, and other plans for the

benefit of its directors, trustees, officers and employees; and

24
 CORPO NOTES - JUDE
Classification of corporate The three classes of powers of a corporation are:
powers.
(1) Those expressly granted or authorized by law (Sec. 2.);
Expressed Powers
Implied powers
11. To exercise such other powers as may be essential or
necessary to carry out its purpose or purposes as stated in its
articles of incorporation. (13a)
(2) Those that are necessary to the exercise of the express or
incidental powers (Secs. 2, 36[11], 45.); and
(3) Those incidental to its existence. (Secs. 2, 45.)
The powers of a corporation, however, frequently cut across lines
of the above classification.
Acts or contracts of a corporation outside the scope of its express,
implied, and incidental powers are ultra vires.
Express powers are the powers expressly conferred upon the
corporation by law. These powers can be ascertained from the
special law creating the corporation, or from the general
incorporation law under which it is created, the general laws of
the land applicable to corporations (i.e., Corporation Code), and
its articles of incorporation. (6 Fletcher 183.)
Section 36 contains an enumeration of powers expressly given to
corporations created under the general incorporation law. Other
express powers of the corporation are specifically provided in
Sections 37-44.
Implied powers are those powers which are reasonably necessary
to exercise the express powers and to accomplish or carry out the
purposes for which the corporation was formed.
Sometimes it is difficult to determine whether a certain activity is
an implied power or not. However, the following rough
classification embraces most of the implied powers:
(1) Acts in the usual course of business. — This includes such
acts as borrowing money; making ordinary contracts; executing
promissory notes, checks or bills of exchange; taking notes or
other securities; acquiring personal property for use in
connection with the business; acquiring lands and buildings to
be used as places of business or in connection therewith; and
selling, leasing, mortgaging or other transfers of property of the
corporation in connection with the running of the business. It is
evident that all of such acts, under ordinary circumstances, are
25
 CORPO NOTES - JUDE

necessary in order to run a business;

(2) Acts to protect debts owing to a corporation. — If a

corporation is a creditor, it may do such acts as may be necessary
to protect its right as such creditor. Thus, a corporation may
purchase property, act as a guarantor or sometimes even run a
business temporarily to collect a debt;

(3) Embarking in different business. — A corporation may not

engage in a business different from that for which it was created
as a regular and a permanent part of its business. (see, however,
Sec. 42.) This is especially true with respect to those particular
kinds of corporate activities which are governed by special laws
(see comments under Sec. 14[2].) Thus, a corporation not
organized for that purpose cannot go into the banking or
insurance business but it may do any isolated act of banking or
insurance in connection with some express power. So, it is
generally held that a corporation may temporarily conduct an
outside business to collect a debt out of its profits;

(4) Acts in part or wholly to protect or aid employees. — While the

cases are divided, the better view favors such acts as building
homes, places of amusement, hospitals, etc., for employees, as
within the corporate powers (see Sec. 36[10].); and

(5) Acts to increase business. — Thus, a corporation may

conduct contests or sponsor radio or television programs, or
promote fairs and other gatherings to advertise and increase its
business. (see 6 Fletcher 276-277.)

Incidental or inherent Incidental or inherent powers are powers which a corporation

powers can exercise by the mere fact of its being a corporation or powers
which are necessary to corporate existence and are, therefore,
impliedly granted. As powers inherent in the corporation as a
legal entity, they exist independently of the express powers. (see
Sec. 45.)

Some of the powers enumerated in Section 36 are incidental

powers which can be exercised by a corporation even in the
absence of an express grant.

Examples of incidental powers are: the power of succession; to

sue and be sued; to have a corporate name; to purchase and hold
real and personal property; to adopt and use a corporate seal; to
contract; to make by-laws; etc.

Power to extend or shorten The corporate term of a private corporation may be extended or

26
 CORPO NOTES - JUDE

corporate term shortened by an amendment of the articles of incorporation

approved by the majority vote of the board of directors or trustees
and ratified at a meeting of the stockholders representing at least
2/3 of the outstanding capital stock or by at least 2/3 of the
members in case of non-stock corporations.

Appraisal right of dissenting stockholders.

Section 37 grants appraisal right to a dissenting

stockholder, i.e., right of such stockholder in the cases provided
by law to demand payment of the fair value of his shares “in case
of an extension of corporate term.” Such right should also be
available to a dissenting stockholder if the corporate term is
shortened as it is impliedly recognized in Section 81(1).

Note that the appraisal right applies only to a stockholder of a

stock corporation.

Power to increase or An increase or reduction in the capital stock of the corporation

decrease involves a fundamental change in the corporation. The authority
of the corporation to take such action exists only when expressly
capital stock.
conferred by law.

Section 38 prescribes the procedure to be complied with to effect

a legal increase or decrease of the capital stock (not capital) which
is now subject to prior approval of the Securities and Exchange
Commission. (par. 4.)

Limitations on the power.

(1) As a general rule, a corporation cannot lawfully decrease its

capital stock if such decrease will have the effect of relieving
existing subscribers from the obligation of paying for their unpaid
subscriptions without a valuable consideration for such release
as such an act of the corporation constitutes an attempted
withdrawal of so much capital of the corporation upon which
corporate creditors are entitled to rely (Phil. Trust Co. vs. Rivera,
44 Phil. 649.);

(2) A corporation cannot issue stock in excess of the amount

limited by its articles of incorporation; such issue is ultra
vires and the stock so issued is void even in the hands of a bona
fide purchaser for value; and

(3) A reduction or increase of the capital stock can take place only
in the manner and under the conditions prescribed by law. (see
Sec. 38.)

27
 CORPO NOTES - JUDE

The Corporation Code contains no prohibition for a corporation to

increase its authorized capital stocks even if the same has not yet
been fully subscribed.

Necessity for increasing capital stock.

(1) Increase of corporate assets. — An increase of the amount of

the stated capital may be for the purpose of effecting an increase
in the corporate assets. It may be effected:

(a) by authorizing the creation of new shares to be offered and

issued at a fixed valuation; or

(b) without any corresponding increase in the corporate assets,

by the issuance of stock dividends. (13 Am. Jur. 306.)

(2) Issuance of stock dividends. — The capital stock may also be

increased without any corresponding increase in the corporate
assets by the issuance of stock dividends.

Right of pre-emption of Whenever the capital stock of a corporation is increased and new
stockholders. shares of stock are issued, the new issue must be offered first to
the stockholders who are such at the time the increase was made
in proportion to their existing share-holdings and on equal terms
with other holders of the original stocks before subscriptions are
received from the general public. For example, if a stockholder
with pre-emptive right owns 10% of the outstanding shares of a
corporation, he may subscribe to 10% of any shares of stock
issued by the corporation. The principle is known as the right of
pre-emption or pre-emptive right of stockholders.

ILLUSTRATION:

Corporation X has an original capital stock of P100,000.00

di-vided into 1,000 shares with a par value of P100.00. A owns
500 shares. Subsequently, the capital stock is increased to
P200,000.00 (to 1,000 more shares). Both the old and new shares
are voting shares.

(1) Right to vote. — A must be given a right to subscribe to 500 of

the new shares before they are offered to others. If A is al-lowed to
subscribe to only 100 shares of the increased stock, his voting
control would be reduced from 50% (500/1,000) to only 30%
(600/2,000).

(2) Right to net earnings as dividends. — Suppose the

corpora-tion made a net earnings of P50,000.00. Had this entire
amount been distributed as cash dividends before the increase,
28
CORPO NOTES - JUDE

each stockholder, including A, would have received P50.00

(P50,000.00/1,000) per share. After the increase, the dividend
would be reduced to P25.00 (P50,000.00/2,000) per share.

(3) Right to net corporate assets after liquidation. — Assume that

the total assets of the corporation amount to P170,000.00, with
li-abilities of P20,000.00 and surplus of P50,000.00. Thus, its net
assets or net worth is P150,000.00. Therefore, the actual value
per share is P150.00 (P150,000.00/1,000). If the new shares were
to be issued at their par value of P100.00, the actual value of the
original shares would be reduced to P125.00
(P250,000.00/2,000).

If the rule of pre-emption will not be observed, it is evident that

existing stockholders who are allowed to subscribe to more than
their pro rata shares in the increase of the capital stock and new
stockholders will unjustly benefit by P25.00 per share at the
expense of the stockholders whose pre-emptive right is violated.
In the event of liquidation, each stockholder, old and new, will
par-ticipate in the net assets of the corporation at the rate of
P125.00 per share.

Power to deny pre-emptive right.

The pre-emptive right of stockholders of a stock corporation “to

subscribe to all issues or disposition of shares of any class in
proportion to their respective share-holdings” may be “denied by
the articles of incorporation or an amendment thereto.” (Sec. 39.)

Unless so denied, the right should be granted to a holder of

shares although they are of a class different from those issued or
disposed of.

For example, holders of common “A” shares are entitled to

subscribe to common “B” shares in proportion to their interest,
but they cannot be compelled to subscribe to the common “B”
shares especially since the latter are of a class different from the
class they are holding.

A stockholder whose pre-emptive right is violated may maintain

an action to compel the corporation to give him that right. If the
denial is by an amendment to the articles of incorporation, he
may exercise his appraisal right under Section 81(1).

Pre-emptive right as to treasury shares.

(1) In close corporations, the pre-emptive right of stockholders

extends to all stock to be issued, including reissuance of treasury
29
 CORPO NOTES - JUDE

shares, whether for money or for property or personal services, or

in payment of corporate debts, unless the articles of
incorporation provides otherwise. (Sec. 103.)

(2) In widely held corporations, it would seem that existing

stockholders have also a pre-emptive right as to treasury shares
(Sec. 9.) in view of the use of the phrase “disposition of shares of
any class” in Section 39.

Power to sell, lease, etc. all A corporation, by the action of its board of directors or trustees
or substantially supported by the vote of shareholders or members, may sell,
lease, exchange, mortgage, pledge, or otherwise dispose of all or
all corporate assets.
substantially all of its property and assets including its goodwill.
(see Title IX.)

The requisites for the validity of such sale, etc. are as follows:

(1) The sale etc., must be approved by the board of directors or

trustees;

(2) The action of the board of directors or trustees must be

authorized by the vote of stockholders representing 2/3 of the
outstanding capital stock or 2/3 of the members, as the case may
be; and

(3) The authorization must be done at a stockholders’ or

members’ meeting duly called for that purpose after written
notice;

The sale, etc., shall be subject to the provisions of existing laws

on illegal combinations and monopolies. (see Sec. 140.)

Authority of the board.

(1) Stock corporations. — Section 40 covers not only sale, but

also lease, exchange, mortgage, pledge or other disposition of its
properties.

(a) The board is given the right to decide upon the terms and
conditions of the sale including the consideration for the property
sold, for at any rate, the sale is still subject to approval, by the
stockholders or members.

(b) After such approval, the board may nevertheless, in its

discretion, abandon the transaction, without further action or
approval by the stockholders or members but subject to the right
of third parties under any contract relating thereto. (par. 3.)

(2) Non-stock corporations. — Under the last paragraph, the vote

30
 CORPO NOTES - JUDE

of the majority of the trustees in office will be sufficient

authorization for the corporation to enter into any transaction
authorized by Section 40 in the case of non-stock corporations
where there are no members with voting rights.

Appraisal right of dissenting stockholder.

It is to be noted that the exercise of the appraisal right of any

dissenting stockholder (par. 1; see Sec. 81[2].) is predicated on
the “sale or other disposition of all or substantially all” of the
corporate assets, the phrase being defined as such which would
render the corporation “incapable of continuing the business or
accomplishing the purpose for which it was incorporated.” (Sec.
40, par. 2.)

Conversely, any disposition which does not involve all or

substantially all of the corporate assets made in the ordinary
course of business does not require the approval of the
stockholders or members and would not entitle any dissenting
stockholder to exercise his appraisal right. (Ibid., par. 4.)

Sec. 40337

Power to acquire own Section 41 expressly authorizes a stock corporation to purchase

shares. or acquire its own shares subject to the limitation that the
acquisition is for a legitimate corporate purpose or purposes and
that there is unrestricted retained earnings (see Sec. 43.) in its
books to cover the shares acquired.

(1) Elimination of fractional shares. — A fractional share is a

share which is less than one (1) share. Thus, if a stockholder own
250 shares and the corporation declares 25% stock dividend, his
total shares will be 312 and 1/2 shares. Inasmuch as fractional
shares cannot be represented at corporate meetings (No. 1.), the
corporation may purchase the same from the stockholders
concerned or issue fractional scrip certificates to such
stockholders who may negotiate for the sale thereof with other
stockholders also owning fractional shares so as to convert them
into full shares.

(2) Satisfaction of indebtedness to corporation. — No. 2 of Section

41 does not authorize a corporation to arbitrarily purchase the
shares it issued to any of its stockholders indebted to it, whether
at the prevailing market price or at par value for the purpose of
applying the proceeds thereof to the satisfaction of its claim
against them, and this is particularly true where the consent of
such stockholders has not been secured. And even where their
31
CORPO NOTES - JUDE

consent has been secured, the corporation can buy their shares
only if the conditions for the purchase (infra.) are present. (see
SEC Opinion, Aug. 11, 1961.)

(3) Payment of shares of dissenting or withdrawing

stockholders. — No. 3 of Section 41 refers to instances when a
dissenting stockholder is given appraisal right (see Sec. 81.) and
the right to withdraw from the corporation as provided in Section
16 (Amendment of articles of incorporation), Section 37 (Power to
extend or shorten corporate term), Section 40 (Sale or other
disposition of assets), Section 42 (Power to invest corporate funds
in another corporation or business or for any other purpose),
Section 68 (Delinquency sale), Section 77 (Stockholders’ or
members’ approval of plan of merger or consolidation), and
Section 105 (Withdrawal of stockholder or dissolution of [close]
corporation).

(4) Other cases. — This power of the corporation to acquire its

own shares is not limited to the cases enumerated in Section 41.
Thus, it may also be exercised under Section 9 (treasury shares).
With respect to redeemable shares, they may be purchased by the
corporation regardless of the existence of unrestricted retained
earnings in the books of the corporation. (see Sec. 8.)

Conditions for the exercise of the power.

Briefly, a corporation’s right to purchase its shares according to

the weight of authority is subject to the following limitations:

(1) That its capital is not thereby impaired;

(2) That it be for a legitimate and proper corporate purpose;

(3) That there shall be unrestricted retained earnings to purchase

the same and its capital is not thereby impaired;

(4) That the corporation acts in good faith and without preju-dice
to the rights of creditors and stockholders; and

(5) That the conditions of corporate affairs warrant it. (SEC

Opinion, Feb. 27, 1976.)

Sec. 41339

Thus, if the aforementioned conditions are obtained, a

cor-poration may acquire the shares of alien stockholders to
comply with constitutional or legal requirements prescribing the
mini-mum percentage of capital stock ownership of Filipino

32
 CORPO NOTES - JUDE

citizens in certain corporations. (Ibid., see Sec. 12.)

Trust fund doctrine. This doctrine holds that the assets of the corporation as
represented by its capital stock are “trust funds” to be
maintained unimpaired and to be used to pay corporate creditors
in the sense that there can be no distribution of such assets
among the stockholders without provision being first made for
the payment of corporate debts and that any such disposition of it
is a fraud on the creditors of the corporation and, therefore, void.

(1) Corporation generally without power to purchase its own

shares. — A corporation has no general power to purchase its
own shares of stock. This rule is dictated by the necessity of
protecting the interests of existing creditors who might be
adversely affected by the stock purchase which, in effect, may
operate to reduce its capital stock to the extent of the shares
purchased without complying with the formalities required by
Section 38. The foregoing is in consonance with the doctrine.

(2) Repayment to stockholders, a fraud on corporate creditors. —

The purchase, in effect, constitutes a fraud on corporate creditors
as it amounts to repayment to the stockholder of his
proportionate share from the corporate assets and hence, an
impairment of the capital available for the benefit and protection
of creditors who are preferred over the stockholders in the
distribution of corporate assets. (see Sec. 122, last par.)

Note that under the doctrine, the corporation is not prohibited to

use its assets for purposes of its business.

Power to invest funds in By virtue of the provisions of Section 42, a corporation may be
other corporations organized with multiple lawful purposes so long as the primary
purpose is indicated in the articles of incorporation. However, the
or for other purposes.
investment of its funds (includes any of its corporate property) is
limited to the primary purpose. In order that it may invest its
funds in any other corporation or business or for any purpose
other than the primary purpose, compliance with the
requirements of Section 42 is necessary (see De la Rosa vs.
Mao-Sugar Central Co., Inc., 27 SCRA 247.) and, of course,
subject to the prohibition against certain corporations from
having more than one purpose.

But a corporation may invest its funds in another business which

is incident or auxiliary to its primary purpose as stated in its
articles of incorporation without the approval of the stockholders
or members as required under Section 42. In such case, a

33
 CORPO NOTES - JUDE

dissenting stockholder shall have no appraisal right.

Sec. 42341

Power to declare dividends. The board of directors of a stock corporation has the power to
declare dividends out of the “unrestricted retained earnings”
which shall be payable in cash, in property, or in stock to all
stockholders on the basis of outstanding stock held by them.

(1) Stock dividends. — In case of stock dividend, it shall not be

issued without the approval of stockholders representing at least
2/3 of the capital stock then outstanding at a regular meeting of
the corporation or at a special meeting duly called for the
purpose.

(2) Other dividends. — A mere majority of the quorum of the

board of directors is sufficient to declare other dividends. The
board may declare dividends other than stock without need of
stockholders’ approval. (Sec. 43)

The dividend is paid to the registered owner of stocks as of a

record date usually a date different from the date of declaration. It
is stated either at a given percent or a fixed amount for each
share. The record date determines the time when the
stockholders of record shall be ascertained.

Concept of dividends.

A dividend is that part or portion of the profits of a corporation

set aside, declared and ordered by the directors to be paid ratably
to the stockholders on demand or at a fixed time.

It is a payment to the stockholders of a corporation as a return

upon their investment. It is a characteristic of a dividend that all
stockholders of the same class share in it in proportion to the
respective amounts of stock which they hold. (13 Am. Jur.
637-639.)

Classes of dividends. Dividends that may be declared by a corporation may be

classified as follows:

(1) Cash dividend or dividend payable in cash.

(a) Dividends on par value shares are made at a stated percentage

(e.g., 10%) of the par value although they may also be paid as a
fixed amount per share.

(b) As to no par value shares, dividends are payable in terms of so

many pesos or centavos (e.g., P10.00, P0.05) per share since
34
CORPO NOTES - JUDE

there is no basis on which a percentage can be stated.

(c) Dividends are usually paid in money;

(2) Property dividend or dividend distributed to the stock-holders

in the form of property, real or personal, such as warehouse
receipts, or shares of stock of another corporation.

(a) A dividend payable in property is actually a cash dividend. The

stockholder can take the property, sell it and realize the cash.

(b) A corporation may, therefore, pay declared cash dividend in

the form of a “property” provided the distribution of the same is
practicable, specifically where the surplus is in that form
(property) and is no longer intended to be used in the operation of
the business;

(c) The property must form part of the surplus or retained

earnings of the corporation, otherwise it cannot be declared as
property dividends;

(3) Stock dividend or dividend payable on unissued or increased

or additional shares of the corporation instead of in cash or in
property.

(a) By this alternative to declaring dividends, the corporation can

retain earnings. The declaration involves the issuance of new
shares to be distributed pro rata to the stockholders;

(b) A stock dividend may be declared to the extent of the

maximum number of shares authorized in the articles of
incorporation.

(4) Optional dividend or dividend which gives the stockholder an

option to receive cash or stock dividend;

(5) Composite dividend or dividend which is partly in cash and

partly in stocks. Here, there is no option involved;

(6) Scrip dividend or a writing or certificate issued to a

stockholder entitling him to the payment of money or the like at
some future time inasmuch as the corporation at the time such
dividends are declared has profits not in cash, or has no sufficient
cash, or has the cash but wishes to reserve it for some corporate
purposes. It is in the form of a promissory note or promise to pay
and may be issued to bear interest;

(7) Bond dividend or dividend distributed in bonds of the

35
 CORPO NOTES - JUDE

corporation to the stockholders;

(8) Preferred dividend or dividend payable to one class of

stockholders in priority to be paid to another class.

(9) Cumulative dividend or dividend payable at a certain rate at

stated times and if the stipulated dividend is not paid in any
dividend period, the dividend in arrears must also be paid the
following period.

(10) Liquidating dividends which are actually distributions of the

assets of the corporation upon dissolution or winding up of the
same.

Dividends may also be participating or non-participating. (see

Sec. 6.)

Dividends distinguished from profits or earnings.

(1) A dividend, as applied to corporate stock, is that portion of the

profit or net earnings which the corporation has set aside for
ratable distribution among the stockholders. Thus, dividends
come from profits, while profits are a source of dividends.

(2) Profits are not dividends until so declared or set aside by the
corporation. In the meantime, all profits are a part of the assets of
the corporation and do not belong to the stockholders
individually. (Ibid., 640.)

Dividends payable out of Under the law, dividends other than liquidating dividends (which
unrestricted are not really dividends as they are from capital) may be declared
and paid out of “the unrestricted retained earnings” of the
retained earnings.
corporation. (Ibid.) A corporation cannot make a valid contract to
pay dividends other than from retained earnings or profits and an
agreement to pay such dividends out of capital is unlawful and
void.

The power of a corporation to acquire its own shares is likewise

subject to the condition that there be unrestricted retained
earnings in its books to cover the shares to be purchased. (Sec.
41.)

Note: The Code, in Section 43, adopting the change made in

accounting terminology, substituted the phrase “unrestricted
retained earnings,” which may be considered a more precise
term, in place of “surplus profits arising from its business,” in the
former law. However, the Code still speaks of “surplus profits” in
the second paragraph of Section 43 in fixing the maximum
36
 CORPO NOTES - JUDE

earnings which may be retained by a corporation and in Section 3

in defining stock corporations.

The Code deleted the phrase “arising from its business.” It may be
argued that the term “unrestricted retained earnings,” as used in
the Code, refers to all the excess of assets of the corporation over
its liabilities including legal or stated capital. Hence, it is not
limited to accumulated net profits of the corporation “arising from
its business” but may comprehend also other gains such as those
derived from the sale of fixed assets. But it does not include the
unrealized increase in value of fixed assets. (infra.)

Unrestricted retained (1) The retained earnings of a corporation is “the difference

earnings explained.
between the total present value of its assets after deducting
losses and liabilities and the amount of its capital stock.” (see 11
Fletcher 1041.) Capital stock, in this instance, should be
understood to refer to outstanding stock (see Sec. 137.) and not
the stated or nominal (authorized) capital stock.

Stated otherwise, the ordinary way of determining whether a

corporation has retained earnings or not is to compute the value
of all its assets and deduct therefrom all of its liabilities including
legal capital, and thus ascertain whether the balance exceeds the
amount of its outstanding shares of capital stock. This may be
expressed in the following formula:

Retained earnings = Assets - (liabilities and capital)

The difference between the total assets and liabilities of a

corporation represents its net worth or net assets or the
stockholders’ equity consisting of the capital invested and the
retained earnings. Thus, the retained earnings will be
the balance of the net worth or net assets after deducting the
value of the corporation’s outstanding capital stock. They refer to
the accumulated undistributed earnings or profits realized by a
corporation arising from the transaction of its business and the
management of its affairs, out of current and prior years.

Power to enter into Under Section 44, a corporation is expressly allowed to enter into
management contract. a management contract with another corporation, which refers
“to any contract whereby a corporation undertakes to manage or
operate all or substantially all of the business of another
corporation, whether such contracts are called service contracts,
operating agreements or otherwise.”

The following are the limitations for the exercise of the power:

37
CORPO NOTES - JUDE

(1) The contract must be approved by a majority of the quorum of

the board of directors or trustees and ratified by the prescribed
vote of the stockholders or members, as the case may be, of both
the managing and the managed corporations, at a meeting duly
called for the purpose; and

(2) The period of the contract must not be longer than five (5)
years for any one term except that contracts which relate to the
exploration, development, exploitation or utilization of natural
resources may be entered into for such periods as may be
provided by pertinent laws or regulations.

In either of the two cases mentioned (par. 1.), the management

contract must be approved by the stockholders of
the managed corporation owning at least 2/3, not merely a
majority, of the total outstanding capital stock entitled to vote, or
in case the managed corporation is a non-stock corporation, by at
least 2/3, not merely a majority, of the members.

ILLUSTRATIONS:

(1) Interlocking stockholders. — If A, B, and C, stockholders in

both X Corporation and Y Corporation, the managing and
man-aged corporations, respectively, own 35% of the total
outstanding capital stock entitled to vote of X Corporation, the
management contract must be approved by the prescribed 2/3
vote of the stock-holders of Y Corporation. The same vote shall
apply where A is the only stockholder in both corporations and he
owns more than 1/3 of the total outstanding capital stock
entitled to vote of X Corpora-tion. Only a majority vote is required
if the more than 1/3 owner-ship of A, B and C, or of A refers to the
outstanding capital stock of Y Corporation, the managed
corporation.

(2) Interlocking directors. — If A, B, C, D, and E constitute the

majority of the members of the board of directors of X Corporation
and also of Y Corporation, the bigger 2/3 vote by the stockholders
of Y Corporation is necessary. This is a case of a contract between
two corporations with interlocking directorates. (see Sec. 33.) The
extent of the shareholdings of A, B, C, D, and E in X Corporation
is immaterial.

In both illustrations, the management contract need only be

ap-proved by the majority of the outstanding capital stock of X
Corpo-ration, or in illustration No. 2, of the members, in case X
Corpora-tion is a non-stock corporation.

38
 CORPO NOTES - JUDE

Ultra vires and intra vires It is well-settled that a corporation is not restricted to the exercise
acts explained. of powers expressly conferred upon it but has the implied or
incidental powers to do what is reasonably necessary to carry out
its express powers and to accomplish the purposes for which it
was formed.

Sections 36(11) and 45 give express recognition to these implied

and incidental powers possessed by private corporations.

According to the strict construction of the term, an ultra vires act

is one not within the express, implied, and incidental powers of
the corporation. It is an act which is impliedly forbidden,
be-cause it is not expressly or impliedly authorized or necessary
or incidental in the exercise of the powers so conferred.

Acts within the legitimate powers of a corporation are called intra

vires.

ILLUSTRATION:

A corporation was organized for the purpose of engaging in the

buying and selling of home appliances. The act of buying and
selling motor vehicles would be ultra vires although it is itself
law-ful because it is outside the object for which the corporation
is cre-ated and, therefore, beyond its powers.

The buying and selling of refrigerators would be intra vires.

Ultra vires act When properly used, an ultra vires act means simply an act
distinguished from which is beyond the conferred powers of a corporation or the
purposes for which it is created. (Republic vs. Acoje Mining Co.,
an illegal act.
Inc., 7 SCRA 661 [1963].)

By itself, an ultra vires act is not necessarily illegal. On the

contrary, it may be lawful, moral and even praiseworthy.

An illegal corporate act, on the other hand, is an act which is

contrary to law, morals, good customs, public order, or public
policy (Art. 1306, Civil Code.) and, therefore, per se illicit. (see
Pirovano vs. de la Rama, 96 Phil. 335 [1954].) The buying and
selling of contraband goods would not only be illegal but
also ultra vires.

Ratification of ultra vires (1) Where the contract is illegal per se, it is wholly void or
acts. inexistent. It cannot be ratified or validated. (Art. 1409, Civil
Code.)

(2) Where the contract is not illegal per se but merely beyond the

39
 CORPO NOTES - JUDE

power of a corporation, the same is merely voidable and may be

enforced by performance, ratification, or estoppel, or on equitable
ground. (Republic vs. Acoje Mining Co., Inc., supra.)

Effects of ultra vires acts which are not illegal.

The following rules are recognized:

(1) An ultra vires contract, as long as it is executory on both

sides, cannot be enforced by either party thereto. It is in the
public interest that corporations do not transcend the powers
granted to them and their assets be not subjected to risks created
by forbidden acts;

(2) When an ultra vires contract has been fully performed on both
sides, neither party thereto can lawfully set aside the same or to
recover what has been given. No public interest is involved here
since both parties have already received to their advantage the
benefits of the contract voluntarily entered into; and

(3) When an ultra vires contract has been performed on one side
and the other has received benefits by reason of such
per-formance, recovery is permitted in most courts on behalf of
the former (7 Fletcher, 620.) on the ground that it would be
unjust to allow retention of benefits by a party coupled with his
refusal to perform. Other courts hold the contract unenforceable
but re-quire the party who has received the benefits of
performance to return what he has received or failing to do that,
to pay its rea-sonable value. (Ibid., 613.)

In any case, when a contract is not on its face necessarily beyond

the scope of the power of the corporation by which it was made, it
will, in the absence of proof to the contrary, be presumed to be
valid. (Coleman vs. Rotel de France Co., 29 Phil. 323 [1915].) In
other words, an act is presumed to be within corporate powers
unless clearly shown to be otherwise.

Board of (1) Governing body of the corporation. — All corporations, being

Directors/Corporate impersonal, existing only in contemplation of law, can only act
Officers and contract through the aid and by means of individuals. Such
individuals may be these holding corporate offices or agents
properly appointed by such officers.

It is well-established in corporation law that the corporation can

act only through its board of directors or trustees. Section 23
provides that “unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall

40
 CORPO NOTES - JUDE

be exercised, all business conducted and all property of such

corporations controlled and held by the board of directors or
trustees.” The board of directors or trustees, therefore, is the
governing body of the corporation chosen by the stockholders or
members.

(2) Binding effect of stockholders’ action. — The stockholders (or

members) elect a board of directors (or trustees) to oversee the
management and operation of the corporation. They are not the
agents of the corporation; they cannot bind it by their acts. With
the exception only of some powers reserved by law to
stockholders, the directors have sole authority to determine
policy and conduct the ordinary business of the corporation
within the scope of its charter in all those matters which do not
require the consent or approval of the stockholders. (see Sec. 4.)
Once elected, the directors are not directly controlled by the
stockholders who only have indirect control of the corporation
through their votes.

(a) The law is settled that contracts between a corporation and

third persons must be made by or under the authority of its board
of directors and not by its stockholders. Hence, the action of the
stockholders in such matter is only advisory and not in any wise
binding on the corporation. (Barreto vs. La Previsora Filipina, 57
Phil. 649.)

(b) For the same reason that a corporation can act only through
the board of directors, a resolution adopted at a meeting of
stockholders refusing to recognize a corporate contract effected
with the approval of the board of directors or repudiating it, is
without effect. (Ramirez vs. Orientalist, 38 Phil. 634.)

Term of office of directors It is now expressly provided that the board of directors or trustees
or trustees. to be elected “shall hold office for one (1) year and until their
successors are elected and qualified.” (Sec. 23, par. 1.) Upon
failure of a quorum at any meeting of the stockholders or
members called for an election, the directorate naturally holds
over and continues to function until another directorate is chosen
and qualified. (see Sec. 24, last sentence.)

Number of directors or (1) Under the Code, the number must be “not be less than five (5)
trustees. nor more than fifteen (15)” (Sec. 14[6].) except as otherwise
provided by the Code or special law.

(2) In ordinary non-stock corporations, the board of trustees,

unless otherwise provided in the articles of incorporation or the

41
 CORPO NOTES - JUDE

by-laws, “may be more than fifteen (15) in number,” with the term
of office of 1/3 of their number expiring every year. (see Sec. 92,
par. 1.)

(3) In a close corporation, the articles of incorporation may

provide that the business of the corporation shall be managed by
its stockholders rather than by a board of directors in which case
no meeting of stockholders need be held to elect directors. (see
Sec. 97, par. 2.)

(4) Trustees of non-stock educational corporations “shall not be

less than five (5) nor more than fifteen (15),” provided that the
number “shall be in multiples of five (5),” with the term of office of
1/5 of their number expiring every year. (see Sec. 108, pars. 1,
2.)

(5) In a corporation sole, there is no board of directors or trustees

as it consists of one member or corporator only. (see Sec. 110.)

(6) The board of trustees of religious societies shall also “be not
less than five

(5) nor more than fifteen (15).” (see Sec. 116[6].)

The limitation as to the number of directors or trustees seeks to

give ample representation to stockholders or members of a
corporation to its board while at the same avoiding that it will be
too unwieldy.

Qualifications of directors (1) Stock corporations. — The qualifications of directors of stock

or trustees. corporations are as follows:

(a) Every director must own at least one share of the capital
stock;

(b) The share of stock held by the director must be registered in

his name on the books of the corporation;

(c) Every director must continuously own at least a share of stock

during his term, otherwise, he shall automatically cease to be a
director; and

(d) A majority of the directors must be residents of the

Philippines. (Sec. 23.)

(2) Non-stock corporations. — Trustees of non-stock

corporations must be members thereof and like in stock
corporations, a majority of them must be residents of the
Philippines. In case of domestic banks, the General Banking Act
42
 CORPO NOTES - JUDE

requires that at least two-thirds of the members of the board of

directors must be citizens of the Philippines. (R.A. No. 337, Sec.
13.)

b. Election and removal The following limitations or conditions are imposed in the election
of directors or trustees:

(1) At any meeting of stockholders or members called for the

election of directors or trustees, there must be present in person
or by representative authorized to act by written proxy, the
owners of the majority of the outstanding capital stock, or if there
be no capital stock, a majority of the members entitled to vote;

(2) The election must be by ballot if requested by any voting

stockholder or member. Hence, voting by viva voces or roll call
(raising of hands) is valid except when there is a request that the
election be by ballot;

(3) A stockholder cannot be deprived in the articles of

incorporation or in the by-laws of his statutory right to use any of
the methods of voting in the election of directors;

(4) No delinquent stock shall be voted;

(5) If a quorum is present, the candidates receiving the highest

number of votes shall be declared elected. The law requires only
plurality, not majority of the votes cast at the election;

(6) In case of failure to hold an election for any reason, the

meeting may be adjourned from day to day or from time to time
but it cannot be adjourned sine die or indefinitely; and

(7) The requisite notice must be given. (see Sec. 50, par. 1.)

Methods of voting. Every stockholder entitled to vote shall have the right to vote in
person or by proxy the numbers of shares of stock standing, at
the time fixed in the by-laws, in his own name on the stock books
of the corporation or where the by-laws are silent, at the time of
the election, and said stockholder may vote his shares in any of
the ways mentioned below.

(1) Straight voting. — By this voting method, every stockholder

“may vote such number of shares for as many persons as there
are directors” to be elected.

ILLUSTRATION:

A owns 100 shares of stock in a corporation. If there are five

directors to be chosen, A is entitled to 500 votes obtained by
43
CORPO NOTES - JUDE

multi-plying 100 by 5. He may give to the five candidates he

wants to be elected 100 votes each.

Under this method, the votes are distributed equally among the
five candidates without preference.

(2) Cumulative voting for one candidate. — By this method, a

stockholder is allowed to concentrate his votes and “give one
candidate as many votes as the number of directors to be elected
multiplied by the number of his shares shall equal.”

(a) The privilege of cumulative voting is permitted for the purpose

of giving minority stockholders representation in the board of
directors. Needless to say, straight voting does not benefit
minority stockholders for they would not be able to elect any
director over the objection of the stockholder or stockholders who
own at least 51% of the capital stock.

(b) A director elected because of the vote of minority stockholders

who united in cumulative voting cannot be removed without
cause. (Sec. 28, last sentence.)

ILLUSTRATIONS:

(1) If A owns 100 shares of stock and there are five directors to be
elected, he is entitled to 500 votes all of which he may cast in
favor of any one candidate.

(2) Suppose that out of a total of 500 shares, A and B

(repre-senting a group of stockholders) own 400 shares while C,
D, E and F (representing another group of stockholders) own 100
shares.

If there are five directors to be elected, A and B are entitled to

2,000 votes and C, D, E, and F, to 500 votes. The highest number
of votes that A and B can give each of their four candidates is 500.
Hence, by cumulating their 500 votes in favor of a candidate, C,
D, E and F would be able to secure representation in the board of
directors.

(3) Cumulative voting by distribution. — By this method, a

stockholder may cumulate his shares by multiplying also the
number of his shares by the number of directors to be elected and
distribute the same among as many candidates as he shall see fit.

ILLUSTRATIONS:

(1) With 100 shares of stock, A is entitled to 500 votes if there are
five directors to be elected. A may distribute his votes to
44
 CORPO NOTES - JUDE

can-didates W, X and Y, giving W, 100 votes, X 150 and Y, 250. A

may cast his votes in any combination desired by him provided
that the total number of votes cast by him does not exceed 500
which is the number of shares owned by him multiplied by the
total number of directors to be elected.

(2) X, a stockholder, wishes to be elected to a nine-man board. He

expects that out of 3,000 outstanding shares, only 2,000 shares
will be represented at the meeting. How many of the 2,000 shares
does X need to get elected? X will need 200 of the 2,000 shares to
be elected. Now, if X seeks control of the company and desires to
elect five directors, he will need 1,001 shares to elect the five.

(3) Suppose there are 20,000 outstanding shares of a

corpora-tion and 11 directors are to be elected. The minority
stockholders wish to elect three directors. The formula for
determining the votes needed in cumulative voting:

D = [A x B] / [C + 1] + 1

E=DxC

where:

A = Total number of outstanding shares entitled to vote

B = Number directors desired to be elected

C = Total number of directors to be elected

D = Number of shares necessary to elect desired number of

directors

E = Number of votes required to elect desired number of directors

Thus:

D = [20,000 x 3] / [11 + 1] + 1 or

D = 5001 shares

E = 5001 x 11 or

E = 55,011 votes which may be distributed equally (18,337 each)

to three candidates for directors

Voting in a non-stock Members of non-stock corporations may cast as many votes as

corporation. there are trustees to be elected but may not cast more than one
vote for one candidate. This is the manner of voting in non-stock
corporations unless otherwise provided in the articles of

45
 CORPO NOTES - JUDE

incorporation or in the by-laws. (see Sec. 89.)

ILLUSTRATION:

If A is a member of a non-stock corporation and there are five (5)

directors to be elected, he is entitled only to five (5) votes. He may
give one (1) vote to each of the five candidates he wants to be
elected.

If he has only one candidate he can cast only one (1) vote for said
candidate unless cumulative voting is authorized in the arti-cles
of incorporation or in the by-laws. Thus, where cumulative
vot-ing exists, and there are nine (9) trustees to be elected, a
member is entitled to cast nine (9) votes for one candidate or by
distributing the same among as many candidates as he shall see
fit.

Requisites for board Under Section 25, validity of a corporate act is predicated on the
meeting. presence of the following requisites:

(1) Meeting of the directors or trustees duly assembled as a

board, i.e., as a body in a lawful meeting;

(2) Presence of a quorum;

(3) Decision of the majority of the quorum or, in other cases, a

majority of the entire board; and

(4) Meeting at the place (see Sec. 51, par. 1.), time, and in the
manner provided in the by-laws. (see Secs. 47[12], 53, 101.)

Quorum.

Quorum is such number of the membership of a collective body

as is competent to transact its business or do any other corporate
act.

(1) Number required for presence of quorum. — Section 25

provides that ‘’unless the articles of incorporation or the by-laws
provide for a greater majority, a majority of the number of
directors or trustees as fixed in the articles shall constitute
a quorum for the transaction of corporate business.” The
majority would be at least one-half plus one of the number of
directors.

(2) Number required for approval of corporate acts. — As a

general rule, a majority vote of the directors or trustees present at
a meeting at which there is a quorum, as distinguished from a
majority of the full board, is sufficient to authorize action where
46
CORPO NOTES - JUDE

the Code requires approval of certain corporate acts such as the

declaration of dividends (Sec. 43.) or entering into a management
contract (Sec. 44.), without stating that it shall be by majority
vote of the board but if the word “majority,’’ is used, the number
of votes required to approve such acts shall be at least one-half
plus one of the entire membership.

(3) Number provided greater than majority. — Unlike the old law
which sets the quorum at “a majority of the directors” without
giving the corporation the power to provide otherwise, the Code
gives the corporation the power to require a number greater than
the majority of the board members to constitute
the quorum necessary to transact business. So that, given a
corporation with nine (9) directors, the presence of five (5)
members will be sufficient to hold a board meeting and a vote of
three (3) will be enough to pass a board resolution. However, the
same corporation can provide in its articles of incorporation or
by-laws, that the required quorum shall be seven (7) members. In
this case, a vote of at least four (4) members is necessary for the
approval of any board resolution. But “the vote of a majority of all
the members of the board” or at least five (5) members, shall be
required for the election of officers. (see Sec. 97, par. 1[13].)

ILLUSTRATION:

The by-laws of X Corporation provide for 11 directors. Only 9

directors were elected with 2 seats remaining vacant. During a
spe-cial meeting of the board where only 5 directors were present
(no quorum), the board passed a resolution.

Under the law, the required quorum of the board is a majority of

the entire board as it would be constituted if all the vacancies
were filled, i.e., 6 directors. Consequently, the resolution is
irregular.

Suppose the absent director subsequently signed the minutes of

the meeting. Will the signature cure the defect of the first
meet-ing?

No.

But if the board subsequently met with 6 directors present and all
of them voted unanimously to approve and ratify said resolu-tion,
such action would have the effect of curing the defect and giv-ing
effect to the resolution.

Proxy not allowed.

47
 CORPO NOTES - JUDE

Directors or trustees cannot validly act by proxy. (as to meaning

of “proxy” see comments under Sec. 58.) They must attend the
meeting of the board of directors or trustees and act in person
(Sec. 25, last par.) and as a body.

Each director or trustee is required to exercise his personal

judgment and he cannot delegate his duties or assign his powers
to another.

Disqualification of The above provision disqualifies any one convicted by final

directors/trustees judgment of an offense punishable by imprisonment for a period
exceeding six (6) years or a violation of the Code as a
or officers.
director/trustee or officer of any corporation.

The offense need not involve moral turpitude. The rule applies
regardless of the nature or classification of the offense as long as
it is punishable by imprisonment for a period exceeding six (6)
years. If the disqualification is based on a violation of the Code
(see Sec. 144.), the duration of the imprisonment is immaterial
but the commission (not conviction) of the violation must have
taken place within five (5) years prior to the date of the election or
appointment.

Removal of directors or Stockholders cannot tell directors how they are to manage the
trustees. corporation but they do maintain indirect control since they can
remove directors any time if they wish.

(1) Generally; limitation. — The law does not specify cases for
removal of a director or trustee nor even require that removal
should be for sufficient cause or reason. A director or trustee may
be removed by the prescribed vote of the stockholders or
members without cause subject to the limitation that a director
or trustee cannot be removed without cause if the effect of such
removal is to deprive minority stockholders or members who
united in cumulative voting to elect such director, of right of
representation to which they may be entitled under Section 24.

(2) Filling of vacancy created. — In case of removal on the vote of

stockholders or members, as the case may be, the vacancy so
created may be filled by election at the same meeting without
further notice, or at any regular or at any special meeting called
for the purpose after giving the prescribed notice. (Sec. 28.) Thus,
the stockholders or members who have removed a director or
trustee are also given the power to choose his replacement at the
same meeting.

Power of the board to The board of directors (or trustees) has no power to remove one of
48
 CORPO NOTES - JUDE

remove a member. its members as director (or trustee).

The reason is that as officers deriving their title from the

stockholders (or members), they can be removed only by the
power that appointed them. (Ibid.)

Since the law expressly confers the authority to stockholders or

members, the board cannot indirectly usurp or disregard the
same.

Power of court to remove The Corporation Code does not confer expressly upon the courts
directors or trustees. the power to remove a director or trustee of a corporation.

There are abundant authorities, however, which hold that if the

court has acquired jurisdiction to appoint a receiver (see Sec.
122.) because of the mismanagement of the directors, these may
thereafter be removed and others appointed in their place by the
court in the exercise of its equity jurisdiction.

But where the properties and assets of the corporation are amply
protected by the appointment of a receiver, such removal is
unnecessary and unwarranted in view of the provisions of Section
28 prescribing the manner of removal of directors or trustees. (see
Angeles vs. Santos, 64 Phil. 697 [1937].)

Requisites for removal of Section 28 specifies the following requisites for the removal of
directors directors or trustees:

or trustees. (1) The removal must “take place either at a regular meeting of the
corporation or at a special meeting called for the purpose”;

(2) There must be “previous notice to the stockholders or

members of the corporation of the intention to propose such
removal at the meeting”; and

(3) The removal must be “by a vote of the stockholders holding or

representing two-thirds (2/3) of the outstanding capital stock, or
if the corporation be a non-stock corporation, by a vote of
two-thirds (2/3) of the members entitled to vote.”

Filling of vacancies in the The person elected to fill a vacancy holds office only for the
office unexpired term of his predecessor. A vacancy in the office of
director or trustee may be filled as follows:
of director or trustee.
(1) By the stockholders or members. — In any of the following
cases:

(a) If the vacancy results from the removal by the stock-holders or

49
 CORPO NOTES - JUDE
Powers and fiduciary duties
members or the expiration of term;
(b) If the vacancy occurs other than by removal or by expiration of
term (see Sec. 23, par. 1.), such as death, res-ignation,
abandonment, or disqualification, if the remaining directors or
trustees do not constitute a quorum for the pur-pose of filling the
vacancy;
(c) If the vacancy may be filled by the remaining directors or
trustees (infra.) but the board refers the matter to the
stockholders or members; or
(d) If the vacancy is created by reason of an increase in the
number of directors or trustees.
(2) By the members of the board. — If still constituting a quorum,
at least a majority of them are empowered to fill any vacancy
occurring in the board other than by removal by the stockholders
or members or by expiration of term. The board has no power to
fill any directorship or trusteeship by reason of an increase in the
number of directors or trustees.
ILLUSTRATION:
If four (4) of nine (9) directors died, the remaining five (5)
direc-tors still constitute a quorum, and a majority of the five (5)
or three (3) may fill the four (4) vacancies.2 But if five (5) of the
directors died, the vacancies will have to be filled by the
stockholders in a regular or special meeting duly called for the
purpose.
The directors of a corporation are its agents. They also occupy a
fiduciary relation to the corporation. By numerous authorities
they have been called “trustees” (McEwen vs. Kelly, 79 S.E. 777.),
with certain powers and subject to certain duties in the
management of its property, and each stockholder a cestui que
trust according to his interest and shares. (Jackson vs. Ludeling,
21 Wall. [U.S.] 616.)
(1) In the performance of their official duties, they are under
obligations of trust and confidence to the corporation and its
stockholders and must act in good faith and for the interest of the
corporation or its stockholders with due care and diligence and
within the scope of their authority. (Ibid.)
(2) They are personally liable for any wrongful disposition of
corporate assets and for any loss or injury to the corporation
arising from their gross negligence or unauthorized acts or
50
CORPO NOTES - JUDE

violation of their duties. (see Steinberg vs. Velasco, 52 Phil. 953

[1929].)

(3) Directors are not liable, however, for business losses incurred
because of honest bad judgment not amounting to bad faith or
gross negligence. (see Ballantine, 160; see also Board of
Liquidators vs. Heirs of Maximo Kalaw, 20 SCRA 987 [1967].)

Liability of directors/trustees for damages.

Section 31 enumerates the occasions when a director or trustee

may be held liable for damages, as follows:

(1) He willfully and knowingly votes or assents to patently

unlawful acts of the corporation;

(2) He is guilty of gross negligence (not mere “want of ordinary

prudence” as held in Steinberg vs. Velosco, supra.) or bad faith in
directing the affairs of the corporation; and

Sec. 31305

(3) He acquires any personal or pecuniary interest in conflict with

his duty as such director or trustee.

In the above instances, the erring board members shall be held

jointly and severally (or solidarily) liable for all the damages
resulting therefrom suffered by the corporation, its stockholders
or members, or other persons such as corporate creditors.

Liability of directors/trustees or officers for secret profits.

Furthermore, in the case mentioned in the second paragraph, the

director/trustee or officer guilty of violation of duty shall be held
accountable for the profits which otherwise would have accrued
to the corporation.

Similarly, a director guilty of disloyal act against the corpora-tion,

is required by Section 34 to account to the corporation for the
profits obtained by him from a business opportunity which
should belong to the corporation.

Self-dealing directors/trustees or officers.

Section 32 renders voidable at the option of the corporation a

contract of such corporation with one or more of its
directors/trustees or officers.

In any of the following cases, the contract shall be valid.

51
CORPO NOTES - JUDE

(1) All the conditions enumerated in Section 32 are present;

(2) Not all the conditions set forth are present but the corporation
(through the board) elects not to question the validity of the
contract without prejudice to the liability of the directors or
trustees for damages under Section 31; or

(3) In the case of a contract with a director or trustee, only the

third condition is present, i.e., the contract is fair and reasonable
under the circumstances, if the contract is ratified by the
required vote of the stockholders or members in a meeting called
for the purpose, provided that full disclosure of the adverse
interest of the directors or trustees involved is made at such
meeting.

Section 32 fails to specify whether the votes of the self-dealing

director or trustee shall be counted in the meeting for the
ratification of the contract.

Contracts between corporations with interlocking directors.

Section 33 recognizes as valid a contract between two or more

corporations which have interlocking directors (i.e., one, some, or
all of the directors in one corporation is/are also
director/directors in another corporation) as long as there is no
fraud and the contract is fair and reasonable under the
circumstances.

However, if the interest of the interlocking director in one

corporation is substantial, i.e., his stockholdings exceed 20% of
the outstanding capital stock and in the other merely nominal,
the rules of Section 32 on self-dealing directors shall apply
insofar as the latter corporation is concerned.

ILLUSTRATION:

X Corporation sold a parcel of land worth P500,000.00 to Y

Cor-poration for only P300,000.00. Z is a board member of both
corpora-tions.

Evidently, the contract is not fair and reasonable, and is,

there-fore, voidable on that ground. But if the contract is fair and
reason­able under the circumstances and Z’s interest in X
Corporation is merely nominal and in Y Corporation substantial,
the conditions in Section 32 must be present insofar as X
Corporation is concerned, on the theory that the contract of X
Corporation is with Z.

52
 CORPO NOTES - JUDE

However, if Z’s interest in both corporations is nominal or is

substantial, the provisions of Section 32 do not apply but the
con-tract shall be valid only if there is no fraud and the contract
is fair and reasonable under the circumstances.

The “corporate Under this doctrine, a director who, by virtue of his office,
opportunity’’ doctrine. acquires for himself a business opportunity which should belong
to the corporation, thereby obtaining profits to the prejudice of
such corporation, is guilty of disloyalty and should, therefore,
account to the latter for all such profits by refunding the same,
notwithstanding that he risked his funds in the venture.

Under Section 34, the guilty director will only be exempted from
liability to the corporation if his disloyal act is ratified by the vote
of the stockholders owning or representing at least 2/3 of the
outstanding capital stock. Note that there is no similar provision
in Section 31.

Section 34 is silent on whether the disloyal director shall be

allowed to vote his shares in the ratification of his act.

Kinds of meetings (1) Meetings of stockholders or members. — It may be:

(a) Regular or those held annually on a date fixed in the by-laws,

or if not so fixed, on any date in April of every year as determined
by the board of directors or trustees; or

(b) Special or those held at any time deemed necessary or as

provided in the by-laws. (Secs. 49, 50.)

(2) Meetings of directors or trustees. — It may be:

(a) Regular or those held by the board monthly, unless the

by-laws provide otherwise; or

(b) Special or those held by the board at any time upon the call of
the president or as provided in the by-laws. (Secs. 49-53.)

The president shall preside at all meetings of directors or trustees

and of the stockholders or members, unless otherwise provided in
the by-laws (Sec. 54.) and subject to the provisions of Section 50.
(last par.) Thus, the by-laws may provide that the chairman
instead of the President, shall preside at board meetings.

Necessity of meetings. The corporate powers are vested in the board of directors or
trustees and/or the stockholders or members as a body and not
as individuals.

(1) Meetings of stockholders or members. — “It is a fundamental

53
 CORPO NOTES - JUDE

rule of corporation law that unless the statute otherwise provides,

stockholders [or members] can act only in meetings properly
convened and assembled. The written assent of a majority of the
shareholders [or members] without a meeting to a matter
requiring action by them is not sufficient.” (Fisher, op. cit., Sec.
128.) The reason for the rule lies in the protection to the
stockholders (or members) accorded by the giving of notice and
the opportunity to attend, discuss, and vote at a meeting.

(2) Meetings of directors or trustees. — Similarly, as agents of the

corporation managing its affairs, the directors or trustees can
only exercise their powers as a board, not individually or
separately. The law proceeds upon the theory that directors or
trustees shall meet and counsel with each other, and that any
determination affecting the corporation shall only be arrived at
after a consultation at a meeting of the board upon notice to all,
attended by at least a quorum of its members. (SEC Opinion,
March 10, 1972, citing Ballantine, p. 123.)

Exceptions to the rule.

(1) Under Section 16, any corporation may amend its articles of
incorporation

“by a majority vote of the board of directors or trustees and the

vote or written assent of two-thirds of the stockholders
representing at least two-thirds of the outstanding capital stock,
xxx or xxx of the members xx.” Thus, a meeting of stockholders or
members is not necessary.

(2) It is evident that the corporation will be bound by the

unanimous act or agreement of its stockholders or members
although expressed elsewhere than at a meeting.

(3) In any of the cases mentioned in Section 101, any action taken
by the directors of a close corporation without a meeting shall
nevertheless be deemed valid, unless otherwise provided in the
by-laws.

Requisites for a valid The following requisites must be complied with in order that there
meeting of stock-holders or will be a valid meeting of stockholders or members:
members.
(1) It must be held at the proper place (Sec. 51.);

(2) It must be held at the stated date and at the appointed time or
at a reasonable time thereafter (Ibid.);

54
 CORPO NOTES - JUDE

(3) It must be called by the proper person (Sec. 50, last par.);

(4) There must be a previous notice (Secs. 50, 51, 53.); and

(5) There must be a quorum. (Sec. 52.)

Matters in which the law Hereunder are enumerated the corporate acts together with the
requires specific number of corresponding minimum votes required for their approval:
votes.
(1) to amend the articles of incorporation — a majority vote of the
board of directors or trustees and vote or written assent of 2/3 of
the outstanding capital stock or of the members (Sec. 16.);

(2) to elect directors or trustees — a majority of the outstanding

capital stock or of the members entitled to vote (Sec. 24.);

(3) to remove directors or trustees — 2/3 of the outstanding

capital stock or of the members entitled to vote (Sec. 28.);

(4) to call a special meeting to remove directors or trustees — a

majority of the outstanding capital stock or of the members
entitled to vote (Sec. 28.);

(5) to ratify a contract of a director/trustee or officer with the

corporation — 2/3 of the outstanding capital stock or of the
members (Sec. 32.);

(6) to extend or shorten corporate term — a majority vote of the

board of directors or trustees and 2/3 of the capital stock or of
the members (Sec. 37.);

(7) to increase or decrease the capital stock — a majority of the

board of directors and 2/3 of the outstanding capital stock (Sec.
38.);

(8) to incur, create, or increase bonded indebtedness — a majority

vote of the board of directors or trustees and 2/3 of the
outstanding capital stock or of the members (Ibid.);

(9) to sell, lease, exchange, mortgage, pledge or otherwise dispose

of all or substantially all of the corporate assets — a majority vote
of the board of directors or trustees and 2/3 of the outstanding
capital stock or of the members (Sec. 40.);

(10) to invest corporate funds in another corporation or business

or for any purpose other than the primary purpose — a majority
vote of the board of directors or trustees and 2/3 of the
outstanding capital stock or of the members (Sec. 42.);

(11) to issue stock dividends — a majority of the quorum of the

55
CORPO NOTES - JUDE

board of directors and 2/3 of the outstanding capital stock. (Sec.

43.) Note: The approval of the stockholders is not required with
respect to other dividends such as cash and bond dividends;

(12) to enter into a management contract — a majority of the

quorum of the board of directors or trustees and a majority of the
outstanding capital stock or of the members of both the
managing and the managed corporations and, in some cases, 2/3
of the total outstanding capital stock entitled to vote or of the
members, with respect to the managed corporation (Sec. 44.);

(13) to adopt by-laws — a majority of the outstanding capital

stock or of the members (Sec. 46.);

(14) to amend or repeal the by-laws or adopt new by-laws — a

majority vote of the board of directors or trustees and of the
outstanding capital stock or of the members (Sec. 48.);

(15) to delegate to the board of directors or trustees the power to

amend or repeal the by laws or adopt new by-laws — 2/3 of the
outstanding capital stock or of the members (Ibid.); and

(16) to revoke the preceding power delegated to the board of

directors or trustees — a majority of the outstanding capital stock
or of the members (Ibid.);

(17) to fix the issued price of no par value shares — a majority of

the quorum of the board of directors if authorized by the articles
of incorporation or in the absence of such authority, by a majority
of the outstanding capital stock (Sec. 62, last par.);

(18) to effect or amend a plan of merger or consolidation — a

majority vote of the board of directors or trustees and 2/3 of the
outstanding capital stock or of the members of the constituent
corporations (Sec. 77.);

(19) to dissolve the corporation — a majority vote of the board of

directors or trustees and 2/3 of the outstanding capital stock or
of the members (Secs. 118, 119.); and

(20) to adopt a plan of distribution of assets of a non-stock

corporation — a majority vote of the board of trustees and 2/3 of
the members having voting rights. (Sec. 95, par. 2.)

A corporation may prescribe a greater voting requirement for the

approval of any of the above corporate acts in its articles of
incorporation and/or by-laws in order to protect the rights of
minority stockholders or members. Note that in Nos. (1), (6), (7),

56
 CORPO NOTES - JUDE

(8), (9), (10), (11), (12), (14), (18), (19), and (20), the acts
mentioned must be approved by both the board of directors of
trustees and the stockholders or members.

Powers, duties, rights and The theory of a stock corporation is that the stockholders may
obligations of stockholders have all the profits but shall turn over the complete management
of the enterprise to their representatives or agents called
directors. (Ramirez vs. Orientalist, 38 Phil. 634 [1918]; Wolfson
vs. Araneta Stock Exchange, 72 Phil. 492 [1941].) The
stockholders, however, as part owners of the corporation, have
certain rights expressly recognized by the corporation law. These
rights may be summarized as follows:

(1) Right to attend and vote in person or by proxy at stockholders’

meetings (see comments under Secs. 50, 58.);

(2) Right to elect and remove directors (Secs. 24, 28.);

(3) Right to approve certain corporate acts (see comments under

Secs. 49-54.);

(4) Right to adopt and amend or repeal the by-laws or adopt new
by-laws (Secs. 46, 48.);

(5) Right to compel the calling of meetings of stockholders when

for any cause there is no person authorized to call a meeting (Sec.
50, last par.);

(6) Right to issuance of certificate of stock or other evidence of

stock ownership and be registered as shareholder (see comments
under Sec. 63.);

(7) Right to receive dividends when declared (see comments under

Sec. 43.);

(8) Right to participate in the distribution of corporate assets

upon dissolution (see comments under Secs. 118-119.);

(9) Right to transfer of stock on the corporate books (see

comments under Sec. 63.);

(10) Right to pre-emption in the issue of shares (see comments

under Sec. 39.);

(11) Right to inspect corporate books and records and to receive

financial report of the corporation’s operations (Secs. 74-75.);

(12) Right to be furnished the most recent financial statement

upon request and to receive a financial report of the corporation’s

57
 CORPO NOTES - JUDE
Action by stockholders or Corporations represent their stockholders (or members) in all
members. matters within the scope of their corporate powers. This is true
respecting litigations as well as in other matters. As a result of the
Derivative suit explained.
operations (Sec. 75.);
(13) Right to bring individual and representative or derivative
suits (infra.);
(14) Right to recover stock unlawfully sold for delinquency (Sec.
69.);
(15) Right to enter into a voting trust agreement (Sec. 59.);
(16) Right to demand payment of the value of his shares and
withdraw from the corporation in certain cases (see comments
under Secs. 41 and 81.); and
(17) Right to have the corporation voluntarily dissolved. (see
comments under Secs. 118-119.)
Most of these rights have already been discussed in the preceding
chapters while the others (Nos. 8, 11, 12, 16, and 17) are
discussed subsequently. Only the right to bring representatives
or derivative suits (No. 13) will be discussed here.
separate identities of the corporation and its stockholders, it
follows that any wrong or injury done directly against the
corporation gives rise to a cause of action on the part of the
corporation through the board of directors (or trustees) and not
primarily of an individual stockholder.
But, whenever the officials of a corporation refuse to bring suit to
redress the wrong, such as when they are the ones to be sued, a
stockholder may maintain a derivative suit to enforce the
corporate right of action in behalf of himself, the other
stockholders, and for the benefit of the corporation. And the fact
that no other stockholder has made common cause with the
suing stockholder is irrelevant because the smallness of his
stockholding is no ground for denying relief. (Republic Bank vs.
Cuaderno, 19 SCRA 671.)
A derivative suit is thus defined as one brought by one or more
stockholders or members in the name and on behalf of the
corporation to redress wrongs committed against it or to protect
or vindicate corporate rights, whenever the officials of the
corporation refuse to sue, or are the ones to be sued or hold
control of the corporation. In such action, the suing stockholder
58
 CORPO NOTES - JUDE

is regarded as a nominal party with the corporation as the real

party in interest. (Ibid., Gamboa vs. Victoriano, 90 SCRA 40.)

In a derivative suit filed by a stockholder, the plaintiff is suing for

a wrong done to the corporation and not one done to himself.
Hence, the name of the remedy because he derives his right from
the corporation. Any recovery belongs to the corporation but the
plaintiff is entitled to reimbursement at least of legal expenses.

It is important that the corporation should be made a party in

order to make the court’s judgment binding upon it. (Republic
Bank vs. Cuaderno, supra.) A suit against corporate officers in
their official capacity is considered a suit against the corporation.
(E. Cano Enterprises, Inc. vs. Court of Industrial Relations, 13
SCRA 290.)

Liabilities of stockholder. Stock ownership in a corporation results in certain rights.

Assuredly, it also places certain liabilities upon the stockholder.
These liabilities may be grouped into the following:

(1) Liability to the corporation for unpaid subscription (Secs.

67-70.);

(2) Liability to the corporation for interest on unpaid subscription

(Sec. 66.);

(3) Liability to creditors of the corporation on unpaid subscription

(Sec. 60.);

(4) Liability for watered stock (Sec. 65.);

(5) Liability for dividends unlawfully paid (Sec. 43.); and

(6) Liability for failure to create corporation. (Sec. 10.)

These liabilities are discussed under the corresponding sections

indicated.

Corporate reorganization Common forms of corporate combinations.

a. Mergers Below are the common forms of corporate combinations.

b. Consolidations (1) Sale of assets. — A union of corporations may be effected by

one corporation selling all or substantially all of its assets to
c. Other business
another. (see Sec. 40.) Such sale is usually, though not
combinations
necessarily, made in the course of the dissolution of the vendor
corporation.

(a) In a strict legal sense, the mere sale of all its property by a
corporation and the distribution of its assets do not work a
59
CORPO NOTES - JUDE

dissolution of the corporation inasmuch as possession of

property is not essential to corporate existence. (Re: Fulton, 178
N.E. 766.) Generally, therefore, where one corporation sells or
otherwise transfers all its assets to another corporation, the latter
is not liable for the debts and liabilities of the transferor. (Edward
J. Neil Co. vs. Pacific Farms, Inc., 15 SCRA 415.)

(b) But, if in the agreement, a new corporation expressly acquired

the assets and properties, and assumed the obliga-tions and
liabilities of an old corporation which it succeeded, the former
cannot excuse itself from said obligations and liabilities on the
argument that said two corporations are distinct and separate.
(Rivera vs. Litam & Co., Inc., 4 SCRA 1072.)

(c) The sale of the assets for stock, if followed by dissolution, has
the effect of a merger.

ILLUSTRATION:

X Inc., a shoe manufacturing company, sells all its assets to Y

Inc., another shoe manufacturing company. In consideration for
the transfer of all its assets, X Inc. receives shares of stocks from
Y Inc.

Thus, X Inc. becomes a stockholder of Y Inc. By the terms of the

sale, the shares of stock of Y Inc. may be issued directly to the
stockhold-ers of X Inc. on the basis of their shareholdings. In
such case, X Inc. will have no more stockholders as well. It may
be dissolved subse-quently.

The above transaction is a sale of assets for stock in name but

may be found by the courts to be really a de facto merger.

Y Inc. is not liable for the liabilities of X Inc. except where Y Inc.
expressly or impliedly assumed said liabilities, or Y Inc. is merely
a continuation of X Inc. especially where the sale to Y Inc. was
ef-fected in furtherance of a fraudulent purpose to evade payment
by X Inc. of its outstanding obligations. In the second case, the
two corporations are treated as one.

(2) Lease of assets. — In this case, a corporation, without being

dissolved, leases its property to another corporation for which the
lessor merely receives rental paid by the lessee. This is usually
practiced by railroad and transportation companies. The lease of
assets is similar to the sale of assets except than under a lease
nothing passes except the right to use the property leased.

(3) Sale of stock. — The purpose of a holding company is to

60
CORPO NOTES - JUDE

acquire a sufficient amount of the stock of another cor-poration

for the purpose of control. The acquiring corporation is called
the parent or holding company. The corporation whose stocks
are acquired is known as the subsidiary corporation.

In all the three foregoing cases of corporate combination, the legal

identity of each corporation is retained.

(4) Merger. — By this method, two (or more) corporations unite,

one corporation which remains in being, absorbing or merging in
itself the other which disappears as a separate corporation.

ILLUSTRATION:

A Inc. and B Inc. are existing corporations. A Inc. transfers all its
assets to B Inc. B Inc. absorbs and acquires all the property,
rights and liabilities of A Inc. which is dissolved. B Inc. continues
its cor-porate existence.

A Inc. and B Inc. are the constituent corporations. A Inc. is the

merged or absorbed corporation while B Inc. is the merging,
absorbing, or surviving corporation that continues the combined
business. The stockholders of A Inc. become stockholders of B
Inc.

(5) Consolidation. — By this method, two (or more) corporation

unite, giving rise to a new corporate body and dissolving the
constituent corporations as separate corporations.

ILLUSTRATION:

A Inc. and B Inc. are existing corporations. They unite together to

form C Inc. to which they transfer all their assets. A Inc. and B
Inc. are dissolved by the consolidation. The title to their property
passes to C Inc. and all their rights and liabilities are assumed by
C Inc.

The dissolved corporations, A Inc. and B Inc., are the constitu-ent

corporations. They are also the original corporations. C Inc., the
new corporation, is called the consolidated corporation. The
stock-holders of A Inc. and B Inc. become stockholders of C Inc.

The legal effects of the merger or consolidation accomplished

under Title IX are provided in Section 80. Both methods involve a
transfer of the assets of the constituent corporations in exchange
for securities in the new or surviving corporation but neither
involves the winding-up of the affairs of the constituent
corporations in the sense that the assets are distributed to the

61
 CORPO NOTES - JUDE

stockholders. Note that there is automatic assumption of

liabilities of the absorbed corporation or constituent corporations
(Sec. 80[5].) which are dissolved. (Sec. 80[1, 2].)

Meaning of dissolution. The term dissolution, as applied to a corporation, signifies the

extinguishment of its franchise to be a corporation and the
termination of its corporate existence. (16 Fletcher 655.)

Power to dissolve It is an accepted theory that what the law itself has granted, the
corporation. law may take away. And so a corporation may come to an end and
its life extinguished only by the act or with the consent of the
State by which it was established. (16 Fletcher 659.)

Two legal steps in corporate Dissolution of a corporation involves two legal steps:
dissolution.
(1) The termination of the corporate existence at least as far as
the right to go on doing ordinary business is concerned; and

(2) The winding-up of its affairs, the payment of its debts, and the
distribution of its assets among the shareholders (16 Fletcher
655.) or members and other persons in interest. After
winding-up, the existence of the corporation is terminated for all
purposes.

Methods or causes of A corporation can have perpetual existence. The law, how-ever,
corporate dissolution. permits the dissolution of corporations. Under Section 117, a
private corporation organized under the law may be dissolved
either voluntarily or involuntarily.

These two methods of dis-solving corporations may be outlined as

follows:

(1) Voluntary. — It may be effected:

(a) by the vote of the board of directors/trustees and the

stockholders/members, where no creditors are affected (Sec.
118.);

(b) by judgment of the Securities and Exchange Com-mission

after hearing of petition for voluntary dissolution, where creditors
are affected (Sec. 119.); or

(c) by amending the articles of incorporation to shorten the

corporate term (Sec. 120.); and

(d) In the case of a corporation sole, by submitting to the

Securities and Exchange Commission a verified declaration of
dissolution for approval. (Sec. 115.)

62
 CORPO NOTES - JUDE

(2) Involuntary. — It may be effected:

(a) by expiration of term provided for in the original articles of

incorporation (Sec. 11.);

(b) by legislative enactment (infra.);

(c) by failure to formally organize and commence the transaction

of its business within two (2) years from date of incorporation
(Sec. 22.); or

(d) by order of the Securities and Exchange Commission. (Sec.

121.)

The change of name of a corporation does not result in its

dissolution.

Effects of dissolution. (1) The corporation ceases as a body corporate to continue the
business for which it was established (Sec. 122, par. 1.);

(2) The corporation continues as a body corporate for three (3)

years for purposes of winding-up or liquidation (Ibid.); and

(3) Upon the expiration of the winding-up period of three (3)

years, the corporation ceases to exist for all purposes and as a
general rule, it can no longer sue and be sued as such.
(Fisher, op. cit., p. 386.)

A dissolved corporation thus continues to exist but only for a

limited purpose and for a limited time.

Meaning of liquidation. Liquidation, as applied to a corporation, means the winding-up of

the affairs of the corporation, by reducing its assets into money,
settling with creditors and debtors, and apportioning the amount
of profit and loss.

Methods of corporate There are three methods by which a dissolved corporation may
liquidation. wind-up its affairs:

(1) Liquidation by the corporation itself (Sec. 122, par. 1.);

(2) Liquidation by a duly appointed receiver (Sec. 119, last par.);

and

(3) Liquidation by trustees to whom the board of directors or

trustees had conveyed the corporate assets. (see Sec. 122, par. 2.)

Liquidation by the The normal method or procedure is for the corporation through
corporation itself. the directors or trustees and executive officers to have charge of
the winding-up operations.

63
 CORPO NOTES - JUDE

(1) As the law (Sec. 122.) grants it a period of three years after the
time when it would have been so dissolved within which to
wind-up its affairs, the claims by and against it not presented and
settled within that period become unenforceable as there exists
no longer a corporate entity against which they can be enforced.

(2) It is to be noted that there is nothing in Section 122 (par. 1.)

which bars an action for the recovery of the debts of the
corporation against the liquidator thereof after the lapse of the
winding-up period of three (3) years. (Republic of the Philippines
vs. Marsman Dev. Co., 44 SCRA 418.)

Liquidation by a receiver. The liquidation by receivership is authorized by Section 119 by

virtue of which upon the dissolution of the corporation, the
Securities and Exchange Commission “may appoint a receiver to
collect its assets and pay the debts of the corporation.” (last par.)
Courts are also empowered to appoint a receiver.

(1) The receivership, unless otherwise specifically limited in its

duration, shall exist indefinitely until the affairs of the dissolved
corporation shall have been completely settled and liquidated.
During its continuance, claims can be presented and allowed if
they are not barred by the statute of limitations. In other words,
the period of three (3) years prescribed by Section 122 is not
applicable. (see Summers vs. Valencia, 67 Phil. 721 [1939].)

(2) The appointment of a receiver is discretionary with the court

and the Securities and Exchange Commission and is not made
except upon proper showing that such appointment is necessary.
Even without dissolution, the court has the authority to appoint a
receiver for a corporation to protect and preserve its properties for
the use and benefit of its creditors and others who may have
similar interests in the property as where there is already a final
and executory judgment against the corporation which is in a
precarious financial condition. (Central Sawmills, Inc. vs. Alto
Surety and Insurance Co., 27 SCRA 247 [1969].)

(3) Where corporate directors are guilty of breach of trust,

minority stockholders may ask for receivership. (Chase vs. Court
of First Instance, supra.)

Liquidation by a trustee. The liquidation of the corporation may be placed in the hands of a
trustee or assignee to whom the corporate assets are conveyed.

(1) By the terms of Section 122 (par. 2.), the effect of the
conveyance is to make the trustee the legal owner of the property,
subject to the beneficial interest therein of the creditors,
64
 CORPO NOTES - JUDE

stockholders/members, and other persons in interest. The

trustee may sue and be sued as such in all matters connected
with the liquidation.

(2) The same rules governing duration and the time for filing of
claim where the liquidation is done by a receiver apply to
liquidation effected by a trustee. (see Board of Liquidators vs.
Heirs of Maximo Kalaw, 20 SCRA 987 [1967].)

Priority of application of The question of the right of a claimant against the assets of a
assets. corporation that is being dissolved and liquidated to priority in
the payment of his claims becomes of importance only when the
assets of the corporation are not sufficient to pay all claims. It is
evident that if the corporate assets are sufficient to pay all claims,
it cannot matter practically which claim is paid first or is entitled
to preferential payment. (13 Am. Jur. 1208-1210.)

(1) When the corporation is insolvent, the creditors of the

corporation are entitled to have all its assets distributed first
among them according to their rights and priorities. This is in
accordance with the trust fund doctrine.

(2) Stockholders/members, directors/trustees, or officers of the

corporation who are also its creditors as a result of a legitimate or
proper loan or claim must be paid next.

(3) The remaining assets are then to be distributed among the

stockholders or members in proportion to their shareholdings or
interest in the absence of any provision to the contrary. (see
Stockholders of F. Guanzon & Sons, Inc. vs. Register of Deeds, 6
SCRA 373 [1966].) Of course, holders of preferred stock as to
assets have a preference over the common stockholders in the
distribution of the surplus proceeds of the assets of the dissolved
corporation.

(4) Upon winding-up of the corporate affairs, any asset

distributable to any creditor or stockholder or member who is
unknown or cannot be found shall be escheated to the city or
municipality where such assets are located. (Sec. 122, par. 3.)
Under the law, such distributive shares of the assets of the
corporation upon its dissolution are not available for general
distribution among the stockholders. The reason for this rule is
that upon the dissolution of a corporation, the assets become a
trust fund (see Sec. 41.) with the title of the stockholders
becoming an equitable right to a distributive share therein, and
that the stockholders, in respect of the liquidating dividend, are

65
 CORPO NOTES - JUDE

not mere creditors, but the money is set apart for them and is,
therefore, not available for general distribution. (19 Am. Jur. 2d
1035-1036.)

Foreign corporations (1) With respect to a particular state, a foreign corporation is a

corporation created by or under the laws of another State or
country. This is the traditional definition of the term.

(2) Under Section 123, it is one formed, organized or existing

under any laws other than those of the Philippines and whose
laws allow Filipino citizens and corporations to do business in its
own State or country. Under the incorporation test, a corporation
organized under the laws of the Philippines is a domestic
corpo-ration with respect to the Philippines and a foreign
corporation with reference to any other State; if organized under
the laws of another country, it is domestic with reference to said
country and a foreign corporation under our Corporation Code.

(3) During wartime, however, for reasons of national secu-rity,

the control test shall determine the nationality of a corpora-tion,
that is, a domestic corporation controlled by enemy aliens shall
be deemed a foreign corporation with a nationality iden-tical with
that of its controlling stockholders. (Filipinas Cia de Seguros vs.
Christern Huenefeld & Co., 89 Phil. 54.)

License and certificate of Under Section 123, foreign corporations shall not be permit-ted
authority required to transact or do business in the Philippines until they have
secured a license for that purpose from the Securities and
of foreign corporations.
Ex-change Commission (see Sec. 126.) and a certificate of
authority from the appropriate government agency.

The fact, however, that a foreign corporation may not transact

business in the Philippines unless it has obtained a license for
that purpose, nor maintain a suit in Philippine courts for recovery
of any debt, claim or demand without such license does not make
such corporation any less a juridical person. (General Garments
Corp. vs. Director of Patents, 41 SCRA 50.)

Meaning of “transacting (1) Circumstances of each case. — No general rule can be laid
business.” down as to what constitutes “doing” or “engaging” “or
transacting” business. Indeed, each case must be judged in the
light of its peculiar environmental circumstances. It should
appear, however, that the corporation and its officers intended to
establish as continuous business and not one of a temporary
character. (Marshall Welis Co. vs. Elser & Co., 46 Phil. 71; see Far
East Int. Import & Export Corp. vs. Nankai Kogyo Co., Ltd., 6

66
 CORPO NOTES - JUDE

SCRA 725.)

(2) Acts included. — The Code does not define the phrase “doing
or transacting business.” The Omnibus Investments Code of
1987. (Exec. Order No. 226, Art. 44.), and the Foreign
Investments Act (R.A. No. 7062, Sec. 2[d].), however, give a
definition which may be adopted for purposes of the Corporation
Code. Under the two laws, “doing business” by a foreign
corporation shall include:

(a) Soliciting orders, purchases, and service contracts;

(b) Opening offices, whether called “liaison” offices or branches;

(c) Appointing representatives or distributors who are domiciled

in the Philippines or who, in any calendar year, stay in the
Philippines for a period or periods totalling 180 days or more;

(d) Participating in the management, supervision or control of any

domestic business firm, entity or corporation in the Philippines;
and

(e) Any other act or acts that imply a continuity of commercial

dealings or arrangements, and contemplate to that extent the
performance of acts or works, or the exercise of some of the
functions normally incident to, and in progressive prosecution of,
commercial gain or for the purpose and object of the business
organization. (Sec. 65 thereof.)

(3) Acts not included. — Under the Foreign Investments Act, the
phrase “doing business” does not, however, include:

(a) mere investment as a shareholder by a foreign entity in

domestic corporations duly registered to do business; and/or

(b) the exercise of rights as such investor; nor

(c) having a nominee director or officer to represent its interests in

such corporation; nor

(d) appointing a representative or distributor domiciled in the

Philippines which transacts business in its own name and for its
own account. (Sec. 2[d] thereof.)

Application for and A foreign corporation applying for a license to transact business
issuance of license. in the Philippines must comply with the following requirements
and conditions precedent to the issuance of the license by the
Securities and Exchange Commission:

67
CORPO NOTES - JUDE

(1) Submission of required documents. — It shall submit to the

Securities and Exchange Commission a certified copy of its
articles of incorporation, with a translation to an official language
of the Philippines, if necessary, and the application for a license
which shall be under oath and shall specifically set forth the

matters enumerated by law, unless already stated in its articles of

incorporation (Sec. 125, par. 1.); and

(2) Accompanying documents to application. — The application

shall be accompanied by the following:

(a) A duly executed certificate under oath by the author-ized

official or officials of the jurisdiction of its incorporation attesting
to the fact that the laws of the country or state of the applicant
allow Filipino citizens and corporations to do busi-ness therein
and the applicant is an existing corporation of good standing,
with a translation of the certificate in English under oath of the
translator if it is in a foreign language (Ibid., par. 2.);

(b) A sworn statement of the president or any authorized officer of

the corporation, showing to the satisfaction of the Securities and
Exchange Commission and other government agency in proper
cases that the applicant is solvent and in sound financial
condition and setting forth its assets and li-abilities for the
previous year (Ibid., par. 3.);

(c) A certificate of authority from the appropriate gov-ernment

authority, whenever required by law (Ibid., last par.; Sec. 123.);
and

(d) A written power of attorney designating a resident agent on

whom summons and other legal processes against the
corporation may be served and a written agreement or stipulation
consenting that such service may be made upon the Securities
and Exchange Commission if at any time it shall cease to transact
business in the Philippines, or shall be without any resident
agent (Secs. 127, 128.);

(3) Compliance with special laws. — Foreign banking, financial

and insurance corporations shall, in addition to the above
requirements, comply with the provisions of existing laws
applicable to them (Sec. 125, last par.); and

(4) Issuance of license to transact business. — If the applicant

shows to the satisfaction of the Securities and Exchange
Commission that it has complied with the above requirements of

68
 CORPO NOTES - JUDE

the Code and those imposed by other special laws, rules and
regulations, the Commission shall issue a license authorizing it
to transact business in the Philippines for the purpose or
purposes specified therein. (Sec. 126, par. 1.)

Resident agent. The resident agent is an individual who must be of good moral
character and of sound financial standing, residing in the
Philippines, or a domestic corporation lawfully transacting
business in the Philippines (Sec. 127.), designated in a written
power of attorney, by a foreign corporation authorized to transact
business in the Philippines, “on whom any summons and other
legal processes may be served in all actions or other legal
proceeding against such corporation.”

The principal duty of a resident agent is to receive in behalf of a

foreign corporation notices, summons and other legal processes
in connection with actions against such corporation. The service
of any such papers on such resident agent has the same force
and effect as if made upon the duly authorized officers of the
foreign corporation at its home office. (Sec. 128, par. 1.)

Effect of doing business Section 133 states the effects as follows:

without a license.
(1) Suit by a foreign corporation. — The foreign corporation
transacting business without a license, or its successors or
assigns shall not be permitted to maintain or intervene in any
action, suit or proceeding in any court or administrative agency of
the Philippines; and

(2) Suit against a foreign corporation. — Such corporation may,

however, be sued or proceeded against before Philippine courts or
administrative tribunals on any valid cause of action recognized
under Philippine laws.

Furthermore, it is implied from the rule established in Section

123 (2nd sentence) that the foreign corporation shall not be
permitted to continue transacting business in the Philippines,
unless it shall have obtained the license required by law and,
until it complies with the law, shall not be permitted to maintain
any suit in the local courts. (see Marshall Wells Co. vs. Elser &
Co., 46 Phil. 71; Converse Rubber Corp. vs. Jacinto Rubber &
Plastics Co., Inc., 97 SCRA 158.)

Suit by and against an (1) Isolated business transaction in the Philippines. —

unlicensed Con-versely, a foreign corporation not transacting business in the
Philippines may maintain an action, even if it has no license. “The
implication of the law is that it was never the purpose of the
69
 CORPO NOTES - JUDE

foreign corporation. legislature to exclude a foreign corporation which happens to

obtain an isolated order for business from the Philippines from
receiving redress in Philippine courts and thus, in effect, permit
persons to avoid contracts made with such foreign corporation.”
(Ibid.; General Garments Corp. vs. Director of Patents, 41 SCRA
50.)

In either case, however, compliance with the requirement of

license or the fact that the suing corporation is exempt therefrom,
as the case may be, must be affirmatively stated in the complaint
being an essential part of the plaintiff’s capacity to sue. (Atlantic
Mutual Ins. Co. & Continental Ins. Co. vs. Cebu Stevedoring Co.,
Inc., 17 SCRA 1037.)

(2) Protection of its trade name or trademark in the

Philippines. — Similarly, an unlicensed foreign corporation
which has never transacted business in the Philippines may
maintain an action in our local courts for the purpose of
protecting its reputation, corporate name and goodwill acquired
through the sale by importers and the use within the country of
its products bearing its corporate name or trademark. The right
to the use of the corporate tradename is a property right, a
right in rem, which the foreign corporation may assert and
protect in any of the courts in the world, even in countries where
it does not transact any business. (Western Equipment & Supply
Co. vs. Reyes, 51 Phil. 115; General Garments Corp. vs. Director
of Patents, supra.)

The matter of trademark or tradename is now governed by

statute, Republic Act No. 8293, known as the Intellectual
Property Code which repealed R.A. No. 165 (Patent Law), R.A. No.
166 (Trademark Law), and Presidential Decree No. 49 (Decree on
the Protection of Intellectual Property).

(3) Non-business transaction in the Philippines. — Neither does

the prohibition apply to a suit based on an act not arising out of a
business transaction in the Philippines. Thus, it has been held
that a foreign corporation without a license to engage in business
in the Philippines may maintain a suit to recover the value of
goods that were part of the shipment which was erroneously
discharged in Manila and received by the defendant and not
returned. (Swedish East Asia Co. Ltd. vs. Manila Port Service, 25
SCRA 633.)

(4) Non-exemption from suit in the Philippines. — If a foreign

corporation not engaged in business in the Philippines is not
70
 CORPO NOTES - JUDE

barred from seeking redress from courts in the Philippines, with

more reason, that same corporation cannot claim exemption from
being sued in the Philippine courts for acts done against a person
or persons in the Philippines. (Facilities Management Corp. vs.
De La Osa, 89 SCRA 131.)

Withdrawal of a foreign Section 136 prescribes the rules for the withdrawal of a foreign
corporation. corporation from business in the Philippines.

(1) A petition for withdrawal of license must be filed with the

Securities and

Exchange Commission which shall issue a certificate of

withdrawal only after compliance with all the requirements
mentioned in Section 136.

(2) To ascertain that the foreign corporation has no outstanding

liabilities to residents in the Philippines, the Commission shall
have to make an examination and inspection of its books and
records. If the Commission is aware of pending cases against the
foreign corporation, it may not declare that such corporation has
no outstanding liabilities in the Philippines. (see Scottish Union &
National Insurance Co. vs. Macadaeg, 91 Phil. 89.)

(3) The courts may review the action of the Commission approving
the withdrawal of a foreign corporation for the law should not be
interpreted as to permit a foreign corporation to escape the
results of pending action against it by withdrawing from the
Philippines with all the securities it has deposited, provided it
gets the sanction of the Securities and Exchange Commission.
(see Ibid.)

Books and records to be (1) Under the Corporation Code. — Section 74 requires every
kept private corporation, stock or non-stock, to keep books and
records at its principal office as follows:
by corporations.
(a) A record of all business transactions;

(b) Minutes of all meetings of stockholders or members;

(c) Minutes of all meetings of directors or trustees; and

(d) Stock and transfer book, in the case of stock corpora-tions.

(2) Under other laws. — In addition, corporations must keep

other books and records required by special laws like the General
Banking Act, National Internal Revenue Code, Labor Code, and
others. They may also keep such optional records and subsidiary

71
 CORPO NOTES - JUDE

books as the needs of their business may require.

Right to inspect corporate The right of inspection of corporate books is granted by express
books. provision of our corporation law. Said provision states that “the
record of all business transactions of the corporation and the
minutes of any meeting shall be open to the inspection of any
director, trustee, or stockholder or member of the corporation at
reasonable hours on business days.” (Sec. 74, par. 2.)

Remedies and sanctions for (1) Action for mandamus. — In case the officers of the
enforcement corporation wrongfully denies a stockholder or member of the
right to inspect corporate books or papers, the usual remedy to
of right.
enforce his right is by filing an action for mandamus against the
corporation. The secretary should be included as party defendant
since such official is customarily charged with the custody of all
documents and records of the corporation against whom personal
orders of the court would be made. (Ibid., SEC Opinion, April 27,
1970.)

(2) Civil and criminal liability. — Under Section 74 (par. 3.), any
officer or agent of the corporation who shall refuse to allow any
director, trustee, stockholder or member of the corporation to
examine and copy excerpts from its records or minutes, in
accordance with the provisions of the Code, shall be liable to such
director, etc. for damages, and, in addition, shall be guilty of an
offense which shall be punishable under Section 144 of the Code.
However, if such refusal is pursuant to a resolution or order of
the board of directors or trustees, the liability for such action
shall be imposed upon the directors or trustees who voted for
such refusal.

Basis and purpose of right (1) Beneficial ownership of corporate assets. — Those in charge of
to inspect the corporation are merely the stockholders’ or members’ agents
concerning whose good faith in discharging their duties the
corporate books.
stockholders or members have an interest and right to be
informed. (3 Fletcher, Sec. 2213.)

(a) The law is based on the principle that the stockholders or

members have a right to be fully informed as to the conditions of
the corporation, in the manner its affairs are conducted, and how
its capital to which they have contributed is employed or
managed. (Stone vs. Kellog, 46 NE 22.)

(b) The right of stockholders to inspect the books of the

corporation rests on the fact of beneficial ownership of the
corporate property and assets through ownership of shares. With

72
CORPO NOTES - JUDE

reference to his right of inspection, the relation of a stockholder to

the corporation is analogous to that of partner to the firm. (18
Am. Jur. 2d. 710; Art. 1803, Civil Code.)

(c) The right is predicated upon the necessity of self-protection.

(Gokongwei, Jr. vs. Securities and Exchange Commission, 89
SCRA 336.)

(2) Protection of stockholders and general public from

mismanage-ment. — The evident purpose of the law in granting
stockhold-ers the right to inspect corporate books and records is
to protect small and minority stockholders from the power of the
majority and from mismanagement by its officers, as well as to
ascertain, establish, and maintain their rights and intelligently
perform their corporate duties. (SEC Opinion, April 29, 1970,
citing Stone vs. Kellog, 46 NE 22.)

It has also been stated that the purpose of the law which requires
corporations to keep books of account and gives stockholders the
right to examine the records of their corporation is not only to
protect the interests of stockholders but also to protect the public
from monopolies, unlawful combinations, and unreasonable
exactions from corporations. (18 Am Jur. 2d 710.)

73