A.Y. 2018-2019 (Second Semester) Atty.

Gaviola | Corporation Law EH 404 | UNIVERSITY OF SAN CARLOS

CORPORATION LAW
TRANSCRIPT OF EH404

TYPES OF BUSINESS ORGANIZATIONS: As to At least two Not more than 15

composition persons incorporators, natural or
1) Sole Proprietorship juridical. May be a One
An individual does business. The owner personally conducts Person Corporation
business. He can do it under his own name or he can do it under (amendment)
a business name.
As to powers Depends on what Based on what is provided
exercised the partners in the Corporation Code and
The essence of a sole proprietorship is that the person doing the
agree upon for as any incidental powers which
business is the business. The business is not a separate entity
long as it is not are expressly granted
from the owner.
contrary to laws,
morals, good
2) Partnership
customs, public
A partnership is both a contract and a business organization.
order or public
policy
A partnership is where two or more individuals contribute money,
As to the As a general rule, Only the board of directors
property, or industry for the purpose of sharing profits among
management a partner can bind acting as a board can bind
themselves.
the partnership the corporation. Individually,
a director cannot bind the
The partnership has a separate personality from its owners. It is
corporation. They have to
a business organization that is created by mere consent. Aside
act as a board
from being a business organization, it is also contractual in
As to liability A partner can be General rule, all the
nature. It is created by mere consent of the parties and thus there
held liable with his stockholders will be held
is no need to register or go through a process to create a
personal property liable up to the extent of
partnership. The moment the partners agree as to how much they
their contribution. They
would contribute and what the business of the partnership will be,
cannot be liable beyond
the moment that there is consent, a contract of partnership is
what they contributed. This
created.
is what is known as limited
liability.
3) Corporation
As to the When a partner As a general rule, a
The most common type of business organization. A corporation
transfer of transfers his stockholder does not need
is an artificial being created by operation of law, having the
interest interest, the the consent of other
right of succession and the powers, attributes and properties
person to whom stockholders in order to
expressly authorized by law or incident to its existence (Sec.
his interest is transfer his shares.
2, B.P. Blg. 68 [Corporation Code of the Philippines]).
transferred to
does not become The transferee does not
Essence of a corporation is found in its definition under Section 2
a partner automatically become a
of the Corporation Code (CCP or B.P. Blg. 68)
automatically, he stockholder. He has to take
needs the the deed of assignment to
Difference between a partnership and a corporation:
consent of the the corporate secretary and
PARTNERSHIP CORPORATION
other partners. have the transfer recorded
Upon approval of the in the books. The moment
Securities and Exchange If this is done, the that the transfer is recorded
Commission (SEC) previous in the stock and transfer
evidenced by the issuance partnership is book that is the moment that
of the certificate of considered the transferee becomes a
incorporation dissolved and a stockholder. The duty of the
Made by mere new one is corporate secretary is
As to consent or The creation of a created. The merely ministerial. The
creation agreement of the corporation requires the change in moment the transferee
parties intervention of the state ownership presents the deed of
because it is created by law changes the assignment, he has to
and not by mere contract. partnership. record the transfer in the
There has to be compliance stock and transfer book.
with the legal process Consent is not required
before there can be a
corporation.

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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law EH 404 | UNIVERSITY OF SAN CARLOS

As to The death of a The death of a stockholder 2. Acquire properties

successional partner dissolves does not dissolve the 3. Enter into contract
rights the partnership. corporation. Rather, his
shares are transmitted to his This fourth attribute is a direct result of a corporation being an artificial
heirs. This is because a being.
corporation has the right of
succession. This means that because a corporation is created by operation of law
Attributes of a corporation: as a separate and distinct entity, the powers is limited to only that
1. Artificial Being prescribed by law and any power incidental to the express powers
2. Created by operation of law provided by law. Anything beyond that, the corporation is not aut
3. Successional Rights
4. Power and attributes or properties expressly provided for by law PIERCING THE CORPORATE VEIL
Liability of Corporations
Artificial Being
GR: Only the corporation can be held liable even if it was the member
It has a separate legal personality created by fiction of law. It is
of the board who signed the contract in behalf of the corporation.
considered a separate juridical entity from its stockholders.
The consequence of having a separate and distinct personality is that
Created by Operation of Law
it can enter into contracts under its own name and incur obligations
In order to create a corporation is mere agreement is not sufficient. It
solely in its own name. It is not the obligation of its BOD, Officers and
has to have the consent of the state done through the submission of
stockholders.
requirements to the SEC. The consent of the state is manifested by
the issuance of the certificate of incorporation.
A stockholder of a corporation does not have any right to a land
purchased by a corporation even though he/she provided the funds (in
The articles is what you file to the SEC, your charter documents and
the form of investment of stock).
articles but that is not the manifestation of consent yet. Such consent
is manifested through the issuance of the certificate of
Regardless of how the corporation sourced its funds and from which
incorporation.
stockholder, it does not matter. The moment the investment is
made, that investment turns into the property of the corporation,
Created by Law Created by operation of law
solely of the corporation. The stockholder does not have any claim
Creation of Local Government After complying with the
because the law considers the corporation as a separate and distinct
Units through passage of a procedure found in the
personality. Is there an exception to this rule that it is separate and
charter (in the form of a law). Corporation Code, it will give
distinct to its stockholders?
rise to the creation of a
corporation.
XPNs: (Doctrine Of Piercing the Corporate Veil)
Corporations created by law are Corporations created by
1. Defeat of public convenience
governed by its charter operation of law are governed
2. Fraud Cases
by the Corporation Code
3. Alter Ego Cases
Right of Succession Reason behind piercing the veil:
Means that if there is a change in the stockholders or board of There is a need to pierce to veil to protect the law against injustices
directors, the corporation continues to exist. because they hide behind the corporate existence in order not to incur
liability.
This right of succession comes from its right of being an artificial being.
No matter what happens to your stockholders, it will continue to exist Existence of a corporation as a separate entity is given by law
as an artificial being separate and distinct from its stockholders. Death as a concession for:
of a stockholder does not affect the existence of the corporation. 1. Convenience and
2. To facilitate business and economic transactions.
Death and incapacity are those involuntary transfers. The succession
also applies to voluntary transfers for corporation. Even if there is a But in reality, is there a person there? Do you have a real person there?
transfer of shares the corporation still exists. No, its incorporeal. However, if that fiction and artificial entity is now
being used to commit fraud or harm the public, courts will now
In the transfer of shares: disregard the separate entity of the corporation and make the
GR: Consent of other stockholders is not needed stockholders liable for whatever liability of the corporation. It will
XPN: When the article of incorporation expressly provides. consider the illegal act of the corporation the same as that of its
stockholders.
Powers and Attributes
The corporation also has powers and attributes given by law and
incidental to its existence. It means that a corporation can: Solidbank Corporation v Mindanao Ferroalloy Corporation
1. Sue in its own name Facts:

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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
Respondents, as officers, secured loans from the bank in the name of
the corporation. The corporation was not able to pay. Thus, a collection
suit was filed against the officers and the corporation itself. SC said
that the corporation has a separate personality from its officers and the
latter signed not in their personal capacity but on behalf of the officers
who signed cannot be held liable.
Argument of Solidbank to implead officers of Ferroalloy:
By virtue of a loan where the loan documents were signed by Cu and
Jong.
A corporation is merely an artificial being, there is no real person there.
It has to act through its representatives. It cannot sign contracts by
itself so it needs to have authorized personnel signing the contract on
its behalf.
When these officers sign the contract in behalf of the corporation, does
it mean that they now become liable same with the corporation?
No, they are not liable. Merely acting as a representative of the
corporation or signing documents in behalf of the corporation will not
render them liable.
What would make them liable? Pierce the veil of corporate entity.
Is there any other way to hold them liable without piercing the veil?
What is the essence of signing twice?
When they signed the first time, it was not really them personally
signing. It was the assent of the corporation. If they had signed a
second time, that would mean that they are binding themselves
personally as co-maker or a co-debtor of the corporation which would
make them solidarily liable.
GR: An officer is not liable for the contracts he enters into in behalf of
the corporation.
XPN (As ruled in the Solidbank Case): That officer voluntarily made
himself liable. This is allowed that as an officer, you act as a co-maker,
guarantor or surety of a corporation. If you do that, there is no need to
pierce the veil because you are already solidarily liable with the
corporation.
SC found: Officers were merely acting as representatives of the
corporation so they are not liable.
TN (based on a question of a student): In piercing the veil, even if
you are not a representative of that corporation in the transaction, by
virtue of the fraud committed by the corporation against the public, you
will be held liable. This is different from the provision in the code which
provides for liability of officers.
Zambrano v. Pclil Carpet Manufacturing Corp
Facts:
Employees of Phil Carpet were terminated due to serious losses of the
company. The procedures for termination were followed and they
signed a quitclaim. But, they filed a complaint against the company
alleging that there was an unfair labor practice because Phil Carpet
ceased its operations to transfer its assets to Pacific Carpet hence,
EH 404 | UNIVERSITY OF SAN CARLOS
their termination. They allege that both companies are one and the
same.
GR: A corporation as an artificial being has a separate and distinct
personality from its stockholders, directors, officers and any other legal
entities.
What was the relationship between Phil Carpet and Pacific Carpet?
Pacific Carpet was a subsidiary wholly owned by Phil Carpet. This is
other than they have the same officers, BOD, equipment, business,
clients. Phil Carpet was the parent company, it owned all of the
outstanding shares of Pacific Carpet.
Does this mean that rules on artificial personality applies?
SC: A corporation has a personality separate and distinct from the
persons composing it as well as from any other legal entity to which
it may be related. So not just its stockholders, BOD or officers but also
its subsidiaries or parent companies, affiliates, they are separate and
distinct from each other. Separate legal fiction not only applies to
natural persons but also to juridical entities.
Example:
 A, a natural person owning 100 % of X and Y Corp:
 A is a separate entity from X Corporation.
 A is also a separate entity from Y Corporation.
What about X and Y here? They are owned by a common person, are
they considered as one entity?
GR: They are separate entities. A corporation has a personality
separate and distinct from the persons composing it as well as from
any other legal entity to which it may be related.
What else needs to be present for the veil of corporate fiction to be
pierced?
The doctrine of piercing the corporate veil applies only in three
(3) basic areas, namely:
1) Defeat of public convenience as when the corporate fiction
is used as a vehicle for the evasion of an existing obligation;
2) Fraud cases or when the corporate entity is used to justify a
wrong, protect fraud, or defend a crime; or
3) Alter ego cases, where a corporation is merely a farce since
it is a mere alter ego or business conduit of a person, or
where the corporation is so organized and controlled and its
affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another
corporation.
Alter Ego Cases:
The layman’s definition is that it is a dummy/representative, it has no
will of its own and is controlled by another entity.
Grounds in order to apply the Doctrine of Piercing the Corporate Veil
under Alter Ego Cases:
1. Control Test
2. Fraud Test
3. Harm Test
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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
Case law lays down a three-pronged test to determine the application
of the alter ego theory, which is also known as the instrumentality
theory, namely:
(1) Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in
respect to the transaction attacked so that the corporate entity as to
this transaction had at the time no separate mind, will or existence of
its own;
(2) Such control must have been used by the defendant to commit
fraud or wrong, to perpetuate the violation of a statutory or other
positive legal duty, or dishonest and unjust act in contravention of
plaintiffs legal right; and
(3) The aforesaid control and breach of duty must have proximately
caused the injury or unjust loss complained of.
The first prong is the "instrumentality" or "control" test.
This test requires that the subsidiary be completely under the control
and domination of the parent. It examines the parent corporation's
relationship with the subsidiary. It inquires whether a subsidiary
corporation is so organized and controlled and its affairs are so
conducted as to make it a mere instrumentality or agent of the parent
corporation such that its separate existence as a distinct corporate
entity will be ignored.
It seeks to establish whether the subsidiary corporation has no
autonomy and the parent corporation, though acting through the
subsidiary in form and appearance, "is operating the business directly
for itself."
The second prong is the "fraud" test.
This test requires that the parent corporation's conduct in using the
subsidiary corporation be unjust, fraudulent or wrongful. It examines
the relationship of the plaintiff to the corporation. It recognizes that
piercing is appropriate only if the parent corporation uses the
subsidiary in a way that harms the plaintiff creditor. As such, it requires
a showing of "an element of injustice or fundamental unfairness."
The third prong is the "harm" test.
This test requires the plaintiff to show that the defendant's control,
exerted in a fraudulent, illegal or otherwise unfair manner toward it,
caused the harm suffered. A causal connection between the fraudulent
conduct committed through the instrumentality of the subsidiary and
the injury suffered or the damage incurred by the plaintiff should be
established.
1 Their audited financial statements were audited by SGV one of the biggest auditing firms in the
country and because it is true that there really were substantial losses, under the Labor Code this is
one of the authorized causes for terminating employment, since there was a valid ground the liability
of Phil Carpet can’t be transferred to Pacific Carpet.
EH 404 | UNIVERSITY OF SAN CARLOS
The plaintiff must prove that, unless the corporate veil is pierced, it will
have been treated unjustly by the defendant's exercise of control and
improper use of the corporate form and, thereby, suffer damages.
As to control, it is not just owning shares but complete control over the
company and the fraud test means that the control is used to
perpetrate fraud then you pierce the corporate veil and the 3rd is harm,
so not just a fraud but a harm done to another. So all in all control is
used to perpetrate fraud, fraud then causes harm. This is what needs
to happen in order to apply the alter ego doctrine.
The case requires that all 3 must be present before the veil of
corporate entity can be pierced. In this case there was control in the
form of ownership of Pacific but the other 2 were not present.
What was proven here?
What was proven was that there were legitimate business losses and
that the Pacific was already incorporated before the losses, the
laborers knew what they were signing when they signed the quitclaims.
The SC said in this case is that mere ownership by a single
stockholder or another corporation of all or nearly all of the capital
stock of a corporation is not nearly sufficient ground for piercing
the veil.
Control by itself is not enough there has to be fraud and harm, so
if these three are present that is the time you can use the alter ego
doctrine to pierce the veil, it was duly proven that Phil Carpet was really
losing1.
Martinez v CA
Facts:
In this case, CLL which is a foreign corporation engaged in the
importation of molasses from the Phil which are obtained from a
company called Mar Tierra which is a domestic company and the
president if Mar Tierra was Wilfred Martinez.
Who was Wilfredo to CLL?
CLL has nominee shareholders and one of them was a firm also owned
by Wilfredo which was Baker Mckenzie (their firm here in the Phil is
Quisumbing Torres). Baker was a nominee stockholder but the
beneficial ownership was vested in Wilfredo Martinez, Lacson et.al
RJL owned some of the shares of Mar Tierra which was 42% owned
by petitioner Ruben Maritnez. Ruben had nothing to with CLL he was
neither a beneficial owner nor a stockholder of CLL. He was a
stockholder of RJL.
CLL purchases molasses from Mar Tierra through letters of credit2.
2 Letters of credit is a financial device where in an ordinary case, you have a buyer who wants to buy
but is afraid to pay because the goods may not arrive at the same time you have a seller who wants
to sell but is afraid that the payment will not arrive, this is used when the two are in different places,
you make sure that there is payment and delivery.
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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
This is how CLL and Mar Tierra did their business and their bank was
BPI. The bank transferred funds to Mar Tierra upon instructions of CLL,
so what happened next was that there was a non-payment of $340k.
CLL had Money market placements3 with BPI so the arrangement was
that the bank will deduct the deposit from the amount that was paid to
Mar Tierra. The bank did not do this because at the time the money
market placements were not matured and so instead of deducting
it from the deposit, it recorded as a receivable from CLL meaning
CLL owes the bank.
When the placements matured, the bank did not collect but they
allowed withdrawal from amount. So at the end of the day there was
no more money in the account of CLL but CLL still had an obligation
to the bank.
The bank filed a case against CLL, Wilfredo and Ruben, He was
included because he was one of the signatories of the account. Ruben
questions why he was impleaded because he had nothing to do with
CLL.
The bank filed a case for the payment of the 340k against CLL,
Wilfredo et.al and Ruben.
Why was Wilfredo and Lacson liable in the RTC and CA?
Because they signed and agreed that they bound themselves solidarily
with CLL while Ruben Martinez was made liable by the RTC because
he owned shares in RJL.
RJL owns share with Mar Tierra and Mar Tierra and CLL had common
stockholders and that he was a co-signor in the bank account, so they
ruled that Ruben was liable because of such connection they pierced
the veil.
Is this valid?
No. The SC said that the mere fact the majority stockholder of Mar
Tierra is RJL and that Ruben along with Jose and Luis Martinez owned
42% of the corporate stock does not mean that they had complete
domination over Mar Tierra.
There was no showing that Ruben even benefitted of the transaction.
Just because he was a signatory, does not mean that he can be made
liable. Control alone does not warrant piercing the veil.
The SC said that the mere fact, therefore, that the businesses of two
or more corporations are interrelated is not a justification for
disregarding their separate personalities, absent sufficient showing
that the corporate entity was purposely used as a shield to defraud
creditors and third persons of their rights
So Ruben was held not liable, Wilfredo and Lacson were liable.
We have the letter of credit, the buyer goes to a bank applying for a LOC, when that is granted the
bank will now inform the seller that the bank has a letter of credit in your favor from the buyer so now
you can deliver the goods and ship them then present to us the shipping docs. When the documents
are presented then the bank will pay the seller, it is now an undertaking of the bank to pay. The seller
EH 404 | UNIVERSITY OF SAN CARLOS
How does the case of Tan Uy differ from Martinez or Zambrano,
because we said that mere ownership of stock does not pierce
the corporate veil?
In this case, the corporation was used to evade the liability from the
other corporation. It would cause harm, thus the corporate veil may be
pierced.
An important fact in this case was that Hammer and Goldkey
commingled their assets. Meaning one corporation benefited from the
other’s loan. Even without an express finding of fraud on the part of
Goldkey, by the mere fact that it benefited, then it should be held liable.
Ordinarily, control alone is not sufficient, unless there is a finding of
fraud and harm. But an exception is this case of Uy, where the
commingling of assets is considered sufficient ground to consider them
as one entity.
CIR v. Norton and Harrison Company
Facts:
Norton was a retail company engaged in distribution of merchandise,
while Jackbilt was a corporation engaged with manufacturing of
concrete blocks.
Norton had an arrangement with Jackbilt to be its exclusive distributor
of such concrete blocks. Eventually Jackbilt was absorbed by Norton.
CIR raised the question of the relationship between the two
corporations.
CIR wanted to base their tax liability on Norton’s sale to the public,
while Norton only based it from their purchase from Jackbilt.
What was wrong with the scheme used by Norton and Jackbilt?
The scheme used was that Norton and Jackbilt essentially separated
their report for their income. This scheme would allow Norton to file its
own tax, as well as Jackbilt with its own tax. They added another layer
of transaction to lower the base of the two corporations. However, if
they considered it to be one entity or one transaction, it would have
been bigger. By structuring their transaction to a middle man, they
increased the cost which the CIR found to be a scheme to evade taxes.
Remember, there can only be alter ego allegations if there is fraud
present.
The Supreme Court found that this transaction was merely done to
evade taxes. And take note that Jackbilt was wholly owned by Norton.
It used Jackbilt, a separate entity, to perpetrate fraud. By piercing the
veil, we disregard the sales made by Jackbilt.
knowing that he can get paid can now ship them then bank will inform the buyer that the goods have
been delivered and it has paid on the buyer’s behalf so now the buyer will be the one to pay the bank.
3 Financial instrument with high liquidity and short maturation periods – definition from Google
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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law EH 404 | UNIVERSITY OF SAN CARLOS

Thus, there was control by Norton, and fraud and harm caused to the
government. You apply piercing the veil.
Student: Atty, would it have made any difference if the circumstances
of the case showed that Norton did not exercise total control over
Jackbilt?
Francisco Motors was not agreeable with the decision of the trial court
and brought the matter up to the Supreme Court saying it cannot be
liable for the debt to Gregorio Manuel. They insisted that Francisco
motors corp. is an entity that is separated and distinct from the
stockholders who availed of the services of one of the spouses
Manuel.

Probably, if they found that there was really an arms length transaction What was the ground of the CA when it ruled there can be
between Norton and Jackbilt, then yes they could have defended that compensation?
point.
The CA said that the incorporators and BOD of Francisco Motors Corp.
The problem is, adding another layer of transaction, they lowered their are the heirs of Benita Trinidad whose estate was settled by Gregorio
revenue. With this, the lower rate applied. Manuel. So what the spouses were saying was whatever the
stockholders owed Manuel, the corporation also owed Manuel.
Now, under the BIR there is what we call the transfer pricing regulation.
If you are dealing with an associate, the BIR has the right to look into On what principle?
how much you are pricing the transaction. If the transaction is below
market, the BIR may asses you based on market price. The CA said that the veil of corporate fiction is recognized in this
jurisdiction for convenience and justice. So in this case, to pierce the
In this case, it is similar to what the BIR can do, but remember this veil of corporate fiction is warranted to compensate Gregorio Manuel.
case was decided way before there was a regulation. So they used
piercing the veil. IOW, the CA countenanced piercing the veil to hold the
Student: Comparing this case (CIR Case) to the Tan Uy case, there was specific corporation liable for the debts of one of its stockholders, which
mention of commingling of assets. Does such circumstance have greater weight is something new. Because all the while, it’s making the
as compared to other circumstances like wages, and same employees? stockholders liable for the obligations of the corporation. But now
The general rule is that there should be control, fraud and harm. But if there is it’s the other way around. Was this a sound argument?
commingling of assets, meaning the other corporation enjoyed what was
fraudulently obtained by the first corporation, then you don’t need to prove fraud It was not a sound argument and the Supreme Court upheld the
and harm. Automatically, the control will be considered alter ego. Even if you didn’t
participate in the fraud, but you enjoyed the fruits of such fraud, then it would be position of Francisco motors and aside from reiterating the doctrine of
considered as ground for piercing the veil. the veil of corporate fiction, it cited that the nature of the transaction of
the spouses Manuel that it was clearly a private transaction that
But if there is a co-mingling of assets, meaning the other corporation was
able to enjoy what was fraudulently obtained by the first corporation, you
Francisco motors had nothing to do.
don’t need to prove fraud and harm. Automatically, the control (by the other
corporation) is considered alter ego because you enjoyed the fruits, because What is the basis for piercing the veil again?
you co-mingled your assets, it will be considered as a ground for piercing
the veil.
The SC said the veil of corporate fiction may be pierced if there is a
Student1: How do you quantify “might result into fraud”, because in the book I read, finding that the two seemingly separate and distinct corporation has
if there’s control, it says if there’s an indicia that a transaction might result to fraud
dominate control over the other and that injury and harm was caused
then it may be a ground to pierce the veil of corporate fiction.
to another person.
Atty: So when you say “might” there’s no fraud yet? So what is the basis of the That’s Alter Ego Principle. In this case can you apply the rationale for
case? Isn’t it basic that you can’t file a case if there’s no harm done to you? You piercing the veil?
can’t just question the arrangement of two corporations on the chance that it might
result to fraud when it did not even happen to you. You have no standing. So for
now, just get back to what you read and come back to me if there was something No. Because in this case, although the stockholders of Francisco
you did not understand. From the way you described it now, “might result to fraud” Motors Corp. are the heirs of Benita Trinidad, the SC said that you are
I don’t see what case you can file to pierce the veil. Just check it out and let me
know. applying it in reverse. And here, there was no finding that Francisco
Motors Corp. was just an alter ego, an adjunct or used merely as an
Like for the case of CLL and Mar Tierra, there it alleged CLL was just a sham and agent of the late Benita Trinidad.
it was used by Mar Tierra. In the same way that Mar Tierra was also being
controlled by RLJ and Francisco
that RLJ wasMotors
controlled Corp v. CA
was Ruben. But there was a cause
of action. That CLL owed the bank money and it did not pay. If that was not the The SC said there is no hard and fast rule on how piercing the veil
Facts:
case, do you think the bank can file a case against them? It cannot. So there has can be applied. It is not in the corporation code, but was created
Francisco
to be a harmMotors filed aharm,
done. Without casethere
for aneeds
sumtoofbemoney
standingagainst the spouses
to file a case. Without
because of jurisprudence. But ordinarily it is this way.
Manuel
that, youalleging
just can’tthey stilla had
say that a balance
corporation is just afor theorpurchase
sham of a my
a dummy. That’s jeep
point.As a defense in a counter claim, Gregorio Manuel said he still
body.
You have a corporation, separate and distinct from its stockholders.
has a balance on his legal fees when some of the stockholders of the
But when this legal fiction is used to commit fraud to third persons then
corporation availed of his services in the estate proceedings of Benita
you disregard it and you go straight to the stockholders. Because this
Trinidad.
legal entity is just created for convenience and to facilitate business
transactions. If this is used to perpetrate a fraud, you use the doctrine
The trial court ruled in favor of the Manuels saying that you can just
of piercing the veil of corporate entity and make the stockholders,
compensate whatever you owed each other.
officers, directors liable.

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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
Now the question is if you can apply it the other way around. The SC
said there is no rule prohibiting that. But you have to look at the reason
of that doctrine. The reason of that doctrine is that legal fiction cannot
be used to defraud the public. Now, if this legal fiction is not used to
defraud the public, there is no reason to pierce the veil. So the
corporation remains to be a separate entity.
In the first place, the liability was ONLY PERSONAL TO THE
STOCKHOLDERS. It was them who owed the lawyer. You cannot say
that because they defrauded the public, you can hold the corporation
liable. The corporation had nothing to do with it. There was no fraud.
The SC said the piercing the veil doctrine does not apply in the case
not because it’s the other way around but there is no reason to apply
it. To apply piercing the veil, there must be fraud. And that is not
present in this case. So the corporation cannot be held liable for the
liability of the stockholders because there is no ground to pierce the
veil because there was no fraud.
RATIO TAKEN FROM THE CASE:
The rationale behind piercing a corporation's identity to remove the
barrier between the corporation and the persons comprising it, to
thwart the fraudulent and illegal schemes of those who use the
corporate personality as a shield for undertaking certain proscribed
activities. It is not applicable in the present case.
The personality of the corporation and those of its incorporators,
directors and officers in their personal capacities ought to be kept
separate. The claim for legal fees against the concerned individual
incorporators, officers and directors could not be properly directed
against the corporation without violating basic principles governing
corporations.
Moreover, every action — including a counterclaim — must be
prosecuted or defended in the name of the real party-in-interest. It is
plainly an error to lay the claim for legal fees of private respondent
Gregorio Manuel at the door of petitioner (FMC) rather than individual
members of the Francisco family.
Kukan International Corporation v Hon. Amor Reyes
Facts:
Kukan Inc. has a bidding and won by Morales. Morales delivered his
obligation by supplying and installing the signages of the buildings for
Kukan Inc. Kukan only paid a partial amount of the obligation, thus,
there was still a balance left unpaid.
Despite demands, Kukan refused to pay resulting Morales to file a
case in court for the collection of the remaining amount. Kukan
subsequently defaulted in the trial by not appearing in court.
RTC ruled in favor of RTC allowing Morales.
The sheriff in executing the court judgment went to the address of
Kukan International to levy the assets as ruled. However, during the
execution, the occupant of such address explained that the assets to
be levied was actually owned by Kukan International and not Kukan
Inc, being a different corporation they are separate and distinct from
each other thus, the decision cannot be validly applied to them.
EH 404 | UNIVERSITY OF SAN CARLOS
Morales then filed a motion to pierce the veil for the purpose of
executing the judgment againt Kukan International. In effect Morales
was trying to shortcut, rather than filling a case to pierce the veil and
having to go through all over again. Morales wanted the judgment
against Kukan Inc to be enforced to Kukan International concluding
that they are one and the same entity. He is thus using the piercing the
veil theory to enforce a judgment against a different entity to another
identity making it liable.
The SC opined that it is not a valid approach. Morales should file
another case against Kukan International. The elements should have
applied:
(a) dissolution of the corporation
(b) both corporation was comprised by same owners or
stockholders and transferring of assets
(c) intention to defraud
Although Kukan Inc was actually dissolved, other elements were not
proven. Chua in this case (owner) owns more than 40%, the SC said
that mere ownership is not enough to justify the application of the
doctrine of piercing the corporate veil. Even if the remaining elements
were present, the motion will still not be allowed. The decision at that
time was already executory. Thus, it can no longer be changed.
The essence of piercing the corporate veil is to safeguard against
fraud, thus there is a need to establish that the corporation was used
to defraud and there was harm done. The ultimate result of piercing
the veil is to hold the stockholders of the corporation liable. Piercing
the veil creates liability. The doctrine is to be used to make the
stockholder liable for the obligation of the corporation.
Hence, asking the court to disregard the corporate entity and the
liability will attach to the stockholders. You use it in order to make the
person liable for an obligation. But SC said, piercing the veil cannot be
used to acquire jurisdiction. Acquring jurisdiction is not under the
Corporation code but subject to the technical rules under the Rules of
Court.
Even if its true that there are grounds to pierce the veil, doing it through
a motion during the execution phase of the case is not the proper way.
Because piercing the veil may establish liability but it does not acquire
jurisdiction over the other entity as they are still separate entity.
General Rule is that a corporation as artificial being, used for
convenience and to facilitate economic transaction. But the moment
this fiction is used to circumvent the law or to defraud then the
corporation maybe be pierced making the stockholders liable to the
obligation.
If there is no fraud then you cannot use piercing the veil doctrine,
similar to Francisco and Zambrano case. It is a substantive law use to
create obligation and not a procedural rule that can be use to acquire
jurisdiction.
The SC in Kukan said that Morales is not prohibited from filling another
case, but it must be on the proper procedure and do it all over again.
Because you cannot acquire jurisdiction by saying that piercing the
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veil, instead file a case against the other corporation first of filed a case
against them together.
Based on the case:
(The principle of piercing the veil of corporate fiction, and the resulting
treatment of two related corporations as one and the same juridical
person with respect to a given transaction, is basically applied only to
determine established liability; it is not available to confer on the court
a jurisdiction it has not acquired, in the first place, over a party not
impleaded in a case. Elsewise put, a corporation not impleaded in a
suit cannot be subject to the court’s process of piercing the veil of its
corporate fiction. In that situation, the court has not acquired
jurisdiction over the corporation and, hence, any proceedings taken
against that corporation and its property would infringe on its right to
due process.
Piercing the veil of corporate entity applies to determination of liability
not of jurisdiction. This is so because the doctrine of piercing the veil
of corporate fiction comes to play only during the trial of the case after
the court has already acquired jurisdiction over the corporation.
The suggestion that KIC is but a continuation and successor of Kukan,
Inc., owned and controlled as they are by the same stockholders,
stands without factual basis. It is true that Michael Chan, a.k.a. Chan
Kai Kit, owns 40% of the outstanding capital stock of both corporations.
But such circumstance, standing alone, is insufficient to establish
identity. There must be at least a substantial identity of stockholders
for both corporations in order to consider this factor to be constitutive
of corporate identity.)
TYPES OF CORPORATION
1. Stock corporations – those whose purpose is to derive profit and
there will be dividends distributed among stockholders.
2 essential elements:
1. Capital must be divided into shares of stock
2. Authorized to distribute its shares in the form of dividends
2. Non-stock corporation – its purpose is for general welfare or other
purposes not intended for profit.
Other classifications of corporations:
1. Whether for private purpose
a. public corporation- created by law; formed by the government
for public welfare;
b. private corporation- created by operation of law; its purpose is
for profit
2. Whether they are open to public or not
a. open corporation- membership is open to the public
b. closed corporation- membership is limited within the family
3. Their legal right to corporate existence
a. de facto corporation- acting as a corporation without statutory
authority or grant by the State
b. de jure corporation- granted authority by the State
4. Whether true sense or limited
a. corporation by estoppel- there is no corporate entity. The
persons, by their acts and admissions, are precluded from
EH 404 | UNIVERSITY OF SAN CARLOS
claiming the non-existence of a corporation to avoid liability.
The liability is individual, not of the corporation.
b. corporation by prescription- acting as corporation without
statutory authority for a period of time
5. Their relation to another corporation
a. Parent/holding corporation- owns other corporations. It has
control over these corporations
b. Subsidiary corporation- a corporation controlled by other
corporation, known as a parent corporation
c. Affiliated corporation- one related to another by owning or
being owned by common management
Example:
You have corporation A owning corporation B 100% of the
shares. Corporation A being the corporation in control is the
parent corporation. Corporation B is the corporation being
under the control of corporation A is the subsidiary.
If Corporation A owns and controls Corporation B and C – B
and C are affiliates.
Corporation A owns 100% both corporation B and C.
Corporation A is the parent company as regards to
corporation B and C. As regards to corporation A,
corporation B is a subsidiary. As regards to corporation A,
corporation C is a subsidiary. As between corporation B and
C, they are affiliates of corporation A.
7. As to number of persons who compose them
a. Corporation aggregate – a corporation consisting of more than
one member or corporator.
b. Corporation sole – it is a religious corporation which consists
of one member or corporator only and his successor. (Section
110)
Example: chief archbishop, bishop, priest, rabbi
8. As to whether they are for religious purposes or not
a. Ecclesiastical corporation – organized for religious purposes.
b. Lay corporation – organized for a purpose other than for
religion; it may either by eleemosynary or civil.
9. As to whether they are for charitable purposes or not
a. Eleemosynary corporation – one established for charitable
purposes or those supported by charity.
b. Civil corporation – one established for business or profit.
10. As to State under or by whose laws they have been created
a. Domestic corporation – incorporated under Philippine laws.
b. Foreign corporation – formed, organized or existing under any
laws other than those of the Philippines.
So the last one you mentioned is as to place of incorporation. But the
higher classification before the place of incorporation, what other
classifications would there be? Classification as to the nationality
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NATIONALITY OF A CORPORATION
Classification as to nationality is based on:
1. Place of Incorporation (What matters here is where the
corporation is created)
a. Domestic corporation – that which is incorporated
under the laws of the Philippines.
b. Foreign corporation – that which is incorporated
under laws other than the Philippines.
2. Based on stockholding:
a. Filipino-owned
b. Foreign-owned
There can be a domestic corporation that is foreign owned and a
foreign corporation that is Filipino national.
Example:
A corporation is organized here in the Philippines but the
stockholders are Japanese nationals.
A corporation can be organized under the Corporation Code even if
100% of its stockholders are foreign. The corporation code allows
such.
The only limitations are provided for under the Constitution and special
laws that corporations engaged in nationalized activities where a
certain percentage of ownership is reserved for Filipino nationals. It is
found in the Foreign Negative Investment List.
Foreign Negative Investment List
This is issued every 3 years. It lists down which corporations are
engaged in nationalized activities whose ownership is limited to
Filipino citizens. Outside of the FNIL, there is no requirement of Filipino
ownership. Meaning a 100% foreign owned corporation can register
their corporation under Philippine law. And that corporation would be
considered as domestic but foreign owned.
A corporation which is foreign can also be considered as a Philippine
national.
Example:
The corporation is organized with the laws of Japan but the
corporators are Philippine national.
If organized abroad, it has to be 100% Filipino citizens
stockholdings in order to be considered as Philippine national. In
determining whether domestic or foreign, the rule is simple.
Where are they incorporated? So if incorporated in the Philippines
regardless of their stockholdings, they are domestic. If incorporated
abroad, again regardless of stockholdings, that’s foreign.
Which of this two, based on nationality, place of incorporation or
stockholdings, is relevant under the corporation code?
Only the place of incorporation because if it is a domestic corporation.
EH 404 | UNIVERSITY OF SAN CARLOS
Does foreign corporations matter as far as the corporation code is
concerned? Where does it matter?
It matters when the foreign corporation intends to do business
here in the Philippines because if a foreign corporation intends to do
business and it forms a subsidiary, the subsidiary becomes a domestic
corporation. In which case, no further license is required.
But if the foreign corporation does not want to put up a subsidiary
here in the Philippines but if it intends to do business here in the
Philippines, it has to secure a license either as a branch or a
representative office from the Securities and Exchange Commission.
A foreign corporation cannot do business in the Philippines unless it
secures a license from the SEC. A domestic corporation does not need
a license anymore because its Articles of Incorporation is license
enough.
That is why this is relevant as to the corporation code, the place of
incorporation. What about corporations as to stockholdings? Where is
this relevant? What is the governing law? Here it is the Foreign
Investment Act.
Under the foreign investment act, corporations are classified as
Philippine nationals or foreign owned corporations. And it matters as
to the type of activity that a corporation is authorized to do because I
have mentioned earlier that there are some activities which are
reserved for Philippine nationals. This one matters as to the type of
business a corporation can engage in.
So what are the tests to determine or identify a Philippine national as
opposed to a foreign corporation?
We have the control test and the Grandfather rule.
CONTROL TEST v. GRANDFATHER RULE
Control Test - Under this test, once it is clearly established that an
entity in 60% owned by Filipino citizens, further inquiry on the
ownership of the corporate shareholders is not necessary. The
corporation shall be considered a Filipino corporation if the Filipino
ownership of its capital stock is at least 60% and where the 60%-40%
Filipino-alien equity ownership is not in doubt. (Taken from De Leon)
This is found in FRIA in which in case of corporate layering, in order
for the ultimate investee corporation to be considered a Philippine
national, each of the corporate stockholders and the investee
corporation:
“at least sixty percent (60%) of the capital stock
outstanding and entitled to vote of each of both
corporations must be owned and held by citizens of the
Philippines and at least sixty percent (60%) of the
members of the Board of Directors of each of both
corporations must be citizens of the Philippines, in
order that the corporation shall be considered a
Philippine national; (as amended by R.A. 8179).”
Grandfather Rule - a method of determining the nationality of a
corporation which is owned in part by another corporation by breaking
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down the equity structure of the shareholder corporation. (Taken from through MPSAs which are reserved only for Filipinos. For the
De Leon) petitioners, they averred that they were qualified pursuant to RA 7942
(Philippine Mining Act of 1995).
This is the test that aside from looking at the majority control, you also
take a look at the ultimate ownership of a corporation. Trace back the Respondent Redmont - invoked the grandfather rule
ownership of a corporation to its roots. You must also take a look at Petitioners Narra, Tesoro & McArthur – invoked control test
the indirect ownership.
McArthur Shareholdings Total Paid-up Total
TAKE NOTE: (from Tanya basin ganahan mu i-insert sa atong notes) Mining Subscribe outstanding
capital stock
Grandfather rule; Example: MMC 5,997 shares @ 5,997,000 825,000 59.97%
(Filipino) 1k
MDMI 3,998 shares @ 3,998,000 1,878,174 39.98%
If there is a 24% indirect foreign ownership but there is another (Canadian 1k
company (Corporation C) who owns 40% of Corporation D, you now )
have 40% direct foreign ownership. The total will now be 64% foreign
ownership (24% indirect, 40% direct). MMC Shareholding Total Paid-up Total
s Subscribe Outsanding
In this case, Corporation B will no longer be a Philippine National capital stock
because the foreign ownership is now more than the 40% limit. The Olympic 6,663 shares 6,663,00 No paid up 66.63%
rule is, as long as it is 60-40, if you use the control test, it is always Mines @1K
MDMI 3,331 @ 1K 3,331,000 2,803,900 33.31%
Philippine national. If you use the grandfather rule, it will always be a
foreign national or a non-Philippine national.
The petitioners alleged that using the Control Test in FIA, they have
sufficiently conformed the 60%-40% requirement. Using the FIA, the
In other words, after passing the control test, so you have the 60-40.
McArthur would be a qualified holder of a MBSA. It is sufficient to look
Meaning 60% authorized capital stock outstanding and entitled to vote
at the shareholdings of each company. If each company is 60%owned
must be owned by Filipino citizens and the BOD are 60% Filipinos for
by Filipino citizens and its board of directors is owned by 60% Filipino
both corporations. After passing that, they have to undergo the
Citizens, then that is a qualified Philippine National.
grandfather rule?
MMC’s investment in McArthur would be considered 100% Filipino
Only in certain instances if there is doubt as to the ownership.
citizen. You do not bother to look at that the 60%, there is a foreign
ownership by MDMI. That is the control test.
Narra Nickel Mining v Redmont (facts from Tanya notes)
Facts: The owners of the three mining companies used the same structure in
Redmont took interest in mining and exploring areas in Palawan. After all three corporations.
inquiring, it learned that areas were already covered by Mineral
Production Sharing Agreement (MPSA) applications of petitioners The SC said that it is ludicrous to limit the application of the said word
Narra, Tesoro & McArthur. “doubt” only to the instances where the stockholdings of non-Filipino
stockholders are more then 40% of the total stockholdings of the
Petitioner McArthur through its predecessor-in-interest Sara Marie corporation.
Mining, Inc (SMMI) applied and was issued MPSA & Exploration
Permit (EP). These were later on transferred to Madridejos Mining The corporations interested in circumventing our law would clearly
Corp (MMC) and assigned to McArthur. strive to have 60% Filipino ownership face value because that is the
legal requirement. It would be senseless for these applying
Petitioner Narra acquired its MPSA from Alpha Resources & Devt Corp corporations to state in their respective articles that they have less than
and PLMDC which previously filed an application. Subsequently, 60% Filipino stockholders since the application would be denied
PLMDC assigned its rights and interests over the MPSA application in instantly. Thus, various corporate schemes and layering are utilized to
favour of Narra. Another application of SMMI was filed and assigned circumvent the application of the constitution.
such to Tesoro.
If a corporation has less than 60% Filipino ownership, it will
Total of 3 MPSI are granted and transferred/assigned: automatically not pass the control test. Then, the principle upheld by
1. Sara Marie Mining Inc (SMMI) - Madridejos Mining Corp (MMC) - the SEC and DOJ are senseless because it would not even pass the
MacArthur control test. In order to circumvent our laws, at face value, the
2. SMMI - Tesoro corporation would always put 60% Filipino ownership.
3. Patricia Louise Mining & Dev’t Corp (PLMDC) - Narra
SC said that should not be the meaning of doubt.
Thereafter, Redmont filed before POA 3 separate petitions for denial
of applications alleging that at least 60% of the capital stock of The test to use to determine the Filipino Ownership is still the
McArthur, Narra & Tesoro are owned by MBMI- a 100% Canadian control test. However, even if the control test is applied, but there is
corporation. Thus, they were disqualified from engaging in mining

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still doubt as to the true ownership of the shares, then apply the
Grandfather Rule.
NOTE: “When in the mind of the court there is doubt based on the attendant
facts and circumstances of the case, in the 60-40 equity ownership of the
corporation, it may apply the Grandfather rule.”
Facts and circumstances which gave rise to the doubt:
 The three corporations owned by the same foreigner had
similar corporate structure -that in itself is doubtful. But if the
structure was only correct, there will be no problem.
 Although the Filipino corporations owned majority of the
shares, it did not provide for majority of the funds and
majority of the funds actually came from the foreign
corporations which owned lesser shares.
 Taking a look into this McArthur corporation, the Filipinos
had a paid up capital of P825,000, you compare that with the
foreign paid up. Even if the foreign shareholding is less than
the Filipino shareholdings, it had more paid up capital. And
taking a look further at this 835K, so you take a look at the
mmc corporate structure, where does this money came
from? the money came from MVMI, foreign-funded which
means the Filipino had no paid up capital
 So according to the SC, this structure gave rise to a doubt
as to the 60-40 Filipino ownership. Not to mention that this
corporate structure was applied consistently to the three
corporations. Meaning it was not done inadvertently but for
the purpose of the foreigner funding the mining corporations.
There was an intent.
 And so because there is doubt, apply the grandfather's test
and applying the grandfather's test, this company is not a
Filipino corporation

Based on the structure, what is the status of McArthur?
Under the control test, as long as 60% of the stockholding is owned by
Filipinos, then it is considered as a Filipino national. At first glance, you
have a Filipino corporation (MMI) which is allowed to hold the MPSA.
But when you dig deeper and look at MMI’s capital structure, MBMI is
the major investor, as the Filipino ownership of MMI only had zero
paid-up capital.
What’s gives rise to the doubt as to the ownership of MMI?
When MMC purchased 60% of MMI’s shares, it was paid for with
foreign cash, as the Filipinos did not contribute. Which means that MMI
is 100% foreign funded. This is where the doubt comes from, where
the foreign stockholders are fully funding the mining company. The
question arises of who controls the mining company. It would be stupid
for the foreign company to pay all the cash but have no control.
At first pass, it feels like it passes the control test. But this shows
corporate layering.
Is corporate layering allowed?
Yes. There is nothing wrong with corporate layering. In fact, this is
expressly recognized under the FIA. Under FIA , a corporation may be
owned by another corporate layering. It is allowed.
EH 404 | UNIVERSITY OF SAN CARLOS
However, in both cases, it must be 60% Filipino-owned, and directors
to be 60% Filipinos.
Applying that test, MMI is 60% owned by MMC. MMC is also 60%
owned by Filipinos. So it passes the control test, hence, it is a Filipino
national.
But, do we stop at the control test? Before the Narra case, the
prevailing rule was the control test, and the grandfather rule was only
used if the Philippine stockholding falls below 60%. This is stupid
because if the Filipino stockholdings fall below 60%, it cannot even
pass control test.
In the Narra case, the SC came out with another rule in testing out the
nationality. First of all, the control test is still applied. If the corporation
does not pass the control test, automatic fail. If it passes the control
test, it is a Filipino national.
However, if there is doubt as to the ownership of Filipinos, based on
attendant facts and circumstances surrounding the structure of the
corporations, then the grandfather rule is applied.
How is the grandfather rule applied?
You go to the essence of ownership. In this case, out of 10,000 shares
of MMI, MBMI owns 2,000 shares indirectly owned by foreigners (from
6,000 of MMC) and 4,000 shares directly, resulting to ownership of
more than 40 foreign participation.
Questions asked in class:
What if in this case Olympic Mining also invested, so not all of the
paid up capital was done by foreigners?
The result will change. The whole basis of the ruling was you apply the
grandfather rule as there is doubt. And the doubt comes from the fact
that MMI is fully funded by foreigners. If Olympic had paid up capital,
then there would be no doubt, and we would have stopped at the
control test.
What if the corporate layering structure did not exist, but that the
foreign corporation provided the technical staff, machinery, etc.,
would that warrant the use of the grandfather rule?
I don’t think so, although the essence of applying the grandfather rule
is not about really about corporate layering but on who controls the
corporation.
Under the Constitution, the control and beneficial interest should
belong to the Filipinos. If you violate that, then you are giving control
to the foreigners.
But as to whether or not you can use the grandfather rule, I don’t think
so. Because the grandfather rule is specific on indirect shares. Indirect
shares only apply if you have another corporation coming in. In this
case, there is no other corporation, so you cannot apply the
grandfather rule. But as to whether or not they are disqualified, then
yes, because there is still doubt as to control and beneficial ownership.
What would then be the basis to use, since it is still 60/40 to disqualify?
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The definition of Filipino national (the two-fold test of outstanding
capital stock and BOD) only applies if it is on corporate layering. But
you can also have a Philippine national, domestic corporation with 60%
of its capital stock that are owned by Philippine citizens. You can use
this definition to say that although it is 60%, they did not have control,
because the essence of the Constitutional requirement is that the
Filipino should be the one to benefit and control.
If there are circumstances that circumvent that, then you can have the
corporation disqualified. To the extent that you can say that Filipinos
are just dummies of the foreigners. In which case this becomes a
criminal case for violation of Anti-Dummy Law.
You can have the corporation disqualified. In fact you can even say
that the Filipinos are just dummies of the foreigners in which case it
becomes a criminal case for anti - dummy law. Its not black and white.
Just because it’s not corporate layering it doesn’t mean you can
already circumvent. It’s just easier to circumvent it with corporate
layering.
Just to clarify, both MBMI owned the two companies. Lets say
another company owns one of the companies?
The law does not distinguish because it merely says foreign ownership
and because the law says 40% foreign ownership, regardless whoever
the stock holder is then it is disqualified. But of course it's harder to
prove doubt if different foreign corporations own it because it's harder
to prove collusion. In this case it is easy to see that there is only one
company. In your case, you’ll have to prove that the different
corporations are working together to prove the companies are working
together.
You said that we do not always use the grandfather rule at first
because if we do then they will always fail the test of the
grandfather rule.
Yes, if you’re 60-40 and you apply the grandfather rule, you will always
fail. This case, 33% foreign but it still failed. So applying the
grandfather rule to 60-40 companies, you will always fail.
That is how we apply the control test and grandfather rule. Control test
first and if there are doubts on the attendant facts and circumstances
as to the beneficial ownership and control of the Filipinos on the
corporation then you apply the grandfather rule.
Now, the next question is, what shares or what capital do we apply the
test? To which capital should be 60% Filipino owned
Gamboa v Tevez (I and II)
Remember that for public utilities, it is at least 60% Filipino-
ownership not 100%.
Ruling: 60% must be applied to the common shares who have the
right to vote the directors.
PLDT had two classes of shares. First, the common shares. Second,
the preferred shares.
EH 404 | UNIVERSITY OF SAN CARLOS
The question posed is what does “Capital” mean?
Voting, non - voting or total? In the first Gamboa decision, the SC said
that when you talk about capital under the constitution, you are talking
about beneficial interest and control.
How do you manifest that?
By voting in the election of the directors.
This was the first Gamboa decision. So the lawyers of PLDT filed for
MR because PLDT had a structure of 23% common and 77%
preferred. If you base it on outstanding capital, they would have
passed the test. This is because the 77% was owned by 99% Filipinos
and the 20% was owned by 80% foreigners. Such that if you apply the
test to the total outstanding capital stock, the 60% would have still been
under the requirement of the law. But, if you apply the 60% against the
23% common shares then that would have been below the 60%
requirement of the law because that 23% was around 80% owned by
foreigners.
You must look into the shares entitled to vote the directors. That is how
you manifest the control and beneficial interest. The first Gamboa said
you apply 60% in the common shares entitled to vote the directors. In
the second Gamboa, the Supreme Court said it must be applied
separately.
This is because under the corporation code, there is no stock that is
completely non - voting. So its 60% of the voting and 60% of the non -
voting or 60% of each class of shares.
Roy v Herbosa
Facts:
Under the memorandum circular, there are only two types of shares
where you apply the 60% rule. In the case of PLDT, it has to be applied
to the 60% of shares entitled to vote the directors and 60% of the
outstanding shares entitled or not to vote the directors of the
corporation or the total outstanding capital whether or not entitled to
vote.
Although the second Gamboa ruling said each class of shares, the
SEC said we apply the 60% of the total outstanding capital stock
entitled to vote meaning if you preferred shares is entitled to vote then
you also apply there. So 60% to the total outstanding capital stock
entitled to vote as well as the ones not entitled to vote.
Roy says that the SEC Memorandum Circular doesn’t comply with the
Gamboa ruling because the Gamboa ruling requires application with
each class of shares and not total. But the Supreme Court said that
the term capital applies to that which has effective control and must be
applied to the outstanding shares of stock entitled to vote the directors.
Ruling:
According to the Supreme Court, the Gamboa ruling states that it must
be applied to the outstanding capital stock entitled to vote the directors.
Roy says it must be based on each class of shares. The Supreme
Court said that the Gamboa ruling is merely and obiter dictum such
that the first Gamboa ruling prevails. So the ruling really is that the 60%
must be applied to the shares that is entitled to vote the directors.
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Be careful, do not say common shares because there are instances
when the preferred shares are also entitled to vote. Looking at the SEC
Memorandum, it is even stricter than the Gamboa ruling. The SEC
went one step further by including the total outstanding capital stock.
There is no way the SEC memorandum violated the Gamboa rulings.
We mentioned earlier that corporations are juridical entities but they
are not tangible or real persons. With this, who composes the
corporation?
Sec. 5. Corporators and incorporators, stockholders and members.
– Corporators are those who compose a corporation, whether as
stockholders or as members. Incorporators are those stockholders
or members mentioned in the articles of incorporation and who are
signatories thereof.
Corporators in a stock corporation are called stockholders or
shareholders. Corporators in a non-stock corporation are called
members.
Components of a Corporation:
1. Corporators – those who compose the corporation, whether
stockholders or members. They are those who subscribe the
shares of the corporation.
2. Incorporators - those corporators mentioned in the articles of
incorporation as originally forming and composing the corporation
and who executed and signed the articles of incorporation as such.
Remember TWO things:
 One, you must be an initial subscriber.
 Two, you must be a signatory in the articles of
incorporation.
Relationship: All incorporators are corporators, but a
corporator is not necessarily an incorporator.
3. Stockholders or shareholders – the corporators or owners of
shares of stock in a stock corporation. They may be natural or
juridical persons.
4. Members – corporators of a corporation which has no capital stock.
Are all initial subscribers incorporators?
No. Because you can be an initial subscriber and not be an
incorporator.
Other components:
5. BODs or trustees
6. Officers – president, secretary, treasurer (minimum requirement)
They can have additional officers in the by-laws, but the minimum
required are those three.
Stock or Share of Stocks
It represents the interest or right which the owner has
a) In the management of the corporation in which he takes part
through his right to vote;
• If voting rights are permitted
EH 404 | UNIVERSITY OF SAN CARLOS
b) In a portion of the corporate earnings, if and when segregated in
the form of dividends;
• Generally speaking, stockholders have no right to the
earnings, unless dividends are declared. A portion of the
share of stock is a representation or a right of the stockholder
to the earnings in the form of dividends, and not to the
earnings per se. Once it is declared, then the stockholder
has a right. Without such declaration, then the stockholder
has no right.
c) Upon its dissolution and winding up, in the property and assets
thereof remaining after the payment of corporate debts and
liabilities to creditors.
In relation to the capital of the corporation, what is a share? Or how is
it manifested?
It is one of the units into which the capital stock is divided. In other
words, it is a unit of the capital of the corporation.
Residual Assets – Assets leftover after payment to creditors and of
liabilities.
Net Assets – Assets minus liabilities.
A share of stock is an asset of a stockholder. It is intangible because
it is merely a representation of a right or interest in those three
mentioned above.
If you have here a capital of P1,000, P1 per share. P1,000/P1 or 1,000
is the capital stocks of the corporation.
TYPES OF CAPITAL:
1. Authorized Capital Stock
It 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. It represents
the equity of the stockholders in the corporate assets.
It is the amount of stocks the corporation is authorized to issue.
Anything beyond that, the corporation can no longer issue. You have
to go to SEC and apply for the increase of authorized capital stock.
2. Subscribed Capital Stock or Issued Capital Stock
It is the amount of capital subscribed whether fully paid or not. It
connotes an original subscription contract for the acquisition by a
subscriber of unissued shares and would therefore preclude the
acquisition of shares by reason of subsequent transfer from a
stockholder or resale of treasury shares.
Will you be issued a certificate of stock? No. Just because the stock is
subscribed, it doesn’t mean that it can have a stock certificate. It can
only be issued if the subscription is fully paid.
It can be paid or unpaid, as long as it is covered by a subscription
agreement.
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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
Subscription – the transaction when you buy shares from the unissued
capital stock of the corporation. It is a primary offering. You buy it
directly from the issuing corporation. The document is the subscription
agreement.
Secondary offering – If you are buying the shares from another
stockholder and not from the corporation, it means that you are already
buying issued shares. The document is the deed of assignment.
(Remember: If you are buying a tangible thing, the document is a deed
of sale. If it is an intangible, the document is a deed of assignment.)
Does it matter if the subscription is paid or unpaid?
No. Even if the subscription is unpaid, the moment that there is a
subscription agreement, the shares are already subscribed and they
are considered as issued.
3. Paid-Up Capital Stock
It is the portion of the subscription which has been paid by the
subscriber or stockholder.
4. Unissued Capital Stock
It is the portion of the capital stock that is not issued or subscribed.
They are those not covered by the subscription agreement.
5. Outstanding Capital Stock
It is the portion of the capitol stock which is issued and held by persons
other than the corporation itself. It is the total shares of stock issued to
subscribers or stockholders, whether fully or partially paid except
treasury shares.
Treasury shares:
Sec. 9. Treasury shares. - Treasury shares are shares of stock
which have been issued and fully paid for, but subsequently
reacquired by the issuing corporation by purchase, redemption,
donation or through some other lawful means. Such shares may
again be disposed of for a reasonable price fixed by the board of
directors
What’s the difference between Oustanding Capital Stock vs.
Subscribed capital? Treasury shares still forms part of Authorized
Capital Stock and Subscribed Capital Stock but not Outstanding
Capital Stock because by their definition OCS are shares of stock
issued to subscribers/stockholders, whether or not fully or partially paid
and are held by persons except the issuing corporation.
So subscribed capital stock is broader.
Illustration:
EH 404 | UNIVERSITY OF SAN CARLOS
Authorized Capital Stock= 1 million made up at 1 million shares at 1
peso/share
Subscribed Capital Stock=500k
Paid-up Capital Stock=250k (half of the subscribed capital stock)
Unissued shares=500k
Outstanding Capital Stock=500k
You’re subscribed capital stock is also the same as your outstanding
but this is not true in all cases because if there are treasury shares
which are reacquired by the company. So if there are no treasury
shares, outstanding is the same as subscribed but if there are treasury
shares.
Let’s say here there are Treasury Shares=100k
Then how much will be your Outstanding Capital Stock? 400k
Authorized Capital Stock? 1 million
Subscribed Capital Stock? 500k.
Paid up? 250k
This is regardless of whether you have treasury shares or not because
subscribed refers to those with issued subscription agreements, just
because it is treasury does not negate the original subscription
agreement that was issued for it. Treasury does not make it unissued
but it is no longer outstanding because it is owned by the corporation.
Atty: Remember the definition of subscribed.
Those which have issued a valid subscription agreement whether paid
or unpaid. Thats your subscribed capital. So in this case its still 500k
and your paid-up is still 250k. And your treasury is 100k. And now
because you have treasury shares your outstanding is 400k.
Outstanding shares of stocks are those stock which are subscribed
and issued but are held by persons other than the issuing corporation.
Treasury shares - those shares repurchased by the corporation itself.
What happens when the shares are repurchased?
They no longer form part of the outstanding capital but they still form
part of the authorised capital stock and the subscribed capital stock.
Will there be an instance will they will no longer form part of the
authorized and subscribed capitals tock?
Yes. When the treasury shares are retired.
How is retirement done?
Retirement is done by decreasing the authorized capital stock by
amending the articles of incorporation.
GR: When the shares are reacquired by the corporation, they are not
automatically retired. They may not form part of the outstanding capital
but they still form part of the authorized and subscribed capital stock.
When they are retired they will no longer form part of the authorized
and subscribed.
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When you retire, that means that the company no longer wants to issue
the treasury shares. When you buy back the shares its not retired, so
the corporation can issue it any time. You can issue it anytime because
its still just there.
But if you chose to retire, then you have the decrease your authorized
capital stock by amending the articles of incorporation. So in this case,
if you retire your 100k treasury shares, you ACS will now be 900k. But
this needs the approval of the SEC. Its not easy to decrease the ASC.
The consent of all the creditors is required.
REMEMBER: When you acquire treasury shares, you do not retire the
shares. They can still be reissued. They still form part of ASC and the
SSC but not the outstanding capital stock. But if you chose not to
reissue it then you can retire the shares. How do you retire? You
decrease your authorized capital stock by amending the articles of
incorporation.
What do you need in order to purchase treasure shares? Can you just
buy it anytime?
No. The corporation cannot just buy it anytime. The corporation must
have retained earnings.
Retained earnings - are the net profits you have after distributing your
dividends to your stockholders. It is the portion of your capital which
comes from your profit. So your capital is made up of your
contributions, meaning the subscribed capital and you have your
retained earnings. Any income by the corporation which have not been
distributed to the stockholder will form part of the retained earning of
the corporation.
What is the provision that requires that treasury shares can only be
purchased upon the existence of unrestricted retained earning? Which
provision of the corporation code is it?
SECTION 41. Power to Acquire Own Shares. — A stock
corporation shall have the power to purchase or acquire its own
shares for a legitimate corporate purpose or purposes including but
not limited to the following cases: Provided, That the corporation
has unrestricted retained earnings in its books to cover the shares
to be purchased or acquired:
1. To eliminate fractional shares arising out of stock
dividends;
2. To collect or compromise an indebtedness to the
corporation, arising out of unpaid subscription, in a delinquency
sale, and to purchase delinquent shares sold during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to
payment for their shares under the provisions of this Code.
Atty. Gaviola: So in order to buy treasury shares, the corporation must
have unrestricted retained earnings and it can only buy shares not just
for the sake of buying shares but always for a legitimate corporate
purpose, including but not limited to:
1. To eliminate fractional shares arising out of stock dividends
EH 404 | UNIVERSITY OF SAN CARLOS
Example:
You have ten shares in a corporation and the corporation
declared 25% stock dividends. So that will give you an additional
2.5 shares.
What are you going to do with the 0.5? That is your fractional
shares. So the corporation can buy it from you.
2. Collect or compromise an indebtedness to the corporation,
arising out of unpaid subscription, in a delinquency sale, and
to purchase delinquent shares sold during said sale
Example:
If you have subscribed capital stock of 500k, you have subscriber
that subscribed for 100k, of which only 50k is paid. You will learn
later on that a subscription is indivisible and you cannot even sell
your shares until it is fully paid. So what happens here?
REMEMBER: If your shares are not fully paid, as long as you are
subscribed, you exercise all the rights of a stock holder.
It stops when your shares become delinquent. The share become
delinquent when the board makes a call for the payment of the
subscription and you do not pay your shares will be considered
as delinquent shares.
In delinquent shares, it will undergo public bidding.
So which shares will be declared delinquent? Is it just the unpaid
portion? No, as I said subscription is indivisible. The whole 100k
will be declared as delinquent.
So later on in the delinquency sale, it will be sold to the highest
bidder, if no one will bid up to the third bidding, the corporation
has the right to purchase the entire thing. They become treasury
shares.
3. To pay dissenting or withdrawing stockholders entitled to
payment for their shares under the provisions of this Code -
this is called the appraisal right of a stockholder, if a stockholder
votes against an act of a corporation that it does not agree with
and that act is specifically recognized under the corporation code
as subject to appraisal right, then the stockholder can demand
that the corporation will buy his shares. In this case, the
corporation has a legitimate reason to buy the treasury shares.
AGAIN: Treasury shares cannot just be bought at any time. There has
to be a legitimate corporate purpose. Including but not limited to three
enumerated under section 41.
STUDENT QUESTION: What would be the wisdom of retiring shares?
Atty: Maybe the corporation does not want to dilute the stockholdings
of its current stockholders. Because here the treasury shares still forms
part of the subscribed so compared to the total subscribed, gamy ang
imong share because dako man ang subscribed, but if you don’t have
any intention to reissue it you just retire it so dako pa ang shares sa
imong stockholders.
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DOCTRINE OF EQUALITY OF SHARES OF STOCK - in the absence

of any stipulation in the articles of incorporation and certificate of stock It depends. It can be issued for higher but it cannot be issued for
to the contrary all stocks regardless of their nomenclature enjoy the lower than the par value. If it’s higher that would create your
same rights and privileges and subject to the same liabilities. premium or higher paid-in capital. That will not change your
authorized capital.
So if the AOI does not say what the characteristic of each share are,
its the same characteristic for all. Basically, you are just creating a share premium. It would not
change your authorized but it will only change your paid-in. But you
Who has the power to classify? cannot issue shares lower than the par value because that would
1. The incorporators at the very beginning because they approve turn in into watered stock and that is not allowed under the
the AOI. corporation code.
2. Members of the BOD and the stockholders, subsequently if there
are changes done by amending the AOI. So you have to go back LIMITATION:
to the SEC. A par value share is not as flexible as a no par value share because
a no par share can be issued at any price provided that it should not
be sold at less than P5 pesos per share.
CLASSES OF SHARES:
1. Par Value Shares The no par value shares affords the corporation flexibility in the
2. Non-Par Value Shares issue price of its share in any amount provided that it does not go
3. Common Shares below P5 per share.
4. Preferred Shares
a. Preferred shares as to assets For par value share on the other hand, it doesn’t mean because it’s
b. Preferred shares as to dividends fixed you cannot issue it for a different price. You can. But it should
i. Cumulative be more than the par value. It can never be less than the par value.
ii. Non-cumulative
iii. Participating Conditions/Requirements to issue no par value shares:
iv. Non-participating 1. Cannot be for a price lower than P5/share
v. Participating cumulative 2. Deemed fully paid and non-assessable and the holder of
5. Founder’s Shares such shares shall not be liable to the corporation or to its
6. Convertible Shares creditors in respect thereto. (Sec. 6)
3. Entire consideration received by the corporation for its no-
Status of Shares: par value shares shall be treated as capital and shall not be
1. Shares in escrow available for distribution as dividends
2. Treasury shares 4. That banks, trust companies, insurance companies, public
utilities, and building and loan associations shall not be
1. Par value v. no par-value permitted to issue no-par value shares of stock
5. No par value shares cannot be preferred shares. Preferred
Par value – the amount (price per share) is fixed in the articles of shares can only be issued at par value.
incorporation AND in the certificate of stock
What does subscription have to do with the payment? So again,
No par value - value is not fixed in the articles of incorporation and what does this mean? What is the difference in terms of payment of
in the certificate of stock par value and no par value shares?

DIFFERENCE: So par value shares can be issued based on a subscription

 If the shares have par value, your authorized capital stock
would be described in money terms.
P1M ACS divided into 1M shares at P1.00 per share. That is how
your ACS would be if you have a par value stock.
If the stock on the other hand is no par, you don’t put an amount in
the articles, you just state the number of shares and state that it is
no par value.
 In terms of payment: no par value shares, it has to be fully
paid and there can be no partial payment while in par value
shares, there can be partial payment.
2. Common and preferred
Can a par value share be issued at a price different from its par?
receivables. You still need to pay the price but you don’t have to pay
it the moment of subscription. And in fact, you can also choose to
pay certain percentage of your subscription. If you opt, you can pay
for 10%, 15%, 20% 50%.
There’s no requirement as to the extent of payment if the shares are
par value. But if the shares are no par value, the subscription price
must be paid right away because all no par value shares are
deemed fully paid and non-accessible. Meaning for no par value
share you do not recognize a subscription receivable. The moment
of subscription the amount that is paid is the full amount of the
subscription price.

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Common - is basically represents the residual right of the
stockholder over the corporation. This is the most common type of
share. You cannot have a corporation without common shares and
you cannot deprive them of voting rights. The only time common
shares are deprived of voting rights is when you have founder’s
shares. But founders shares are only for a limited period. After that
common shares will have voting rights again.
Are shares received by the shareholder pro rata. In the order of the
receiving of the dividends, it comes after anything that is remaining
after the dividends have been given to the preferred share
Common shares are the ultimate ownership of a corporation. It is
the residual interest after all the creditors have been paid and all the
preference have been given.
Preferred shares are those which will have preference either as to
assets or dividends.
Preferred as to assets or Preferred as to dividends. Preferred as to
dividends can either be commutative or non-commutative and
participating and non-participating.
So how does it work?
Dividends for preferred shares are either fixed on per unit or a
percentage of par.
Example:
Preferred shares entitled to dividends at 5 pesos per share and they
are commutative.
What does it mean? It means that, remember again that dividends
are not a matter of right to the stockholders, dividends becomes only
a rights once it is declared.

If the AOI provides for the common and preferred shares but does No declaration, no right to the earnings of the corporation.
not state anything else. What is the assumption?
If you are a preferred commutative stockholder, you are entitled to
For preferred shares it is presumed to be non-cumulative and non- dividends for every year that you are a stockholder, it does not mean
participating. that you entitled to receive the dividends every year. The moment it
is declared, you are entitled to dividends not just of the current year
If the articles both provide for the common and preferred but does but also of the past years.
not provide for anything else. Doctrine of equality of shares
applies. 1000 shares | P5/share
2017 2018 2019
Under the doctrine of equality of shares, all the classifications are Entitled to
the same regardless of the nomenclature. Even if they are classified P5000 +
as common share and preferred if there are no other qualifications, P5000 (from
they have the same rights voting, dividends, assets. 2017) +
Preferred
No No P5000 (from
Cumulative
The moment the law or the AOI provides for a preference then that declaration declaration 2018) =
Shareholder
is the one that will prevail. P15000

Can the article provide that the preferred shares are cumulative and Dividends in
participating? Arrears
Preferred
Yes. If preferred shares are cumulative and participating not only Non- No No Entitled to
do, they get shares in arrears and the dividends of the current year, Cumulative declaration declaration P5000 only.
but they also participate with the common stockholder on the Shareholder
residual dividend. Ordinarily once preferred shareholders are given their dividends, the
common shares will now get their share in the dividends.
It does not mean that preferred shares are cumulative, it can no
longer be participating or if it is participating it can no longer be The common stockholders are the ultimate risk takers but at the
cumulative, because cumulative is the right to receive dividend in same time they are also the ultimate beneficiary. Ultimate risk taker
arrears while participating it is the right to receive dividends together because if no dividends are declared they don’t earn anything. If
with the common stockholders. So, they can exist together. there is a declaration of dividends but it not enough to cover the
preferred shares, then they don’t get anything. But if there is a
Preferred - if the articles does not specify preferred are always also declaration of dividends in such a big amount that only a portion
voting unless stated in the articles. Only preferred and redeemable goes to the preferred share holder, they get the rest.
can be deprived of voting rights.
Example:
Has a preference over the common as to the order of the either the The corporation declared 1M worth of dividend.
assets or the dividends. Preferred Shares – P10 000 @ P1 per share

Preferred shares can either be: So at this rate the preferred shareholders at 1 peso will have 10k
share of the dividends.

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P1 000 000
(P10 000)
P 990 000 This balance will go to the common shareholders.
This is why the common shareholders are the ultimate beneficiary
because they get the balance. So if only 10k dividends were
declared, the preferred will get it first, so there will be nothing for the
common stockholder.
But if its a big amount such as 1M the common stockholders will get
the balance. That is ordinarily, but if you’re preferred stockholders
are also participating, they not only get there 10 first they will also
participate in the balance of 990k. They participate with the common
stockholders.
If in the same example:
Preferred Participating Shares – 10 000
Common Shares – 40 000
Supposedly the 990k will only be divided by the 40k common
stockholders, but because the preferred are participating, they also
share, so the 990k will be divided by 50k. So at 990k divided by 40k
its 24.75, this is supposed the share of the common share but
because the preferred will be included it 990k divided by 50 which
is 19.81.
990 000 = 19.81 instead of 990 000 = 24.75
50 000 40 000
If non-participating it all goes to the common stockholders. But if it
is participating, they get their 1 peso share plus they get their 19.81
per share. They get a total of 20.81 per share.
Definitions:
 Preferred as to Assets – preferred in the distribution
of assets of the corporation in case of liquidation
 Preferred as to Dividends – preferred in the
distribution of dividends
 Cumulative shares – right to dividends in arrears. The
declaration of dividends is always a management
prerogative. If your shares are preferred, it means that
for every year that the company did not declare
dividends, each cumulative preferred will have an
interest in those undeclared dividends.
 Non-cumulative shares - they don’t get dividends in
arrears.
 Participating shares – those which after they get their
share of the dividends, they shall participate in the
sharing of dividends of the common stockholders.
 Non-participating shares — Once you get your
preferred shares, you no longer have a right to what is
left.
3. Voting Shares and Non-Voting Shares
Voting Shares – shares that have a right to vote
EH 404 | UNIVERSITY OF SAN CARLOS
Non-voting Shares – shares that do not have the right to vote except
those provided in Sec. 6.
Conditions in the issuance of Non-Voting Shares:
1. Only preferred or redeemable shares may be non-voting;
2. Required to vote under the instances provided in Sec. 6;
3. They cannot issue all non-voting shares – there should
always be a class of shares with FULL voting rights.
8 Instances where non-voting shares may still be entitled to vote:
(Sec. 6) MEMORIZE:
1. Amendment of AOI;
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 this corporation with another
corporation or other corporations;
7. Investment of corporate funds in another corporation or
business in accordance with this code;
8. Dissolution of the corporation.
Remember:
Bonded indebtedness – borrowings through the issuance of
bonds
When bonds are issued, it usually pertains to long-term
obligations.
4. Founders’ Share
GR: Common shares cannot be deprived the right to vote.
XPN: In the case of Founder’s Shares – for a limited period of 5 years,
owners of founders’ shares shall have an exclusive right to vote and
be voted. (Sec. 7)
Founders’ Shares – shares issued to the organizers and promoters
of a corporation in consideration of some supposed right or property
having special rights and privileges not enjoyed by the owners of other
classes of shares.
There may be other privileges that can be granted without the limitation
of five years, like the privilege of having a higher dividends.
5. Shares in Escrow
Escrow – a deed, bond, money, or a piece of property held in trust by
a third party to be turned over to the grantee only upon fulfillment of a
condition (Merriam-Webster)
There is a company that handles, it does not give the shares unless
the obligation is finished from the other party. So, if the certain
obligation is not done, then the shares are not given.
When can a share be subject to escrow?
Atty: Remember, when you are subscribing you are buying from the
corporation unissued shares.
If you buy shares in a secondary purchase (not a subscription), you
are buying from a stockholder not directly from the corporation. If the
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stockholder/seller wants to be assured of payment before he even

gives you the share, what the parties will is that they will deposit the Retirement – a decrease in the authorized capital stock. It has nothing
share with the bank put it under escrow. With the condition that the to do with the unissued shares.
bank will only issue the shares the stock certificates upon the full
payment of the price. 7. Redeemable Shares
Redeemable shares – usually preferred which by their terms are
Atty: In one of the transactions that we handled before it was a purchase of all redeemable at a fixed date or at the option of either the issuing
the shares of a bank, but the problem was one of the stockholders died so the corporation or the stockholder or both at a certain redemption price.
shares were part of his estate. Our client wanted to purchase all the shares
including the properties owned by the estate, but we could not do so until the
Redeemable Share Treasury Share
estate proceedings were done.
Mode of acquisition Share can be Share can only be
At the same time my client did not want the shares to be out there like being acquired even reacquired when
voted on, receiving dividends and all that. So, what the parties agreed was in without unrestricted there are
the meantime the shares will be placed in escrow until the proceeding are done retained earnings – unrestricted
and the shares can be purchased. The share was placed in escrow and then through surplus retained earnings
when the guardian was appointed because the heir was a minor. When the Expressly stated in Not stated in the
guardian was appointed, and the shares can now be legally sold and that was the AOI AOI
the time it was pulled out in escrow.
Treasury shares is not technically a class of share, it is a status like
Technically, escrow is not a type of share it is a status. It is
escrow because it can be any kind of share which has been issued,
basically depositing the share with the 3rd party to be released upon
full paid but which was subsequently reacquired by the corporation.
fulfillment of a certain conditions. It can be any shares; it can either be
preferred, common, convertible. It is a status.
Difference between a redeemable share and other types of
shares:
Questions by the students:
In the shares in escrow, what happened to the dividends?
GR: A corporation can redeem its own shares whether or not the
shares are redeemable based on Sec. 41. It can only do so when it
Parties will agree. Escrow is a contract. The parties will agree who will
has unrestricted retained earnings
shoulder the escrow fee, if there are dividends who will have the right
to the dividends. Although technically as long as the transfer has not
XPN: Under Sec 8, corporation can redeem shares even if it does not
been made in the stock and transfer book, whoever is the stockholder
have unrestricted retained earnings. Redemption is now a matter of
in the stock and transfer book is entitled to the dividends.
right regardless of the existence of retained earnings. But SEC issued
a memorandum that you cannot redeem, if after redemption, your
Absent any stipulation it will be the estate?
assets are not sufficient to pay your liabilities and your paid-up capital.
Yes, but if the parties agree if it is the buyer. So, then the stockholder
In Sec. 41, you must have unrestricted retained earnings. So if you
has the obligation to give the stock dividends to the buyer.
have restricted earnings, you cannot redeem. While in Sec 8, you can
redeem even it is restricted retained earnings.
But as far as the corporation is concerned, it will only deal with the
stockholder.
When your retained earnings is at a deficit. That means you don’t have
sufficient assets to cover your liabilities and paid-up capital.
6. Treasury Shares
What happens to the redeemable shares that has been redeemed by
Treasury shares- it refers to the shares wherein it is fully issued and
the corporation?
paid but is subsequently reacquired by the corporation who issued
such shares through redemption, donation or any other means.
Corporation has TWO options:
1. It can retire the shares, if it is provided in the Articles of the
What happens to the treasury? What is the status of the treasury
Incorporation that they can be retired; or
shares?
How do you retire the shares? It has to amend the articles to
The treasury shares will become a property of the corporation meaning
decrease your authorized capital stock.
that the corporation can resell it in an amount which is fixed by the
board of directors and it cannot be considered as a retired share
2. If the AOI allow, they can be reissued. If still not reissued, it
because it does revert into unissued shares.
remains treasury shares.
Retirement is different from an unissued share.
Note: Redeemable shares which are not retired become treasury
shares. But not all treasury shares are redeemable shares.
We said that when we have treasury shares, it become the property of
the corporation, it can reissue the shares, or it can retire the shares but
Student: Should the assets mentioned in the law come from the sinking
regardless the shares do not revert to the unissued it will always be
fund?
issued but no longer outstanding.

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Atty: When the redemption is mandatory, meaning beyond the
control of the corporation, the corporation under the SEC rules is
required to maintain a sinking fund.
The sinking fund is different from your unrestricted retained earnings
because it is part of your cash or assets. The unrestricted retained
earnings is part of your capital. It may be that you have a sinking fund
but you still have a deficit, they are unrelated, in which case you are
not still allowed. Under the SEC rules you are not allowed to redeem
when you have insufficient assets.
So the redemption is at the option of the corporation, say that it wants
to redeem whether the stockholder likes it or not the stockholder has
to sell. In the same way, if the option belongs to the stockholder
whether the corporation wants it or not it has to buy if the shares are
redeemable.
In ordinary shares, there is no way for the corporation to force the
stockholder to sell. In the same way, the stockholder cannot force the
corporation to buy unless it is in the exercise of its appraisal right.
8. Convertible Shares
Convertible shares – are shares that allow the holder to convert from
one class to another. But the conversion is not automatic, it can be
done thru the amendment of the articles.
Ordinarily, if you want to convert but you do not have yet a convertibility
feature in your Articles you need to submit two amendments (dual
amendment) simultaneously. The first amendment is the convertibility
feature and the secod amendment is the actual conversion. You file
the two amendments together.
INCORPORATION AND ORGANIZATION
How do you incorporate?
1. Not less than 15 incorporators to execute the Articles of
Incorporation;
2. Reservation of corporate name;
3. File with the SEC the AOC, by-laws and the treasurer’s
affidavit together with your approved name reservation
What should be contained in the articles of incorporation? (Sec. 14)
AMENDED
1. Name of the corporation;
2. Purpose
3. Principal Address
4. Term of Existence
5. Names, nationalities, residence of incorporators
6. The number of directors or trustees, which shall not be less
than 5 nor more than 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 the 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,
EH 404 | UNIVERSITY OF SAN CARLOS
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 non-stock, the amount of the 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.
1. Name of the Corporation
Requirements:
It must not be misleading or confusingly similar with the existing name
of a corporation.
Industrial Refractories
Facts:
This case involves two corporations engaged in the sale of similar
products and in the same locality. One is Refractories Corporation of
the Philippines (RCP) and the other is Industrial Refractories
Corporation of the Philippines (IRCP). RCP first registered in 1976 and
IRCP was incorporated in 1979 and changed its name in 1985.
Based on this decision, what are the grounds that would entitle RCP
to question the name of IRCP?
Either identical, deceptively or confusingly similar or patently deceptive
or contrary to existing law.
So any corporation who finds out that there is another corporation has
a name which is similar or confusing can bring a case to change the
name of the second corporation?
In the case, another requirement is that the complainant has a prior
right to the name by prior registration with the SEC.
IRCP also registered its name, does that mean they can file a case
against RCP?
No, prior right means that who registered its name first with the SEC.
It’s a matter of who registered first.
RCP registered first in 1976, while IRCP applied for the change of
name in 1985.
Going back to similarity how is that determined?
Confusion is determined if it can mislead a person using ordinary care
and discrimination.
NB: Distinguish between trade name and corporate name. If it is a
trade name it falls under IPL. If it is a corporate name it falls under
Corporation Code.
Trade names do not need to be registered under IPL. Corporate
names need to be registered under SEC to be protected.
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Iglesia Case
Facts:
Respondent was established in 1936, while petitioner was established
by separatist members and was registered in 1980. An action to
change the corporate name ensued. The defense of the petitioner was
that they added 8 more words such as “mga kaanib” and “sa bansang
Pilipinas” while the law required only 2 more words. Also, they raised
the defense that they changed the name from “suhay” to “saligan”.
The Supreme Court ruled that the addition of other words were merely
descriptive and that they cannot hide behind the generic word rule.
Further, the court held that the words “suhay” and “saligan” are
synonymous.
What is the generic word rule and when does it apply?
The generic word rule is when a generic word like “BAG” cannot be
protected under Intellectual Property Law. It applies only in IPL and
does not find any ground in the corporation code.
Does the protection under the generic word rule apply to corporate
names?
No, under the corporation code, the SEC will not register any name
that is similar, or identical or confusing even if the name is generic.
In intellectual property, generic names are not protected unless you
can apply the doctrine of secondary meaning, where you associate it
specifically with a product. Like apple, although it is generic, you
already associate it with a cellphone so it’s protected. Unlike in a
corporate name, although it is generic, it is already protected. SEC only
looks at whether the names are confusingly similar.
SEC came out with a rule that if a corporation’s name is similar but
there are a number of words that are different, they can overlook the
similarity and look at the additional words and how different the names
are. In the Iglesia ni Cristo case, there was a contention that there were
8 different words. But the Supreme Court said it does not even matter
that there are eight different words, when the rules only require two,
because those words were merely descriptive words. And even if those
words were generic, that generic word rule does not apply to corporate
names. This rule was also reiterated in the Refractories case.
Zuellig v. NLRC
“Change of name is not a change of being.”
This case involves the illegal dismissal of San Miguel by petitioner
Zuelig which was formerly known as Zeta Brokerage Corporation.
Here, private respondent was informed he would be dismissed after
Zeta had decided to cease its operations.
However, San Miguel decided to file a case for illegal dismissal before
the Labor Arbiter, which sided with the respondent. On appeal, the
NLRC also sided with the private respondent as well as the CA.
Hence this petition, where petitioner Zuelig alleges it is not the proper
party to the case as it should have been Zeta, and it already ceased
its operations and the corporation was already dissolved.
What was the ground for the dismissal of the employment of San
Miguel?
EH 404 | UNIVERSITY OF SAN CARLOS
Zeta informed him that they would be closing and ceasing its
operations.
What did Zeta actually do?
Zeta actually changed the name of its corporation to petitioner Zuelig
and now they allege that the Zeta Corporation was already dissolved.
So by amending its articles, there was a claim that the Zeta
Corporation no longer existed. Was the amendment only for the
change of name?
No. They also expanded its primary purpose, changed its name, and
increased its capital stock.
So they said that because of this amendment, the Corporation no
longer exists. So it’s dissolved therefore, closure of operations,
therefore San Miguel was legally dismissed. So what happened?
The SC sided with San Miguel. It held that the amendment of the
articles of incorporation of Zeta Brokerage Corporation did not dissolve
its corporate existence. They also cited a case where a change of
name is analogous to a person changing his name. It would not mean
that another person is born. In this case, the petition of Zuelig was
denied as there was no change of existence of Zuelig.
This case is an offshoot of what attribute of a corporation? Right of
succession
Remember: Under the right of succession, the rule is that the
corporation’s is not affected by the change of its stockholders, or its
Board of Directors. It continues as one separate entity. In the same
manner, if you amend the articles of incorporation, it does not mean
that the corporation is dissolved and a new one is created.
Unlike in a partnership, when you amend the articles of partnership,
the old partnership dies and another partnership exists. For
corporations, as an offshoot of its being an artificial being and with the
right of succession, even if you amend its articles of corporation, the
corporation continues its existence.
The SC said it is similar to a person changing his name. If you change
your name, it does not mean that a new person is born. Just like
corporations, it doesn’t mean that if you change your name, there is a
change in entity. The entity continues its existence even with the
amendment. Change of name does not mean change of corporation.
Atty:
By the way class if you have a client that wants you to incorporate a
corporation for him, the first thing you need to do is to get a name. Because
you need to have it reserved. Don’t get one name. Get three because you
aren’t sure that your first choice will be approved. By the way, just because
there is a similar name, you can’t reserve the name anymore. You cannot do
an online reservation, but you can actually write a letter to the SEC contesting
the nonreservation, basically justifying why you should be allowed to register
the same name. If the same name is because you’re affiliates, parent, or
subsidiary, you just have to get the written consent of the other corporation,
you send it to the SEC, and the SEC will approve manually your reservation.
But that takes time because the approval is done in the Head Office in Manila.
So just to be sure, just get three choices for the name. If one does not pass,
you have other choices.
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2. Purpose/Purposes of the Corporation
Other than the name, the purpose must be indicated in the articles of
incorporation such that if there’s more than one purpose for the
corporation, the primary and secondary purposes must be cited in the
articles.
Why is it necessary to place the corporate purpose in the
articles?
 As a corporation, it is important so you will know if the
business transaction or contract you’re entering into is in line
with the purpose of the corporation.
 As a stockholder, it is important so you will know what risks
you are taking in investing in that company
 As a member, it is important so that you know what you’re
getting yourself into.
So if you transact with a corporation, is it important to look at the
purpose of the corporation? Why?
Because the corporations may not be authorized to transact with the
corporation in the first place.
Remember the last attribute of a corporation that it has the
powers, attributes, and properties expressly provided by law and
incident to its existence.
What shapes the power of the corporation?
It’s the purpose of the corporation. The powers of a corporation are
determined by its purpose. If the purpose of the corporation is to sell
real estate, it cannot engage in retail trade. So if you enter into a
contract with a corporation for retail trade, that contract is ultra vires.
The corporation does not have the power to enter into the contract.
Because you judge the powers, rights and authorities of the
corporation by its purpose.
It is important to know the purpose of the corporation, even if you’re
not investing but just transacting with the corporation because maybe
what the corporation is doing is beyond its purpose, in which case it
becomes ultra vires.
Classifications of Purpose:
1. Primary
2. Secondary
Primary purpose - determines why the corporation was created in the
first place and the secondary purpose states the other incidental
purpose of the corporation.
Example:
You have a client, you have to be careful in crafting the purpose of the
corporation because a few years ago the BIR came a rule that if you
buy shares of a real estate company, the value of the shares will not
be the book value but the appraised value of the real estate. There
was also a rule that if the real estate asset is considered an ordinary
asset of a corporation, then you subject it to income tax which is at
30% and it’s subject to VAT.
EH 404 | UNIVERSITY OF SAN CARLOS
The problem was, if you put in your purpose that if you own or purchase
real estate, the BIR considers that corporation as a real estate
corporation. Which means that if you sell real estate, it’s subject to VAT
and income tax. That was the problem before because you expect
lawyers to put in the secondary purpose that the corporation is capable
of owning real property and transacting real property. But the BIR
turned it around and said that if you put that in the articles, that entity
is a real estate entity.
So, any real property you sell will not be subject to the 6% capital gains
tax but the 30% income tax plus VAT. That was a problem a few years
ago. So corporate purpose is not something that has no implications.
It’s important to think about what you want in your corporate purpose.
3. Principal Address of the Corporation
How should the address be stated? The requirement is it should
be in the Philippines. Can I just say Cebu City, Philippines?
No. It must be sufficient for the place of business to be identified. Cebu
City does not exactly point out the specific address, so you include the
floor number, the building name and number, the Barangay, the City,
the province, and the country.
A few years ago, the SEC allowed when corporations just said “Cebu City”,
“Metro Manila”, “Mandaue City”. Why? Because if you change your principal
office, if you move from one office to another, it means you have to amend
your articles. For example, if you have your principal address is at A Building,
No. 7 street, Cebu City. If you’re going to move to B Building, no. 7 street,
Cebu City, you have to amend your articles.
Remember the requirement for amendment, it requires Board Approval, the
approval of the stockholders, whether voting or nonvoting, and you go back to
the SEC to have your amendment approved. It’s tedious. So to circumvent
that, a lot of corporations just place “Cebu City” so that if they move within
Cebu City, they need not amend.
But there was a problem. The principal place of business is where you’re
supposed to receive summons, keep your stock and transfer book, where the
business is supposed to conduct its business. There was now an issue that
the address needed to be more specific.
So around 2006, the SEC came out with the rule that no corporation will
now be incorporated unless their address is specified in the Articles. All
corporations with addresses that are not specific were required to amend their
Articles to make it more specific. It was a big headache because if you do not
change, you will be penalized. But the problem is still the same.
Example:
If you are in Unit 1 and then you transfer to Unit 2, that is a change in principal
office that needs a change in the Articles. So the SEC needed to compromise.
It said that as long as you are in the same municipality or city, you need not
amend your Articles. Just provide with a General Information Sheet with the
new address. It found that it was impractical that you need to amend the
Articles every time you move.
4. Term of Existence (AMENDED) – Corporate Term is NOW
perpetual
Sec. 11. Corporate term. – A corporation shall exist for a period
not exceeding fifty (50) years from the date of incorporation unless
said period is extended. The corporate term as originally stated in
the articles of incorporation may be extended for periods not
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exceeding fifty (50) years in any single instance by an amendment
of the articles of incorporation, in accordance with this Code:
Provided, That no extension can be made earlier than five (5) years
prior to the original or subsequent expiry date(s) unless there are
justifiable reasons for an earlier extension as may be determined
by the Securities and Exchange Commission.
Maximum – 50 years
It can be shortened or extended. Extension should not exceed 50
years.
How? The shortening or extension shall be made within 5 years prior
to expiration by amending the Articles of Incorporation.
5. Names, Nationalities and Residences of the Incorporators
(AMENDED)
Requirements to become an incorporator: (AMENDED)
1. 5-15 natural persons
2. Of legal age
3. Majority must be residents
4. Certain percentage of citizenship required
5. Owns at least 1 share
Difference between incorporator and corporator:
Corporators – those who compose the corporation, whether
stockholders or members. They are those who subscribe the shares
of the corporation.
Incorporators - those corporators mentioned in the articles of
incorporation as originally forming and composing the corporation and
who executed and signed the articles of incorporation as such.
Can a juridical entity become an initial stockholder? Yes.
A juridical entity cannot be an incorporator, but it does not mean that it
cannot be a stockholder or an initial subscriber.
If a juridical entity is an initial subscriber, its name will still appear in
the Articles but it will not be considered as an incorporator because it
does not sign the Articles. Only natural persons can sign the Articles
and there must be at least 5 natural persons.
No longer required to be natural persons. Incorporators may now
be juridical persons.
Example: Corporation A puts up a subsidiary, Corporation B.
Can a juridical entity own ALL shares in a corporation?
Yes. One person, whether natural or juridical, can own ALL the shares
of a corporation. The law only requires at least 5 names to whom the
shares are registered. It does not mean that those 5 shareholders
actually own the shares. They are the legal owners, but not the
beneficial owners. So in the stocks and transfers book, there must
ALWAYS be at least 5 natural persons named therein. All the time. It
does not mean that those 5 are the owners forever.
EH 404 | UNIVERSITY OF SAN CARLOS
What you actually do there is to have those 5 persons execute a Deed
of Trust. In that deed, they will acknowledge that they are just holding
the shares in trust for the principal. This is allowed by law.
HOWEVER, this is not allowed when it is nationalized. If you are a
foreigner, you might be held liable for violation of the Anti- Dummy Law
(CA No. 108). Even beneficial ownership is not allowed. Filipinos must
control both the legal and beneficial ownership.
6. Number of Directors or Trustees (NOT less than five (5) nor
more than fifteen (15))
That is why you need to have at least 5 incorporators. The corporation
cannot function without the directors. Each director is required to own
at least 1 share.
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
the 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.
Is there a minimum authorized capital stock that needs to be complied
with? No, there is no minimum authorized capital stock required under
the Corporation Code, unless a special law requires such minimum
authorized capital.
But there are certain industries that require a required minimum
authorized capital stocks, such as banks, insurance, construction,
retail and trade (if you have a foreign stockholder), domestic market
enterprise (if you have a foreign stockholder), etc.
(AMENDED)
In order to incorporate, the authorized capital stock must be
subscribed. How much must be subscribed?
At least 25% of the authorized capital stock must be subscribed.
At least 25% of the subscribed capital stock must be paid up.
Example, in a corporation:
Authorized capital stock – 100,000
Subscribed capital stock – 25,000 (at least)
Scenario 1:
Shareholder Subscription
A 1
B 1
C 1
D 1
E 24, 996
Is this allowed? Yes. There is no requirement as to the distribution of the
subscription. The law requires that incorporators shall own at least one share.
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Paid-up capital – 6, 250 (at least)
Scenario 2:
Shareholder Paid-up
A 5,000 Is this allowed? Yes. The law requires that at
least 25% of the TOTAL subscribed capital
B -
stock must be paid up. It does not say EACH
C -
subscription.
D -
E 1,250
If their Par value share, when you subscribe it does not even have to be paid
up, this is a valid subscription. The important thing is you can only incorporate
so long as 25% is paid up, it doesn’t have to be each subscription. It is based
on total.
Remember the case of Narra, remember that MMC 60% was subscribed by
Olympic but 0% was paid up, it was valid in so far as the 25% rule is concerned.
So the corporation already fully paid up the 25% then the
incorporators/stockholders said that we have too much money, lets reduce our
capital. So out of 100k ACS they retired 15k shares so their ACS is 85k and
their subscribed is 10k. Is this allowed?
Allowed. You only need to meet the 25-25 rule at the time of incorporation and
in cases of increase in ACS. In these 2 instances the 25-25 rule must be
followed an outside of these 2 situations the rule does not apply. So this is a
valid decrease in capital.
So when does the corporate existence start?
Upon the issuance of certificate of incorporation from the SEC.
How many relationships are created from such issuance?
Three Relationships created from the Issuance of a COI:
1. Between the State and the Corporation;
2. Corporation and its stockholders;
3. State and the stockholders
The Articles of Incorporation is a tripartite agreement and creates three
relationships between these three parties.
So what is the requirement for there to be a valid corporation?
There must be substantial compliance with the formal requirements
of the law. The law does not require strict compliance. Substantial
compliance will actually create a valid foreign entity. If you fall short of
substantial compliance, what is created is a de facto corporation. The
minimum requirements for a de fact corporation are:
Section 20. De facto corporations. - The due incorporation of any
corporation claiming in good faith to be a corporation under this
Code, and its right to exercise corporate powers, shall not be
inquired into collaterally in any private suit to which such
corporation may be a party. Such inquiry may be made by the
Solicitor General in a quo warranto proceeding.
Seventh Day Adventist Case
Facts:
Spouses Felix Cosio and Felisa Cuysona donate a parcel of land to
South Philippine [Union] Mission (SPUM-SDA)of Seventh Day
Adventist Church, and was received by Liberato Rayos, an elder of the
EH 404 | UNIVERSITY OF SAN CARLOS
Seventh Day Adventist Church, on behalf of the donee.
However, 21 years later, the spouses sold the same land to the
Seventh Day Adventist Church of Northeastern Mindanao Mission.
Claiming to be the alleged donee’s successors-in-interest, petitioners
asserted ownership over the property thru filing a case for revocation
of the donation with the RTC. This was opposed by respondents who
argued that at the time of the donation, SPUM-SDA Bayugan could not
legally be a donee because, not having been incorporated yet, it had
no juridical personality. Neither were petitioners members of the local
church then, hence, the donation could not have been made
particularly to them.
The SC ruled that the donation was void bec The deed of donation was
not in favor of any informal group of SDA members but a supposed
SPUM-SDA Bayugan (the local church) which, at the time, had neither
juridical personality nor capacity to accept such gift.
The filing of articles of incorporation and the issuance of the certificate
of incorporation are essential for the existence of a de facto
corporation. We have held that an organization not registered with the
Securities and Exchange Commission (SEC) cannot be considered a
corporation in any concept, not even as a corporation de facto.
Petitioners themselves admitted that at the time of the donation, they
were not registered with the SEC, nor did they even attempt to
organize to comply with legal requirements.
Corporate existence begins only from the moment a certificate of
incorporation is issued. No such certificate was ever issued to
petitioners or their supposed predecessor-in-interest at the time of the
donation. Petitioners obviously could not have claimed succession to
an entity that never came to exist. Neither could the principle of
separate juridical personality apply since there was never any
corporation to speak of. And, as already stated, some of the
representatives of petitioner Seventh Day Adventist Conference
Church of Southern Philippines, Inc. were not even members of the
local church then, thus, they could not even claim that the donation
was particularly for them.
Atty: SPUM-SDA used the defense of de facto corpo and making the
donation is valid so that they will benefit from the donation because a
de facto corporation has a standing as a corporate entity.
The donation to the 1st donee was revoked on the ground that it had
no juridical personality which in this case was a collateral attack on its
existence because the issue in the case was revocation of the donation
and the issue on juridical personality was brought up here. This
cannot be done because you cannot attack the existence of a de
facto corporation collaterally.
A de facto corporation although has a standing, its status can be
attacked but only in an action thru a quo warranto proceeding and not
collaterally. A de jure corporation’s existence cannot be assailed
whether in a direct/indirect attack, a de jure corporation can hold its
existence even against the state. A quo warranto proceeding initiated
by the government through the OSG against a de jure corpo will not
prosper.
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This is related in this case because SPUM-SDA was not a de facto
corporation because the three requisites for a being a de facto
corporation were not met, namely:
(a) The existence of a valid law under which it may be
incorporated;
As long as you have the corporation code, or whatever law
was present at this time, which allows the existence of
corporations, then it is allowed.
(b) An attempt in good faith to incorporate; and
This entails registration with the SEC thru filing of articles of
incorporation and then the SEC must have issued the
certificate of incorporation meaning you have actually
registered as a corporation. The attempt in good faith to
incorporate in other words is not a mere trying to incorporate,
you must have actually been incorporated, the certificate of
incorporation must have been issued by the SEC.
(c) Assumption of corporate powers
In this case the 1st donee was not a de facto corporation because they
did not register and file the AOI so they are not de facto corporations
so their existence may be attacked indirectly, so valid and revocation
of the donation.
Even if a de facto corpo has a SEC certificate it is not de jure bec there
is an issue with the compliance on the requirements of the law. For de
jure there must be substantial compliance, with de jure there must be
colorable compliance.
Meaning it looks like you complied but in reality you have not, so even
if you were issued the certificate but there was a problem with your
compliance then de facto siya (examples from the book of Aquino: (1)
corporate name resembles that of an existing corporation (2)
ineligibility of one or more incorporators (3) one of the purposes is not
authorized by law)
If a corporation was issued a certificate, it can raise the defense that it
is a de jure corporation, now it’s up to the state to prove that you did
not substantially comply then it can actually terminate your existence,
but if the state will not be able to prove that you did not comply with
the requirements then you will be a de jure corporation.
Once the state finds that there was substantial noncompliance with the
requirements and it declares that you are non-existent then that means
that you were never a de jure corporation to begin with, so it does not
change your status, from the very beginning you are either de jure or
de facto.
If you were issued a certificate of incorporation, the assumption is you
are a valid corporation, does that mean that the state cannot file a quo
warranto case against your corporation?
Of course not, they can always file a case, you can even file against a
person who did not actually borrow money from you.
EH 404 | UNIVERSITY OF SAN CARLOS
But if during the case, it was proven that you substantially complied
them the quo warranto proceeding will not prosper so your
existence/status is affirmed.
If the state will now bring a quo warranto case and it was proven that
you did not substantially comply then it proves that you were never de
jure to begin with, you were just de facto.
So the bringing of the case does not change who you are in the 1st
place that is your status from the beginning. The de jure or de facto is
really just a matter of defending an attack against your corporate
existence, so a de jure corporation can defend against the state in a
quo warranto proceeding, a de facto cannot.
Amendment of Articles of Incorporation
Section 16. Amendment of Articles of Incorporation. - Unless
otherwise prescribed by this Code or by special law, and for
legitimate purposes, any provision or matter stated in the articles
of incorporation may be amended by a majority vote of the board
of directors or trustees and the vote or written assent of the
stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, without prejudice to the appraisal right of
dissenting stockholders in accordance with the provisions of this
Code, or the vote or written assent of at least two-thirds (2/3) of the
members if it be a non-stock corporation.
The original and amended articles together shall contain all
provisions required by law to be set out in the articles of
incorporation. Such articles, as amended shall be indicated by
underscoring the change or changes made, and a copy thereof
duly certified under oath by the corporate secretary and a majority
of the directors or trustees stating the fact that said amendment or
amendments have been duly approved by the required vote of the
stockholders or members, shall be submitted to the Securities and
Exchange Commission.
The amendments shall take effect upon their approval by the
Securities and Exchange Commission or from the date of filing with
the said Commission if not acted upon within six (6) months from
the date of filing for a cause not attributable to the corporation.
In the amendment of the AOI you need two approvals:
1. The approval of the majority of the board and
2. Approval of owners representing 2/3 of the outstanding
capital stock.
Take note the law says outstanding capital stock not
stockholders. So if A B C D E (example on the board), 2/3 must
not be based on the 5 but based on 25k such that if A B C D owns
1 and E owns 24,996 then E voting alone can get the amendment
passed. Count by shares and not by stockholders
When you amend your articles, all you need to do is underscore your
changes.
For example, you amended the number of directors so all you have to
do is underline it.
e.g. 7 directors
(as amended on *date approved by the stockholders)
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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
So you underline the change and place the date of amendment at
the end of the paragraph). If this is not present that means that it was
the original provision. The amendment takes effect upon approval of
the SEC, if they do not act on it within 6 months then the amendment
will be valid from the date of filing.
Section 17. Grounds when articles of incorporation or amendment
may be rejected or disapproved. - The Securities and Exchange
Commission may reject the articles of incorporation or disapprove
any amendment thereto if the same is not in compliance with the
requirements of this Code: Provided, That the Commission shall
give the incorporators a reasonable time within which to correct or
modify the objectionable portions of the articles or amendment.
The following are grounds for such rejection or disapproval:
1. That the articles of incorporation or any amendment thereto
is not substantially in accordance with the form prescribed
herein;
2. That the purpose or purposes of the corporation are patently
unconstitutional, illegal, immoral, or contrary to government
rules and regulations;
3. That the Treasurer's Affidavit concerning the amount of
capital stock subscribed and/or paid is false;
Note: Before, together with your Treasurer’s affidavit, the
SEC will also require you to bring a bank certificate showing
the cash but now it is not required, except if the money came
from abroad which in that case the bank certificate is still
required.
4. That the percentage of ownership of the capital stock to be
owned by citizens of the Philippines has not been complied
with as required by existing laws or the Constitution.
No articles of incorporation or amendment to articles of
incorporation of banks, banking and quasi-banking
institutions, building and loan associations, trust companies
and other financial intermediaries, insurance companies,
public utilities, educational institutions, and other
corporations governed by special laws shall be accepted or
approved by the Commission unless accompanied by a
favorable recommendation of the appropriate government
agency to the effect that such articles or amendment is in
accordance with law.
Atty: If you remember under the General Banking Law, you first apply
with the BSP for the Authority to Establish then you need to apply for
an Authority to Register and once you have this you go to the SEC and
apply for the certificate of incorporation. The SEC will not even accept
your application without the certificate or permit to register from the
BSP. So you need to have certification from the appropriate govt
agency. (e.g. DepEd, DENR, NPR etc.)
If the corporation’s activities are governed by other government
agencies, then the SEC will not even entertain your application unless
endorsed by that agency. Even PEZA, there was a dilemma a few
years back because the PEZA will not endorse unless you are
incorporated but SEC will not endorse without PEZA endorsement so
what happened was you file your draft articles with the PEZA and the
EH 404 | UNIVERSITY OF SAN CARLOS
PEZA will just make an endorsement that you have a pending
application which allows SEC to entertain your application.
Section 22. Effects on non-use of corporate charter and
continuous inoperation of a corporation. - If a corporation does not
formally organize and commence the transaction of its business or
the construction of its works within two (2) years from the date of
its incorporation, its corporate powers cease and the corporation
shall be deemed dissolved. However, if a corporation has
commenced the transaction of its business but subsequently
becomes continuously inoperative for a period of at least five (5)
years, the same shall be a ground for the suspension or revocation
of its corporate franchise or certificate of incorporation. (19a)
This provision shall not apply if the failure to organize, commence
the transaction of its businesses or the construction of its works, or
to continuously operate is due to causes beyond the control of the
corporation as may be determined by the Securities and Exchange
Commission.
Atty: This is not automatic, it still subject to notice and hearing because
it is just a ground for revocation, it doesn’t mean that automatically your
corporate franchise is revoked.
Adoption of By-Laws
What happens upon the issuance of certificate of incorporation from
the SEC?
The corporation commences to have corporate existence and within 2
years the corporation must formally organize and commence its
business, otherwise the corporation will be deemed dissolved.
What is covered by formal organization and commencement of
business? [Post-incorporation requirements]
1. Adoption of by-laws and filing of by-laws with the SEC if
there is still no by-laws,
2. Election of officers by the board,
3. Apply for business permits with the LGU,
4. Register with BIR,
5. Pay documentary stamp tax for the subscription,
6. Open office in the place stated in the AOI,
7. Hire employees,
8. Start transacting business.
 Pre-incorporation - Must be substantially complied with in order for
the SEC to approve the incorporation. If not complied with, then
there can be no valid incorporation.
 Post-incorporation - Does not go into the validity of the
incorporation. Regardless of non-compliance with the post-
incorporation requirements it will not affect the certificate of
incorporation. But non-compliance to certain post-incorporation
requirements may subject the corporation to penalties and even the
revocation or suspension of their license or certification of
incorporation.
BY-LAWS - By-laws are a set of internal set of rules for the
governance of a corporation
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Not being a legal requirement, It is more of a practical requirement.
It is necessary as it is set of rules and guidelines for the corporation
and its stockholders.
What should be in the by-laws?
1. Time and place and manner of conduct of regular and
special meeting of the board.
2. Quorum requirements provided it does not go below the
statutory requirement.
3. Stockholders meeting
4. Penalties for violation of by-laws
5. Manner of election of corporate officers
6. Qualification and duties and compensations of directors,
officers, and employees
7. Other matters which are necessary
What are the requisites for a valid by-law?
It must be consistent with the corporation code and other issuances,
and it must be approved by the board of directors and stockholders. It
should also be consistent with the articles of incorporation.
Two Ways of Adopting By-laws
1. Pre-incorporation
Corporation can adopt and file its by-laws with the SEC together with
the articles of incorporation. It requires the approval of all the
incorporators.
2. Post-incorporation
Corporation must adopt its by-laws and file it with the SEC within 1
month after receipt of official notice of the issuance of its certificate of
incorporation by the SEC.
There must be an affirmative vote of the stockholders representing at
least a majority of the outstanding capital stock, or of at least a majority
of the members, in the case of non-stock corporations.
The by-laws shall be signed by the stockholders or members voting for
them and shall be kept in the principal office of the corporation, subject
to the inspection of the stockholders or members during office hours;
and a copy thereof, duly certified to by a majority of the directors or
trustees and countersigned by the secretary of the corporation.
It shall be filed with the SEC which shall be attached to the original
AOI.
By-laws become effective upon the issuance of a certificate of
filing by-laws or certificate of amendment of by-laws by the SEC.
What happens if the corporation fails to adopt by-laws? Failure to
adopt by-laws does not automatically cause the revocation of the
certificate of incorporation or dissolution of the corporation.
Loyola Grand Villa Homeowners v. CA
Facts:
LGVHA was established in 1983, however, they were not able to
file their by-laws.
EH 404 | UNIVERSITY OF SAN CARLOS
In 1987, LGVHA tried to register its by-laws and they discovered
that there were two other associations, the North and South
Associations.
When Soliven (head of the South Assoc) inquired about the
status of LVHAI he found out that it had been dissolved for non-
submission of by-laws and non-user. This prompted him to cause
the registration of the South Association.
LGVHAI filed a complaint with Home Insurance and Guaranty
Corp questioning the revocation and prayed for cancellation of
the certificates of incorporations of the two other corporations.
Issue: WON LGVHAI’s COI was automatically revoked on the
ground of non-submission of its by-laws.
Held: NO. The automatic corporate dissolution is not the intention
of the law.
Under Sec. 46, the non-filing of the by-laws is merely a ground
for revocation – it does not result in automatic dissolution.
Why did the SC say that even if they said “must” in the provisions,
regarding the adoption of by-laws, it is not mandatory?
It was not considered mandatory because the SC because the
provision allows for post incorporation adoption. Meaning, that it
is not the only way to adopt by-laws.
Not should be taken of the second paragraph which allows for
filing of by-laws after the incorporation.
What was the basis of the SC in saying that the failure to adopt
by laws is not a ground for the automatic dissolution of a
corporation?
PD 902-A, which was issued with the corporation code, said that
among the powers of the SEC is the power to suspend and
revoke the certificate of incorporation, with notice and hearing, on
the grounds of failure to adopt bylaws among others.
It does not even provide for automatic dissolution but may even
be suspension.
Why is the by-law not a necessary document for the validity of a
corporation?
Adoption of the by-laws is a post incorporation requirement. It is
not a pre condition to the existence of the corporation.
What is the basis for the requirement that the by laws must be
consistent with the corporation code?
Sec 47. Subject to the provision of the constitution, and this code,
and special laws...
Sec 46 provides for the approval of the board of directors and
stockholders.
Section 46. Adoption of by-laws. - Every corporation formed under
this Code must, within one (1) month after receipt of official notice
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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
of the issuance of its certificate of incorporation by the Securities
and Exchange Commission, adopt a code of by-laws for its
government not inconsistent with this Code. For the adoption of by-
laws by the corporation the affirmative vote of the stockholders
representing at least a majority of the outstanding capital stock, or
of at least a majority of the members in case of non-stock
corporations, shall be necessary. The by-laws shall be signed by
the stockholders or members voting for them and shall be kept in
the principal office of the corporation, subject to the inspection of
the stockholders or members during office hours. A copy thereof,
duly certified to by a majority of the directors or trustees
countersigned by the secretary of the corporation, shall be filed with
the Securities and Exchange Commission which shall be attached
to the original articles of incorporation.
Notwithstanding the provisions of the preceding paragraph, by-
laws may be adopted and filed prior to incorporation; in such case,
such by-laws shall be approved and signed by all the incorporators
and submitted to the Securities and Exchange Commission,
together with the articles of incorporation.
In all cases, by-laws shall be effective only upon the issuance by
the Securities and Exchange Commission of a certification that the
by-laws are not inconsistent with this Code.
The Securities and Exchange Commission shall not accept for filing
the by-laws or any amendment thereto of any bank, banking
institution, building and loan association, trust company, insurance
company, public utility, educational institution or other special
corporations governed by special laws, unless accompanied by a
certificate of the appropriate government agency to the effect that
such by-laws or amendments are in accordance with law. (20a)
Section 47. Contents of by-laws. - Subject to the provisions of the
Constitution, this Code, other special laws, and the articles of
incorporation, a private corporation may provide in its by-laws for:
1. The time, place and manner of calling and conducting regular
or special meetings of the directors or trustees;
2. The time and manner of calling and conducting regular or
special meetings of the stockholders or members;
3. The required quorum in meetings of stockholders or members
and the manner of voting therein;
4. The form for proxies of stockholders and members and the
manner of voting them;
5. The qualifications, duties and compensation of directors or
trustees, officers and employees;
6. The time for holding the annual election of directors of
trustees and the mode or manner of giving notice thereof;
7. The manner of election or appointment and the term of office
of all officers other than directors or trustees;
8. The penalties for violation of the by-laws;
9. In the case of stock corporations, the manner of issuing stock
certificates; and
10. Such other matters as may be necessary for the proper or
convenient transaction of its corporate business and affairs.
For by-laws, under the law, you are given one (1) month to file the by-
laws after incorporation but the practice by the SEC is that they will not
even entertain your application if you do not file your by-laws together
with your articles so it has to be submitted together. The By-laws
contains basically the rules concerning the management of the
corporation. So it governs the relationship between the corporations
and the BOD and its stockholders and the stockholders and the
corporation. All the rules for the internal management of the
corporation is there. If the by-laws are silent then the matters stated in
EH 404 | UNIVERSITY OF SAN CARLOS
sec 47 will be that which is provided for by the law e.g. quorum-
requires presence of the majority of the outstanding capital stock but
the by-laws can provide for higher and that is what we call
supermajority. The By-laws can also provide for more officers than that
in the law.
Section 48. Amendments to by-laws. - The board of directors or
trustees, by a majority vote thereof, and the owners of at least a
majority of the outstanding capital stock, or at least a majority of the
members of a non-stock corporation, at a regular or special
meeting duly called for the purpose, may amend or repeal any by-
laws or adopt new by-laws. The owners of two-thirds (2/3) of the
outstanding capital stock or two-thirds (2/3) of the members in a
non-stock corporation may delegate to the board of directors or
trustees the power to amend or repeal any by-laws or adopt new
by-laws: Provided, That any power delegated to the board of
directors or trustees to amend or repeal any by-laws or adopt new
by-laws shall be considered as revoked whenever stockholders
owning or representing a majority of the outstanding capital stock
or a majority of the members in non-stock corporations, shall so
vote at a regular or special meeting.
Whenever any amendment or new by-laws are adopted, such
amendment or new by-laws shall be attached to the original by-
laws in the office of the corporation, and a copy thereof, duly
certified under oath by the corporate secretary and a majority of the
directors or trustees, shall be filed with the Securities and
Exchange Commission the same to be attached to the original
articles of incorporation and original by-laws.
The amended or new by-laws shall only be effective upon the
issuance by the Securities and Exchange Commission of a
certification that the same are not inconsistent with this Code.
Note: The vote that is required here is majority of the directors and
majority of the outstanding capital stock but the power to amend may
also be given solely to the directors by the vote of 2/3 of the
outstanding capital stock but this authority can be revoked by the
majority of the outstanding capital stock.
Grace Christian High School v CA
Facts:
From 1975 to 1989, Petitioner was recognized as a “PERMANENT
DIRECTOR” pursuant to a draft of an amendment of the by-laws which
provided “Grace Christian School is a permanent representative
in the board”.
The ASSOCIATION informed petitioner that they were re-examining
the right of the petitioner to continue as an unelected member of the
Board.
Issue: WON petitioner can continue as a permanent representative of
the board.
Held:
The petitioner cannot continue as a permanent unelected director. The
corporation code requires election. The draft was never presented for
approval.
Moreover, practice, no matter how long continued, cannot give rise to
any vested right if it is contrary to law.
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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
THE PROBLEM IN THIS CASE (As discussed)
First, the by-laws does not require that the representative of the
Petitioner (Grace Christian High School) be a homeowner.
The Grace Village Association, Inc. is an association consisting of
HOMEOWNERS as its members. In order to elect a trustee, he/she
must be a member. To be a member in this particular case, he/she
must be a homeowner.
In the case of the petitioner, since the by-laws do not provide for such
requirement, any person designated by the school can become
director of the Village Association.
This situation presents a problem where the Association will have a
director who is not a homeowner. THIS SHOULD NOT BE ALLOWED.
Second, there is no vested right in holding office of the director. The
law does not allow this.
In the first place, the by-law is not even valid because it was not
approved by the SEC. But even if it was approved by the SEC, it would
still not be valid because it is contrary to the provision of the
Corporation Code.
Between the provision of the Corporation Code and the provision of
the by-law, the Corporation Code will prevail.
Between the Articles of Incorporation versus the Corporation Code, the
latter shall still prevail.
China Banking Corporation v. CA, Valley Golf and Country
Club
Facts:
Calapatia, a stockholder of Valley Golf & County Club, Inc. (VGCCI)
entered into a pledge agreement with Chinabank and used his stock
certificate as security. Chinabank notified VGCCI regarding the pledge
agreement, in which VGCCI confirmed it in its books. Calapatia failed
in his obligation hence Chinabank informed VGCCI that it was
executing the foreclosure on the stock certificates. VGCCI then said
that it should not be done since Calapatia has delinquencies against
VGCCI, since under its by-laws, if their stockholders have delinquent
payments, VGCCI has the right to sell the stocks.
Chinabank still proceeded with the foreclosure, with it being the highest
bidder. On the other hand, VGCCI also sold Calapatia’s stock
certificate with other delinquent stock holders.
Being the owner of the stock certificate, Chinabank informed VGCCI
that it is the new owner, but VGCCI responded that it has sold the stock
certificated. SEC’s hearing officer said that VGCCI has the right to sell,
but SEC En Banc reversed the decision and said that the pledge must
be respected. CA reversed it, not being an intra-corporate dispute.
ISSUE: (1) WON petitioner is a stockholder of VGCCI.
(2) WON petitioner is bound by the provisions of the by-laws.
Held:
(1) Yes. The petitioner is a stockholder of VGCCI.
EH 404 | UNIVERSITY OF SAN CARLOS
The by-laws of respondent provided that the corporation may be
allowed to sell stocks of a stockholder by reason of their delinquency.
However, petitioner is not bound. The by-laws do not bind a third
person if he had no knowledge when the shares were pledged.
SC stated that knowledge contemplated under the law that by the time
Chinabank informed VGCCI of the pledge agreement, it should have
been the best time VGCCI could have informed Citibank of its by-laws
regarding delinquent stockholders. However, VGCCI did not do so,
and only informed Chinabank after the pledge agreement has been
perfected, and that it had plans to foreclose the property. This is not
sufficient knowledge.
On VGCCI’s contention that the transfer is not valid under Sec. 63
It’s not the correct argument, as Calapatia’s delinquency is not on the
subscription but on the membership dues. Sec. 63 only applies to
unpaid subscriptions.
If it was Sec. 63 applicable, would Chinabank’s contention that it had
no knowledge be upheld?
No. VGCCI would have won because Chinabank does not need to
know the law as everyone is presumed to know the law. The by-law
provision is not a law, only an internal provision between VGCCI and
its members
Cebu Mactan Members v. Tsukahara
Facts:
Cebu Mactan through its president contracted a loan with Masahiro
Tsukahara. There were post-dated checks as security for the loan.
These bounced when encashed by Tsukahara, and despite repeated
demands, the corporation and its president did not pay. Tsukahara
filed a case against the corporation and president.
Cebu Mactan contended that it is not liable as it was contracted in the
personal capacity of the president, and if it was contracted by the
corporation, it should have been accompanied by a resolution by the
board of directors, as the corporation acts through its board of
directors.
Ruling:
As a general rule, in order to bind third persons to a contract, a board
resolution is necessary. However, as an exception, when the by-laws
provide authority for the president or other officers to contract loan,
then it is valid.
In this case, the by-laws provide for the authority of the president to
borrow money. Hence, the corporation is bound by the contract.
The difference between Cebu Mactan case and Chinabank case is that
in Chinabank, third persons are not bound of the by-laws unless they
have knowledge by the corporation. In Cebu Mactan, the corporation
is bound by its own by-laws. The limitation being that the by-laws must
not be contrary to the constitution, Corporation Code, other laws, and
its own articles of incorporation.
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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law EH 404 | UNIVERSITY OF SAN CARLOS

Gokongwei, Jr. v SEC

Facts: What if you do not reach the 2/3 to delegate the power, you cannot
Gokongwei as stockholder of San Miguel, Inc., and a substantial amend the by-laws?
stockholder of Robina Corp. and CFC Corp. Gokongwei wanted to be You can still amend.
a director of SMI, but SMI amended its by-laws, it disqualified
stockholders who own conflicting interests with other corporations. It How?
was shown that Robina Corp. and CFC Corp., where Gokongwei was By Majority Vote
a substantial stockholder, were corporations in competition with SMI, Majority Vote of the Board of Directors AND majority vote of the
so Gokongwei was not allowed to run, so Gokongwei filed for the stockholders representing the outstanding capital stock (subscribed
cancellation of amendment. capital stock less treasury shares) is required.

Issue ILLUSTRATION:
Whether the amended by-laws of SMI was valid. For the BOD:
If there are 15 BOD, then 8, which is the majority of the 15 members,
Ruling must vote for the amendment. The vote of the BOD is regardless of
Corporations through its board of directors may amend its by-laws. The the number of shares owned by each of the members of the BOD.
amendment of its by-laws was consonant to its self-preservation rights.
To let Gokongwei be the director of SMI is an invitation for him to know For the Stockholders:
significant matters involving SMI, and would be disadvantageous for You consider the number of shares owned and not the number of
SMI. persons.

On the power of corporation to provide for qualifications/ How do we determine the majority?
disqualifications of board of directors in its by-laws. 50 plus 1, not 51%. 50 plus 1 is different from 51%.

It is allowed, as long as the by-laws are reasonable and not arbitrary. Do we consider the number of stockholders?
No. It is the number of shares.
One of the requirements of a valid by law is that the provisions thereof
must be reasonable and not arbitrary. In this case the SC said that as What particular type of shares?
long as the qualifications and disqualifications are reasonable, then it The Outstanding Capital Stock.
is a valid provision in the by law.
EXAMPLE:
How do you determine reasonableness? Given:
SC said that, as long as it applies equally to all, it is reasonable. For Authorized Capital Stock (ACS) 100k
as long as it is not specifically targeted to exclude one person. Which Subscribed Capital Stock (SCS) 70k (50k voting
is the case here. It was not specific. It was any person who has major 20k non-voting)
interest in a business that directly competes with that of San Miguel. Paid-up Capital Stock (PCS) 60k
Those are the disqualified director. Treasury shares 5k

The equal protection clause only requires that the by law apply equally The required vote is the Outstanding Capital Stock which is the
upon all persons of a class. SC also said that the application should Subscribed Capital Stock less the treasury shares which is equal to
not be automatic but there should be due process. There must be 65k. The required vote is majority of the 65k or 32,500 shares plus
hearing and presentation of evidence on whether or not there is actual 1 (32,501).
competition.
SCS 70 000
Treasury shares 5 000
Amendment of By-Laws OCS 65 000
Two ways:
1. BY DELEGATION: Majority of the board of directors. (The Required vote
2/3 refers to the delegation of this power to the board) 65 000 shares + 1 = 32 501 shares (majority of 65 000)
2. Majority vote of the BOD and the owners of at least a 2
majority of the outstanding capital stock.
Does it matter if it is voting or non-voting?
By Delegation No., because under Section 6 of the Corporation Code, even non-
What needs to happen first? voting shares are required to vote in the amendment of the by-laws.

There must first be a delegation of power to amend the by-laws to the If the number of shares are held by one person, the vote of that one
board by 2/3 of the outstanding capital stock. Once there is delegation, person is sufficient to adopt or amend the by-laws. If the other 32, 499
a meeting will be called for that purpose. Wherein the BOB/BOT will shares are held by 32,499 persons, they still could not get the required
vote by a majority vote.

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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
approval. Because for stockholders voting, you don’t count by person,
you count by shares of stock. As a rule, it is one stock one vote.
Board of Directors
QUALIFICATIONS TO BE ELECTED AS DIRECTOR OR TRUSTEE
OF A CORPORATION (Section 23)
1. Every director must own at least one share of the capital stock;
said share must be registered in his name on the books of the
corporation
- The ownership required is legal title/ownership, not
necessarily beneficial ownership
Which means that all that is required is that the share must
be registered in the director’s name; so it doesn’t matter
whether the director has the right to the financial benefits or
dividends, etc.
Take note: you can have legal ownership without beneficial
ownership
Example:
I want to incorporate, but I cannot do it alone so I will gather
the minimum required number of directors then assign to
them the minimum number of shares required. Then I can
make them sign a Declaration of Trust. In that Declaration of
Trust, I will say that the shares are in their name only for the
purpose of being elected as directors and the right to vote
the shares and to the dividends belong to me. That is legal.
- The “books” referred to is the stock and transfer book
2. Majority of the directors should be resident of the Philippines.
- Note: Majority, not all
- There is NO citizenship requirement
 Except: Nationalized industries
Even foreigners can be voted as directors
DISQUALIFICATIONS (Section 27)
1. A person convicted by final judgment of an offense punishable by
imprisonment for a period exceeding 6 years
2. A person who has committed a violation of the Corporation Code,
committed within 5 years prior to the date of his election or
appointment as director or trustee.
ELECTION OF DIRECTORS (Section 24)
1. There must be a meeting where there is a quorum
- This means that there must be present the owners of the
majority of the outstanding capital stock of the corporation
- Majority is 50% plus 1
- Note: there is no quorum, the meeting is NOT valid
2. There will now be voting
How voting is made:
- The manner of voting is CUMULATIVE VOTING
EH 404 | UNIVERSITY OF SAN CARLOS
Example:
I own 100 shares. There are 5 seats needed to be filled. There are 7
nominees (A, B, C ,D, E, F, G).
I am allowed 500 votes. Cumulative. In this case, it is not 1 share = 1
vote. 1 share is allowed more than 1 vote.
Point: You can allocate your vote anyway you want. You can give each
nominee equal share, or give some nominee more shares than the
other, you can give one nominee all your votes, whichever way you
want!
The only LIMITATION is it should not exceed the number of seats
multiplied by the number of shares.
- Those who can vote are those with voting shares.
3. You then report what transpired in the elections through the filing
of the GENERAL INFORMATION SHEET.
Question:
Can the company not opt to use cumulative in its by-laws?
If you remember the contents of the by-laws, there are two items
mentioned there:
SECTION 47. Contents of By-Laws. —
[…]
6. The time for holding the annual election of directors or
trustees and the mode or manner of giving notice thereof;
7. The manner of election or appointment and the term of
office of all officers other than directors or trustees;
[…]
The manner of election is not subject to the discretion of the
corporation. The manner of voting for the directors cannot be
something that is subject to the provisions of the by-laws.
It is always subject under the requirement of the Corporation Code that
it should be the number of seats to be elected multiplied by the number
of shares you hold. You cannot provide in your by-laws a different
manner of voting.
Once we have the directors elected, what roles will the directors play
in the corporation? What are the authorities granted to the board under
the Corporation Code?
Under the Corporation Code, the board of directors exercises the
corporate powers. This includes conducting all the business and
control and hold the corporate properties. Basically they take care of
the management of the corporation.
The board acts or enters into transactions through the issuance of a
resolution.
For directors to approve the transactions that the corporation enters
into, they need to have a meeting as a board. The directors need to
act as a board. They cannot act individually. There has to be a
quorum.
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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
What is a quorum?
Sec. 25 .. x x x 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
of incorporation shall constitute a quorum for the
transaction of corporate business . x x x
How do you determine the correct quorum if the Articles of
Incorporation and By-laws are silent?
The quorum is based on the number of directors indicated in the
articles, not the actual number of directors.
Example:
If your articles provide for 15 directors but you have 9 directors present.
The quorum is still based on the 15, not on the 9 present. So in this
case, the quorum is 8 directors. Once you have at least 8 directors you
can now validly transact business.
What is the required approval for transacting business?
If there are 15 directors, 8 directors are needed in order to hold a valid
meeting. If 12 directors show up, there is a quorum and the board can
now validly transact business and make approvals. If 5 resolutions are
presented, how many votes are needed for each resolution to pass?
In order to approve of resolutions, a majority vote based on the
directors present in the board meeting is needed.
Sec. 25 … x x x every decision of at least a majority of the
directors or trustees present at a meeting at which there
is a quorum shall be valid as a corporate act.. x x x
For the actual voting for the approval of a transaction, it is based
on the number of directors present.
Summary of Voting and Approval of the Board of Resolutions:
First, you have to take a look at is whether there is a valid meeting.
A quorum is what makes a valid meeting. A quorum is majority of the
directors fixed in the Articles of Incorporation. For the actual voting for
the approval of certain transactions to be a valid approval, it must be
based on majority of the directors present during the meeting.
What if the actual number of directors cannot constitute a quorum, is
there a need to hold an election in order to fill the vacancy? Yes.
The transaction has been voted on by the majority of the directors
present and approved. However, it turns out to be a bad decision. The
company lost money. What is the liability of the directors?
The directors do not have any liability for as long as they have acted
in good faith. Under the Business Judgment Rule, whatever the board
of directors decide as long as it is done in good faith, they cannot be
held liable.
EH 404 | UNIVERSITY OF SAN CARLOS
Can’t the stockholders question the validity of the transactions and say
that the directors made a bad decision? Or can the stockholders
compel the courts to revise the terms entered into by the directors?
Business Judgment Rule - the directors in the performance of their
duties cannot be held liable. The Courts cannot suspend or substitute
their judgment to the judgment of the directors.
Even the stockholders cannot say that “This contract is wrong and
should be invalid” just because the directors chose wrongly, the
stockholders do not have that kind of authority. For as long as the
directors act in good faith, all transactions entered into by the directors
are binding and they cannot be held liable for it.
EXCEPTION TO THE BUSINESS JUDGMENT RULE (1st par. of
Sec. 31)
1. Willfully and knowingly assent to patently unlawful acts
2. Guilty of gross negligence or bad faith in directing the affairs of
the corporation
3. Acquires any personal or pecuniary interest in conflict with their
duty (conflict of interest)
SECTION 31. Liability of Directors, Trustees or Officers . —
Directors or trustees who willfully and knowingly vote for
or assent to patently unlawful acts of the corporation or
who are guilty of gross negligence or bad faith in
directing the affairs of the corporation or acquire any
personal or pecuniary interest in conflict with their duty
.. x x x
If a director goes for a patently unlawful act, or when he is guilty of bad
faith or negligence, or when he is guilty of conflict of interest, is it the
same obligation that he would have if he acquires an interest adverse
to that of the corporation?
For patently unlawful acts or guilt of bad faith or negligence or conflict
of interest, the liability of the director is joint and several or solidary to
the corporation, its stockholders or members or other persons.
SEC. 31 x x x .. as such directors, or trustees shall be liable
jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members
and other persons… x x x
In which case, the director is solidarily liable for any damage caused
not just to the corporation but as well as to stockholders and third
persons.
DOCTRINE OF CORPORATE OPPORTUNITY
`Section 31. Liability of directors, trustees or officers.
[…]
When a director, trustee or officer attempts to acquire or
acquires, in violation of his duty, any interest averse to the
corporation in respect of any matter which has been reposed
in him in confidence, as to which equity imposes a disability
upon him to deal in his own behalf, he shall be liable as a
trustee for the corporation and must account for the profits
which otherwise would have accrued to the corporation.
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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
Section 34. Disloyalty of a director. - Where a director, by
virtue of his office, acquires for himself a business
opportunity which should belong to the corporation, thereby
obtaining profits to the prejudice of such corporation, he
must account to the latter for all such profits by refunding the
same, unless his act has been ratified by a vote of the
stockholders owning or representing at least two-thirds (2/3)
of the outstanding capital stock. This provision shall be
applicable, notwithstanding the fact that the director risked
his own funds in the venture.
The things that you need to look at when there is a violation of
the doctrine:
(1) WON the transaction in line with the business of the corporation;
(2) WON the corporation has the capacity to enter into that transaction
but the director takes the opportunity for himself.
That violates the doctrine it doesn’t matter if it’s a competing
corporation, if there is a transaction supposed to be for the corporation
but taking it for yourself violates this.
Example:
(1) The corporation owns land somewhere in the province, a person
goes to the corporation through the director and says we wants
to buy land in the province and he is willing to buy, but instead the
director says that he has his own land and sells it to the person
for 100k.
If the corporation is engaged in buying and selling land then this
is in line with its business, and the corporation has the capacity
because it has land in the area, but instead of selling the
corporation’s land the director sells his own land and so he took
the opportunity for himself and profited from it.
So you have a potential contract that a corporation can validly
enter into where it is in line with its purpose and has the capacity
to enter into it but rather than giving the opportunity to the
corporation, you take it for yourself.
If the director does this then he is liable under sec 34 so he must
account to the latter for all such profits by refunding the same,
unless his act has been ratified by a vote of the stockholders
owning or representing at least two-thirds (2/3) of the outstanding
capital stock.
(2) The corporation is looking for land, and the director knows
somebody who is selling land in the area, so the director goes
there, the director knows that the corporation is willing to buy land
in that area for Php15k/sqm but then the director says to the seller
that ‘hey I’ll buy your land for Php10k/sqm.
Again, this violates the doctrine. Instead of saving the corporation
Php5k/sq.m, the corpo now has lower profits. Again you have to
account for the profits back to the corpo. So it’s really not a matter
of investing funds.
What’s the difference between Sec. 34 and Sec. 31 p.2?
EH 404 | UNIVERSITY OF SAN CARLOS
Section 31 p.2 is another mode of doctrine of corporate opportunity.
Sec 34 is more general, under sec 31 p2, you have been reposed with
the duty to undertake the transaction but rather than giving that
transaction to the corporation you acquired interest averse to the
corporation. It is more specific.
Example:
In the second example, if you have been tasked to look for the land,
but instead of having the corporation buy directly, you buy it first and
you sell it for a higher price, then that falls under sec 31 p2.
But if in general you were not assigned but you know the corporation
is looking for land and you were the one who bought, Sec. 34 applies.
SALIENT AMENDMENTS IN THE
CORPORATION CODE
The following are few points emphasized and compared with the
revised corporation code as opposed to old corporation code.
Caveat: Better read the full codal provisions.
SEC. 10. Number and Qualifications of Incorporators -
Incorporators are not limited to natural person only, partnership,
association or corporation, singly or jointly with others and other
juridical entities may now form a corporation are now allowed to be
incorporators
Juridical entities are now allowed as incorporators, no minimum
number required to be incorporators, requirement of ownership of 1
stock is still there.
SEC. 7. Founders’ Shares. – Founders’ shares may be given
certain rights and privileges not enjoyed by the owners of other
stocks. Where the exclusive right to vote and be voted for in the
election of directors is granted, it must be for a limited period not to
exceed five (5) years from the date of incorporation: Provided, That
such exclusive right shall not be allowed if its exercise will violate
Commonwealth Act No. 108, otherwise known as the “Anti-Dummy
Law”; Republic Act No. 7042, otherwise known as the “Foreign
Investments Act of 1991”; and other pertinent laws.
Changes in founder’s share expressly provided that exclusive right to
vote and be voted on founders share in the election of directors should
not violate the Anti-Dummy Law and FIA.
Anti dummy law – persons not allowed to have interest in nationalized
corporation, they just nominate Filipino citizen to be legal stockholders
but in reality they are the one controlling, a violation of Anti-Dummy
Law, a criminal offense.
Foreign Investment Act, including FINL- Foreign Investment Negative
List – restrictions, as between Founder’s share or Anti-Dummy Law or
FIA, FIA and Anti-Dummy Law will prevail
SEC. 11 Corporate Term - A corporation shall have perpetual
existence unless its articles of incorporation provides otherwise.
Perpetual existence and automatic for existing corp unless elect
otherwise
Applies even to existing corporation.
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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
For those corporation elect a definite term and have expired, old law
automatically dissolve and cannot revive and must incorporate another
corporation, but revised corporation code, expiration of corporate term
does not result in automatic dissolution of the corporation because
corporation can still be revive. Just apply for revival and the personality
of corporation as if it was never dissolve, same rights and obligation,
properties, asset and liabilities
SEC. 12. Minimum Capital Stock Not Required of Stock
Corporations - No more minimum subscribe or paid up capital
stock as opposed to old corporation code which has a minimum
authorized capital stock.
There is no longer a minimum capital at all, whether authorized,
subscribed or paid up.
Deletion of Section 13 in the Old code
Section 13. Amount of capital stock to be subscribed and paid
for the purposes of incorporation.
Requirement of 25-25% was deleted
This is now the new section 13 of the revised corporation code.
Section 13. Contents of the Articles of Incorporation
 It is the same except that the number of incorporators are not
subject to minimum number requirement anymore.
 Provision that if stockholderrs want, there can be arbitration
agreement in articles of incorporation.
 Deleted the treasurers affidavit because supposed affidavit of 25-
25%, now its incorporated in the body that the total paid
subscriptions and have the treasure signed on the articles,
 Not only incorporators are signing the articles, treasurer is also
required
SEC. 17. Corporate Name - No corporate name shall be allowed
by the Commission if it is not distinguishable from that already
reserved or registered for the use of another corporation, or if such
name is already protected by law, or when its use is contrary to
existing law, rules and regulations.
A name is not distinguishable even if it contains one or more of the
following:
(a) The word “corporation”, “company”, “incorporated”, “limited”,
“limited liability”, or an abbreviation of one of such words; and
(b) Punctuations, articles, conjunctions, contractions, prepositions,
abbreviations, different tenses, spacing, or number of the same
word or phrase.
[…]
If the corporation fails to comply with the Commission’s order, the
Commission may hold the corporation and its responsible directors or
officers in contempt and/or hold them administratively, civilly and/or
criminally liable under this Code and other applicable laws and/or
revoke the registration of the corporation.
Example:
EH 404 | UNIVERSITY OF SAN CARLOS
You copy existing or protected and just add corporation in the end of
the name, still not distinguishable, still not allowed to be registered.
SEC now has the power to hold corporations or its directors in
contempt for failure to comply with an order not to use the name, when
it does not comply with an order to change the name.
SEC. 18. Registration, Incorporation and Commencement of
Corporate Existence
This includes the outline for the process of incorporating. It is not in the
old law but is already in practice.
SEC. 21. Effects of Non-Use of Corporate Charter and
Continuous Inoperation
From non-use of two (2) years as provided in the old code, it is now
five (5) years.
In this case certificate of incorporation deemed revoked as the end of
the following 5 year period, but if corporation has already started
operation and then it stop for a period of at least 5 years, is not
anymore a ground for revocation, now just a ground for placing
corporation in delinquent status. And such delinquent corporation has
a period of 2 year to resume operation, if it fails to resume in 2 years,
SEC may now revoked the certificate of incorporation.
SEC. 22. The Board of Directors or Trustees of a Corporation;
Qualification and Term.
[…]
The board of the following corporations vested with public interest
shall have independent directors constituting at least twenty
percent (20%) of such board:
(a) Corporations covered by Section 17.2 of Republic Act No. 8799,
otherwise known as “The Securities Regulation Code”,
[…]
Strengthening corporate governance usual requirement is existence of
independent directors, not really new in the revised corporation code
these are already required under other special laws, 20% of their board
as independent directors.
SEC. 45. Adoption of Bylaws
Filing of Bylaws within 1 month period was deleted, now consistent
with the jurisprudence, that bylaws is not necessary for the existence
of corporation.
SEC. 49. Regular and Special Meetings of Stockholders or
Members
[…]
The right to vote of stockholders or members may be exercised in
person, through a proxy, or when so authorized in the bylaws,
through remote communication or in absentia.
[…]
Under the revised code, attendance in a meeting by remote
communication are now allowed for stockholders, before stockholders
are required to attend in person or by proxy not by video or telephone
conference. Under the old code BOD were already allowed by SEC
rules.
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A.Y. 2018-2019 (Second Semester)
Election of Directors
SEC. 23. Election of Directors or Trustees - At all elections of
directors or trustees, there must be present, either in person or
through a representative authorized to act by written proxy, the
owners of majority of the outstanding capital stock, or if there be no
capital stock, a majority of the members entitled to vote.
When so authorized in the bylaws or by a majority of the board of
directors, the stockholders or members may also vote through
remote communication or in absentia: Provided, That the right
to vote through such modes may be exercised in corporations
vested with public interest, notwithstanding the absence of a
provision in the bylaws of such corporations.
Who nominates?
Each stockholder or member shall have the right to nominate any
director or trustee who possesses all of the qualifications and none of
the disqualifications set forth in this Code, except when the exclusive
right is reserved for holders of founders’ shares under Section 7 of this
Code
A stockholder or member who participates through remote
communication or in absentia, shall be deemed present for purposes
of quorum.
What are the disqualifications?
SEC. 26. Disqualification of Directors, Trustees or Officers. –
A person shall be disqualified from being a director, trustee or
officer of any corporation if, within five (5) years prior to the election
or appointment as such, the person was:
(a) Convicted by final judgment:
(1) Of an offense punishable by imprisonment for a period
exceeding six (6) years;
(2) For violating this Code; and
(3) For violating Republic Act No. 8799, otherwise known as
“The Securities Regulation Code”;
(b) Found administratively liable for any offense involving
fraudulent acts; and
(c) By a foreign court or equivalent foreign regulatory authority for
acts, violations or misconduct similar to those enumerated in
paragraphs (a) and (b) above.
The foregoing is without prejudice to qualifications or other
disqualifications, which the Commission, the primary regulatory
agency, or the Philippine Competition Commission may impose in its
promotion of good corporate governance or as a sanction in its
administrative proceedings.
Atty Gaviola: The Revised Corporation Code now expressly provides
that stockholders have the nominate persons holding at least one
share of stock to be elected as a member of the Board of Directors,
provided that the person nominated has the qualification which is the
“stockholdership”, and none of the disqualifications.
How is the voting done?
By ballot, if expressly requested by one of the stockholders.
How many shares or how many votes can a stockholder cast?
Atty. Gaviola | Corporation Law EH 404 | UNIVERSITY OF SAN CARLOS
Under the Revised Corporation Code, a shareholder is entitled to an
amount of votes equal to his number of shares multiplied by the
number of seats to be elected.
How does a stockholder distribute his/her votes?
There are three manners:
1. Cumulatively or giving all of his votes to one nominee
2. Proportionately divide his votes to the number of vacant seats
3. Give his vote to 2 or more directors, depending on his choice or
as to who he sees fit
Atty Gaviola: So, he can allocate to as many persons as he sees fit.
But, of course, it’s not logical to allocate it to more than the number of
the vacancies or seats to be filled. You cannot get a director elected
that way.
What happens after the election?
After the election of the directors, the corporate secretary is required
to submit a General Information Sheet to the Securities and Exchange
Commission (SEC).
What would be contained in the General Information Sheet?
Names, nationalities, shareholdings, and residence addresses of the
elected directors
Atty Gaviola: The Corporate Secretary would have to file a report to
the SEC on the election of the directors. It has to be filed within 30
days from the time of the conduct of the election.
What happens if no election is held?
Report to the SEC the reason behind the failure of the election within
30 days. State the schedule of the date of the next election which
should not be more than 60 days from the date of the election that was
not held.
Atty Gaviola: This is new, not found in the old Corporation Code. You
are now required to submit a report on non-holding of election. A few
years ago, the SEC was requiring this report through its rule-making
power, but so many people complained about it, they stopped. So,
there was a time (around 2008 onwards), it was no longer required to
submit the report on non-holding of election. Now that it’s back and it’s
under the law, the SEC id now again requiring the report on the non-
holding of elections.
What happens if the corporation continues to not hold the election?
Upon application of a stockholder, member, director, or trustee, and
after verification of the unjustified non-holding of the election, the SEC
can summarily order that an election be held. The SEC has the power
to issue such orders as may be appropriate, including directing the
issuance of a notice stating the time and place of the election,
designating a presiding officer, and the record date or dates for the
determination of stockholders or members entitled to vote.
What is the Business Judgment Rule?
It presupposes the existence of a Board of Directors or Trustees such
that when the stockholders elected the Board of Directors or Trustees,
it is the law that grants them the authority to act. Any decision made
by the Board of Directors or Trustees, the stockholders cannot review
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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
it except for the exceptions provided by law. The law accords the Board
of Directors or Trustees the specific power to act on behalf of the
corporation.
Atty Gaviola: The Board of Directors has been granted the power to
exercise all the corporate powers of the corporation, to conduct all the
business, and to control the corporate properties. So, whatever the
decision or judgment of the BOD no person, not even the stockholders,
not even the courts, can question and substitute their judgment for that
of the BOD. The BOD is insulated from any liability or damages that
may arise out of their decision. This is the general rule of the business
judgment rule.
In those three instances, what’s the liability of the director?
Civil liability. Solidarily liable with the corporation for damages caused
to the corporation, the stockholders, or any other person.
General Rule: Directors are not liable for any losses or damages their
decisions may cause the corporation or any third persons.
Exceptions (Sec. 30, Revised Corporation Code):
1. If they vote for or assent to patently unlawful acts
2. They are guilty of bad faith or gross negligence in managing the
operations of the corporation
3. They acquire personal or pecuniary interest in conflict with their
duty as such director or trustee
Magaling vs. Ong
This is with respect to a Termo Lending corporation. Ong was allegedly
persuaded by Spouses Magaling with respect to investing in the
thermo-lending corporation by virtue of the represented by Spouses
Magaling. Ong invested in the corporation only to know that there were
no return of investments with respect to the investments made by Ong.
Ong had a cause of action with respect to demanding the amount he
invested to the thermo-lending corporation and imputing liability to
Spouses Magaling. The only question in this case is whether there was
gross negligence on the part of Spouses Magaling.
During the cross-examination, it was found out by the court that despite
being the president of various lending corporations, Magaling:
(1) when asked if he knows personal names of the directors of these
corporations, he answered in the negative
(2) when asked if he knew of the outstanding balances of the
corporatons, he answered in the negative and said he did not
know
(3) when asked whether he had any financial statements of thermo-
lending corporation, he answered in the negative
When asked what is his role as the president of the Termo Lending
corporation, Magaling said that it is the manager who is acting on
behalf of the actions committed by the thermo-lending corporation.
The SC said that Magaling in this case is liable because he acted in
gross negligence which is characterized by the want of even the
slightest care, acting or omitting to act in a situation where there is a
duty to act, not inadvertently but willfully with a conscious disregard to
the consequences insofar as other persons are concerned.
EH 404 | UNIVERSITY OF SAN CARLOS
The SC said we cannot simply hold the Termo Lending corporation
liable because the case falls under the second exception to the
Business Judgment Rule which is acting in bad faith or gross
negligence amounting to bad faith. Magaling is solidarily liable with
Termo Lending corporation in paying Ong for the investment made.
Atty Gaviola: So Magaling was made responsible for the loan paid by
Ong — solidarily liable with the corporation — on the ground of
negligence in directing the affairs of the corporation. So, this is an
instance of one of the grounds under Section 30 where a director may
be held liable.
The SC said that when it reviewed the trial transcripts, his answers
appeared to be “I don’t know” or “I don’t remember,” so it connotes an
attitude of nonchalance or indifference. So, he simply did not care
about the operations of the corporation. That is considered as being
grossly negligent, and Magaling was held solidarily liable with the
corporation.
James Ient and Maharlika Schulze vs Tullet Prebon
Philippines G.R. No.189158 Jan. 11, 2017
Facts:
Tullet Prebon and the company of Ient and Schulze Tradition
Philippines are competitors in the deal breaking business. At some
point in time several Tullet deal brokers resigned and went to work with
Tradition Philippines. Tullet filed a complaint against Tradition for
sabotaging their business by taking their deal breakers. Tullet wanted
Tradition to be criminally liable under Sections 31, 34 and 144 of the
Corporation Code
Issue:
Whether or not Ient and Schulze could be criminally liable. (The
aggrieved corporation wasn’t satisfied with civil liability—hence, it’s
insistence for criminal liability.)
Ruling:
No, Ient and Schulze could not be criminally liable because the
Corporation Code is not a penal statute. The penalties suggested in
the code are only administrative, which is
How does the revised corporation code affect the ruling of this
case?
Section 144 is now under Section 170.(The catch-all provision for all
violations of the Code)
No criminal liability anymore, only civil penalty of an increased fine—
apply said section only if the violation is not penalized anywhere else
in the Code.
Section 31 and 34 penalizes the violations in said provisions to which
Section 170 is inapplicable.
Can directors delegate their powers:
Yes. Through the Board of Directors of Executive Committees or Board
of Directors of Special Committees.
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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
Filipinas Port v. Go (2007)
Lessons Applicable: Rationale for "Centralized Management"
Doctrine
FACTS:
Sept 4 1992: Eliodoro C. Cruz, Filport’s president from 1968-1991,
wrote a letter to the corporation’s BOD questioning the creation and
election of the following positions with a monthly remuneration of
P13,050.00 each. Cruz requested the board to take necessary
action/actions to recover from those elected to the aforementioned
positions the salaries they have received.
Jun 4 1993: Cruz, purportedly in representation of Filport and its
stockholders, among which is herein co-petitioner Mindanao Terminal
and Brokerage Services, Inc. (Minterbro), filed with the SEC a
derivative suit against Filport's BOD for acts of mismanagement
detrimental to the interest of the corporation and its shareholders at
large.
Cruz prayed that the BOD be made to pay Filport, jointly and severally,
the sums of money variedly representing the damages incurred as a
result of the creation of the offices/positions complained of and the
aggregate amount of the questioned increased salaries.
RTC: BOD have the power to create positions not in the by-laws and
can increase salaries. But Edgar C. Trinidad under the third and fourth
causes of action to restore to the corporation the total amount of
salaries he received as assistant vice president for corporate planning;
and likewise ordering Fortunato V. de Castro and Arsenio Lopez Chua
under the fourth cause of action to restore to the corporation the
salaries they each received as special assistants respectively to the
president and board chairman. In case of insolvency of any or all of
them, the members of the board who created their positions are
subsidiarily liable.
Appealed: creation of the positions merely for accommodation
purposes - GRANTED
ISSUES:
(1) W/N there was mismanagement – NO
(2) W/N there is a proper derivative suit - YES
HELD: CA Affirmed
(1) NO
Section 35 of the Corporation Code, the creation of an executive
committee (as powerful as the BOD) must be provided for in the bylaws
of the corporation.
Notwithstanding the silence of Filport’s bylaws on the matter, we
cannot rule that the creation of the executive committee by the board
of directors is illegal or unlawful. One reason is the absence of a
showing as to the true nature and functions of executive committee.
But even assuming there was mismanagement resulting to corporate
damages and/or business losses, respondents may not be held liable
in the absence of a showing of bad faith in doing the acts complained
of. ("dishonest purpose","some moral obliquity","conscious doing of a
EH 404 | UNIVERSITY OF SAN CARLOS
wrong", "partakes of the nature of fraud") determination of the
necessity for additional offices and/or positions in a corporation is a
management prerogative which courts are not wont to review in the
absence of any proof that such prerogative was exercised in bad faith
or with malice.
(2) YES
Besides, the requisites before a derivative suit can be filed by a
stockholder: - present
The party bringing suit should be a shareholder as of the time of the
act or transaction complained of, the number of his shares not being
material - a stockholder of Filport.
He has tried to exhaust intra-corporate remedies, i.e., has made a
demand on the board of directors for the appropriate relief but the latter
has failed or refused to heed his plea; and he wrote a letter.
The cause of action actually devolves on the corporation, the
wrongdoing or harm having been, or being caused to the corporation
and not to the particular stockholder bringing the suit. - wrong against
the stockholders of the corporation generally
Filport Inc vs Go: Executive committees can only be created through
by laws; however, the board of directors may create it. The court did
not rule that the creation of the executive committee by the board of
directors is illegal or unlawful because: In relation to Section 34 of the
Amended Code:
1. One reason is the absence of a showing as to the true nature
and functions of said executive committee.
2. The Board of Directors has the power to create positions not
provided for in the bylaws since the board is the corporations
governing body, clearly upholding the power of its board to
exercise its prerogatives in managing the business affairs of
the corporation.
Executive Committee: must be provided for in the bylaws if it is
as powerful as the board of directors and in effect acting for the
board itself. Otherwise, no need to be included in the bylaws.
Relevant Section:
Section. 34. Executive, Management, and Other Special
Committees. – by-laws so provide, the board may create an
executive committee composed of at least three (3) directors. Said
committee may act, by majority vote of all its members, on such
specific matters within the competence of the board, as may be
delegated to it in the bylaws or by majority vote of the board, except
with respect to the: (a) approval of any action for which
shareholders’ approval is also required; (b) filling of vacancies in
the board; (c) amendment or repeal ofbylaws or the adoption of
new bylaws; (d) amendment or repeal of any resolution of the board
which by its express terms is not amendable or repealable; and (e)
distribution of cash dividends to the shareholders. The board of
directors may create special committees of temporary or
permanent nature and determine the members’ term, composition,
compensation, powers, and responsibilities (as long as the
committee does not exercise the powers on the first paragraph
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GR: The Board of Directors has the power to create temporary or
permanent special committees, provided that such committees do
NOT have the powers and functions of the board of directors.
Otherwise, it must be provided for in the by laws. This was the doctrine
held in Filipinas Port Services v Go and is now in Sec. 34 ( Sec. 35).
How do you reconcile the requisite in the law to have an executive
committee, first paragraph (sec. 35, now 34), and the Fil Port Case
where the court said that the “executive committee” is valid even if it
wasn’t stipulated in the by laws?
In the FilPort case, although the committee was named “executive
committee”, it did NOT exercise the powers and functions of the Board
of Directors. It did not exercise the competencies of the board. Thus,
it is not the “executive committee” which is contemplated in Sec. 35
(Now 34) of the Corporation Code.
In FilPort, it was not shown that the executive committee had the
functions of the board nor did it show that the board delegated
functions to it. Regardless of the name it possessed, what is important
is the functions that the committee has.
The board has the right to establish special committees even if it is not
in the by laws.
Self-Dealing Directors
SECTION 31. Dealings of Directors, Trustees or Officers with the
Corporation. — A contract of the corporation with one (1) or more
of its directors, trustees, officers or their spouses and relatives
within the fourth civil degree of consanguinity or affinity is voidable,
at the option of such corporation, unless all the following conditions
are present:
a. The presence of such director or trustee in the board
meeting in which the contract was approved was not
necessary to constitute a quorum for such meeting;
b. The vote of such director or trustee was not necessary
for the approval of the contract;
c. The contract is fair and reasonable under the
circumstances;
d. In case of corporations vested with public interest,
material contracts are approved by at least two-thirds
(2/3) of the entire membership of the board, with at
least a majority of the independent directors voting to
approve the material contract; and
e. In case of an officer, the contract has been previously
authorized by the board of directors.
Where any of the first three (3) conditions set forth in the preceding
paragraph is absent, in the case of a contract with a director or
trustee, such contract may be ratified by the vote of the
stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or of at least two- thirds (2/3) of the
members in a meeting called for the purpose: Provided, That full
disclosure of the adverse interest of the directors or trustees
involved is made at such meeting and the contract is fair and
reasonable under the circumstances.
The requirement for self-dealing directors ONLY applies to directors,
trustees or officers, meaning only those that manage the corporation.
Because the assumption is, the stockholder has nothing to do with the
management of the corporation unless he or she is a director, trustee.
EH 404 | UNIVERSITY OF SAN CARLOS
The law seeks to prevent a conflict of interest where a director will put
his own interest above that of the corporation where he is a director.
“Or their spouses and relatives within the fourth civil degree of
consanguinity or affinity” – this is a new addition to the law. Relatives
are now covered as well.
Quorum of BOD in a meeting
Quorum for the directors is based on the directors that are stated in
the Articles of Incorporation.
Atty Gaviola: It is not typical to find BOD that are in even numbers
because that will result in a deadlock.
Example:
If there are five board of Directors, then the quorum that is needed is
3.
If there are four then the majority needed is three since what is
necessary is the majority of those that are present in order for a
transaction to be valid.
What happens if there are three present including the self-dealing
director then out of the 3, 2 voted to approve including the self-dealing
director?
It could be voidable but is subject to ratification. However, if the
requirement under Sec 31 is met then it is valid.
What’s the third requirement?
The contract must be fair and reasonable.
What happens if the contract is voidable because the requirements are
not met are there any remedy? It could be ratified by a vote of 2/3 of
the stockholders representing 2/3 of the outstanding capital stock or
2/3 of the members of the non-stock corporation and there must be a
meeting wherein the director or trustee shall fully disclose the adverse
interest that he has and such contract must be fair and reasonable
under the circumstances.
What happens if the corporation is vested with public interest?
In case of corporations vested with public interest, material contracts
are approved by at least two-thirds (2/3) of the entire membership of
the board, with at least a majority of the independent directors voting
to approve the material contract.
Independent Directors
They are free from any relation which could reasonably interfere with
their independent exercise with their judgement
When are they required?
a) Corporations covered by Section 17.2 of Republic Act No. 8799,
otherwise known as “The Securities Regulation Code”, namely
those whose securities are registered with the Commission,
corporations listed with an exchange or with assets of at least
Fifty million pesos (P50,000,000.00) and having two hundred
(200) or more holders of shares, each holding at least one
hundred (100) shares of a class of its equity shares;
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(b) Banks and quasi-banks, non-stock savings and loan
associations, pawnshops, corporations engaged in money
service business, preneed, trust and insurance companies,
and other financial intermediaries; and
TN: these are not new but they are just incorporated in the New
Corporation code since this is provided in their own laws already
since they already require independent directors already.
(c) Other corporations engaged in businesses vested with
public interest similar to the above, as may be determined by the
Commission, after taking into account relevant factors which are
germane to the objective and purpose of requiring the election of
an independent director, such as the extent of minority ownership,
type of financial products or securities issued or offered to
investors, public interest involved in the nature of business
operations, and other analogous factors.
There must be 20% of the membership in the above-mentioned
corporations.
Interlocking Director
When one is a board of two corporations and those two corporations
are contracting with one another.
General rule: the contract is valid, since it is not a ground to invalidate
a contract unless there are other grounds such as fraud.
Exception: If one corporation is a substantial shareholder and the
other is nominal shareholder
Nominal Shareholder – owns less than 20%
Substantial: exceeds 20%
How may a director be removed from office?
They can be removed by a vote of a stockholder holding 2/3 of the
outstanding capital stock or 2/3 members in case of a non-stock
corporation.
Removal of Directors or Trustees
Provision:
SEC. 27. Removal of Directors or Trustees. – Any director or
trustee of a corporation may be removed from office by a vote of
the stockholders holding or representing at least two-thirds (2/3) of
the outstanding capital stock, or in a non-stock corporation, by a
vote of at least two-thirds (2/3) of the members entitled to vote:
Provided, That such removal shall take place either at a regular
meeting of the corporation or at a special meeting called for the
purpose, and in either case, after previous notice to stockholders
or members of the corporation of the intention to propose such
removal at the meeting. A special meeting of the stockholders or
members for the purpose of removing any director or trustee must
be called by the secretary on order of the president, or upon written
demand of the stockholders representing or holding at least a
majority of the outstanding capital stock, or a majority of the
members entitled to vote.
If there is no secretary, or if the secretary, despite demand,
fails or refuses to call the special meeting or to give notice
thereof, the stockholder or member of the corporation signing the
demand may call for the meeting by directly addressing the
EH 404 | UNIVERSITY OF SAN CARLOS
stockholders or members. Notice of the time and place of such
meeting, as well as of the intention to propose such removal, must
be given by publication or by written notice prescribed in this Code.
Removal may be with or without cause: Provided, That removal
without cause may not be used to deprive minority stockholders or
members of the right of representation to which they may be
entitled under Section 23 of this Code.
The Commission shall, motu proprio or upon verified complaint,
and after due notice and hearing, order the removal of a director or
trustee elected despite the disqualification, or whose
disqualification arose or is discovered subsequent to an election.
The removal of a disqualified director shall be without prejudice to
other sanctions that the Commission may impose on the board of
directors or trustees who, with knowledge of the disqualification,
failed to remove such director or trustee.
How may directors be removed from office?
(Sec. 27, Par. 1)
(a) May be removed from office by a vote of the stockholders
holding or representing at least (2/3) of the outstanding
capital stock.
(b) Directors may be removed through a regular meeting OR a
special meeting called for that purpose
(c) In either case, there should notice given to all stockholders
or members of such corporation of the intention to propose
such removal.
If held in a SPECIAL MEETING – it should be called by ;
(a) The secretary on the order of the president OR;
(b) Upon written demand of the stockholders representing or
holding at least a majority of the outstanding capital stock, or
majority of the members entitled to vote.
What if the secretary refuses to call?
(Section 27, Par. 2)
If there is no secretary, or if the secretary, despite demand, fails
or refuses to call the special meeting or to give notice thereof;
REMEDY: The stockholder or member of the corporation signing the
demand may call for the meeting by directly addressing the
stockholders or members.
Note: (Notice of the time and place of such meeting, as well as of the
intention to propose such removal, must be given by publication or by
written notice prescribed in this Code)
Should removal of a director be with cause?
(Section 27, Par. 2)
It can be with or without just cause due to the fiduciary nature
between the stockholders and the directors.
If the stockholders no longer see a director fit, they have the right to
remove such director.
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Limitation:
If removal is WITHOUT CAUSE; It may not be used to deprive
minority stockholders or members of the right of representation
to which they may be entitled.
How about the removal of the SEC, can it also be with or without case,
and how is it done? (Section 27, Par. 3)
It is done either through a (a) verified complaint or (b) motu pro prio
and (c) after due notice and hearing.
On grounds of; (a) elected despite the disqualification, or (b)whose
disqualification arose or is discovered subsequent to an election.
Summary: The grounds for the stockholders to remove directors can
only be done with or without cause; Provided that if the removal should
be without cause it should not violate the rights of the minority
stockholders; while for the Securities and Exchange Commission, they
can only remove a director for disqualification.
Bernas, et al vs. Cinco, et al. G.R. Nos. 163356-57. July 1,
2015.
Where there is an officer authorized to call a meeting and that officer
refuses, fails, or neglects to call a meeting, the SEC can assume
jurisdiction and issue an order to the petitioning stockholder to call a
meeting pursuant to its regulatory and administrative powers to
implement the Corporation Code.
Facts:
BERNAS GROUP were among the Members of the Board of Directors
and Ofaicers of the Makati Sports Club corporation whose terms were
to expire either in 1998 or 1999.
CINCO GROUP are the members and stockholders of the corporation
who were elected Members of the Board of Directors and Ofaicers of
the club during the 17 December 1997 Special Stockholders Meeting.
Alarmed with the rumored anomalies in handling the corporate funds,
the MSC Oversight Committee (MSCOC), composed of the past
presidents of the club, demanded from the Bernas Group to resign
from their respective positions to pave the way for the election of new
set of officer’s.
MSCOC called a Special Stockholders' Meeting where in that meeting
proceeded wherein the Bernas Group were removed from ofUice and,
in their place and stead, Cinco Group were elected. Subsequently, the
removal was ratiUied during the Annual Stockholder’s Meeting.
ISSUE:
WHETHER OR NOT THE 17 DECEMBER 1997 SPECIAL
STOCKHOLDERS' MEETING AS RATIFIED BY THE ANNUL
STOCKHOLDERS’ MEETING IS VALID
RULING: NO, invalid
On authority of MSCOC: The removal of the Bernas Group, as well
as the election of the Cinco Group, effected by the assembly in that
improperly called meeting is void.
EH 404 | UNIVERSITY OF SAN CARLOS
The MSCOC is neither empowered by law nor the MSC by-laws to call
a meeting and the subsequent ratification made by the stockholders
did not cure the substantive infirmity, the defect having set in at the
time the void act was done. The defect goes into the very authority of
the persons who made the call for the meeting.
Being void, it cannot be validated through ratification.
The power to call a special meeting, solely vested by law and the MSC
by-laws on the President or the Board of Directors. Sec. 28. Removal
of directors or trustees. xxx A special meeting of the stockholders
or members of a corporation for the purpose of removal of
directors or trustees, or any of them, must be called by the
secretary on order of the president OR on the written demand of
the stockholders representing or holding at least a majority of the
outstanding capital stock, xxx
Remedy: In case of refusal, the remedy of the stockholders would
have been to file a petition to the SEC to direct him to call a meeting
by giving proper notice required under the Code.
Where there is an officer authorized to call a meeting and that officer
refuses, fails, or neglects to call a meeting, the SEC can assume
jurisdiction and issue an order to the petitioning stockholder to call a
meeting pursuant to its regulatory and administrative powers to
implement the Corporation Code.
Sec. 50. Regular and special meetings of stockholders or
members.
xxx Whenever, for any cause, there is no person authorized to call
a meeting, the Securities and Exchange Commission, upon petition
of a stockholder or member, and on a showing of good cause
therefore, may issue an order to the petitioning stockholder or
member directing him to call a meeting of the corporation. xxx
In Philippine National Construction Corporation v. Pabion, where the
Court validated the order of the SEC to compel the corporation to
conduct a stockholders' meeting in the exercise of its regulatory and
administrative powers to implement the Corporation Code:
Analysis: Illegal Acts vs. Ultra Vires Acts
ILLEGAL ACTS ULTRA VIRES ACTS
An act which are contrary to law, Not illegal nor void ab initio.
moral, or public policy or public
duty.
Cannot acquire validity by May become binding and
performance, ratification, or enforceable when ratified by
estoppel. the stockholders.
VOID VOIDABLE
Why was the meeting called by the oversight committee considered as
invalid? It was improperly called.
1. The Corporate Secretary should have called for the meeting
or
2. Upon order of stockholders representing the majority of the
OCS; or
3. Stockholder addressing the rest of the stockholders of the
company.
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Under the bylaws who should’ve called?
It was the President or the majority of the Board.
Whether it was the law or the by-laws MSC wasn’t the proper party to
call for the meeting. Since the meeting was properly called, it was
invalid. Therefore, all acts were illegal and cannot be ratified. The
ratification was also invalid.
The ousting of the Bernas group and selling of their shares was not a
valid act and could not be ratified.
Ultimately, who was the valid group?
Cinco group.
Although the special meeting was invalidated, the Supreme Court
nevertheless, during the Annual Stockholders meeting, the
stockholders still reelected the Cinco group only starting when they
were reelected in the Annual Stockholders Meeting.
Filling of Vacancies
How are vacancies in the board filled?
As a general rule, stockholders have the inherent right to fill in the
Board for whatever is the ground/reason of the vacancy. But the right
to fill in the vacancy may be delegated to the BOD (by a majority vote
of the BOD).
The law says “MAY” so it doesn’t have to be in the Board all the time.
It may be given, even to the Board, if the ground of the vacancy is
NOT: [REIn]
1. Due to Removal
2. Due to Expiration of Term
3. Due to Increase in BOD by amendment of articles
AND provided that the Board still constitutes a quorum.
For the above instances, the election should be done by the
stockholders.
If the vacancy is by resignation, abandonment, death, or any other
reason other than the above instances, the BOD may fill in if they still
constitute a quorum.
But may it be also filled in by the stockholders? Yes. Because
stockholders can fill in, whatever may be the reason of the vacancy.
Meaning, if by death, resignation, abandonment etc. but the Board NO
longer constitutes a quorum, go back to the general rule: only the
stockholders may fill in.
VALLE VERDE COUNTRY CLUB v AFRICA
FACTS:
In 1996, during the Annual Stockholders’ Meeting of Valle Verde
Country Club, Inc. (VVCC), 9 persons were elected as members of the
VVCC Board of Directors. From 1997 to 2001, the requisite quorum for
the holding of the stockholders’ meeting could not be obtained.
EH 404 | UNIVERSITY OF SAN CARLOS
Consequently, the 9 directors continued to serve in the VVCC Board
in a hold-over capacity.
In 1998, Dinglasan resigned from his position. He was replaced by
Roxas who was elected by the board still constituting a quorum. A year
later, Makalintal also resigned and was replaced by Jose Ramirez in
2001. Ramirez was elected by the remaining members of the Board.
Africa, a member of VVCC, questioned the election of Roxas and
Ramirez with the SEC and the RTC, respectively. Before the RTC,
Africa alleged that a year after Makalintal’s election as member of the
VVCC Board in 1996, his term – as well as those of the other members
of the VVCC Board – should be considered to have already expired.
VVCC contends however that the vacancy in this case was caused by
Makalintal’s resignation, not by the expiration of his term, and thus the
board rightfully appointed Ramirez to fill in the vacancy.
ISSUE:
Whether the remaining directors of the corporation’s Board, still
constituting a quorum, can elect another director to fill in a vacancy
caused by the resignation of a hold-over director.
RULING:
NO. Under Section 29 of the Corporation Code, a vacancy occurring
in the board of directors caused by the expiration of a member’s term
shall be filled by the corporation’s stockholders.
The holdover period is not part of the term of office of a member of the
board of directors. In several cases, we have defined "term" as the
time during which the officer may claim to hold the office as of right,
and fixes the interval after which the several incumbents shall succeed
one another. The term of office is not affected by the holdover.
Section 23 of the Corporation Code declares that the term of the
members of the board of directors shall be only for one year; their term
expires one year after election to the office. After the lapse of one year
from his election, Makalintal’s term of office is deemed to have already
expired. With the expiration of Makalintal’s term of office, a vacancy
resulted which, by the terms of Section 29, must be filled by the
stockholders of VVCC in a regular or special meeting called for the
purpose. His resignation as a holdover director did not change the
nature of the vacancy; the vacancy due to the expiration of Makalintal’s
term had been created long before his resignation.
Discussion:
You have to distinguish between term and tenure.
Term: 1 year, as provided under Section 23
Tenure: the length of office actually held by the director
When a director is re-elected, his term is always for one year. It doesn’t
change no matter how long he has held to the position, as long as he
is re-elected, it is always one year. His tenure is the actual length of
time he has stayed in the position.
When a director is in a holdover capacity/period, which means that he
is holding office because no one has been elected yet, is that holdover
period part of the term? No, it is not. The term has already expired.
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That’s why, in a holdover period, it’s only until his successor is duly Is the delivery and indorsement as well as execution of deed of
elected and qualified. So beyond that one-year term, that is the assignment is effective to make a person a stockholder?
holdover capacity. If a director resigns, it’s not a vacancy because of
resignation but it’s a vacancy because of expiration of term. No, Section 63 of the Revised Corporation Code states that:

Director is Reelected; Term […]

Another one year. It does not change, no matter how long he has held
to the position, as long as he is reelected. His tenure is the actual No transfer, however, shall be valid, except as between the parties,
length of time he has stayed in the position. until the transfer is recorded in the books of the corporation
showing the names of the parties to the transaction, the date of the
transfer, the number of the certificate or certificates, and the
Holdover Capacity number of shares transferred.
This happens when a director is holding office because no one has
been elected yet. This is not part of the term because the term has Two Kinds of Subscription
already expired. That is why hold-over period is only until his successor (1) Pre-incorporation - subscription is made before incorporation
is duly elected and qualified. Beyond the 1-year term, that’s hold-over
period. When he resigns, it is not a vacancy because of resignation, GR: irrevocable for a period of 6 months from the date of
but it is a vacancy because of expiration of term. subscription
EXC: revocable if
Emergency Board; When and How Constituted (1) all of the other subscribers consent to the
When the (1) vacancy prevents the remaining directors from revocation (and done without prejudice to creditors),
constituting a quorum and emergency action is required to prevent or
grave, substantial, and (2) irreparable loss or damage to the (2) the corporation fails to incorporate within the same
corporation, the vacancy may be temporarily filled from among the period or within a longer period stipulated in the
officers of the corporation by unanimous vote of the remaining contract of subscription
directors or trustees.
- AFTER FILING OF AOI with the SEC, the pre-incorporation
The action by the designated director or trustee shall be limited to the subscription contract becomes irrevocable.
emergency action necessary, and the term shall cease within a - But AFTER APPROVAL, the subscription contract becomes
reasonable time from the termination of the emergency or upon revocable.
election of the replacement director or trustee, whichever comes
earlier. (Section 28, RCC) It is only the pre-incorpoation subscription that is Irrevocable
(1) for 6 months,
Unlike in a regular filling in of vacancy where you only need majority of (2) before filing,
the members present in a quorum, here, you need a unanimous vote. (3) during filing, and
(4) before the issuance of certificate of incorporation,
You can only elect from the officers of a corporation, and only on a even if it is pending for more than 6 months
temporary basis.
(2) Post-incorporation - subscription is made after incorporation
Stock and Stockholders
GR: Irrevocable
Acquisition of Shares: Two Modes: EXC: May be revoked when corporation consents
(1) by subscription - applies if you are acquiring unissued stocks from
the issuer corporation; and SUMMARY OF DIFFERENCES:
(2) by purchase or by assignment - applies if you are doing a Pre-incorporation subscription Post-incorporation
secondary purchase; you are buying issued shares from existing subscription
stockholders, including the corporation itself for treasury shares It is entered into before the It is entered into after the
incorporation incorporation
Difference between subscription and assignment: The pre-incorporation subscription * post-incorporation
o Subscription pertains to unissued stock, purchase or can be revoked subscription is irrevocable
acquisition of unissued stock directly from the issuer while because it will be in violation
assignment is the acquisition of issued stock from the GR: A pre-incorporation of the Trust fund Doctrine
owner of the share subscription agreement is
irrevocable for a period of six (6)
What are the modes of assigning shares? (Sec. 62) months from the date of
1. By delivery of the certificate or certificates indorsed by the subscription.
owner, his attorney-in-fact, or any other person legally
authorized to make the transfer. XPNs:
2. Execution of Deed of Assignment 1. If all of the other subscribers
consent to the revocation,

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2. If the incorporation of said

corporation fails to materialize DELINQUENT STOCKHOLDER
within said period or within a longer If declared delinquent, what is the only right that the stock holder can
period as may be stipulated in the enjoy?
contract of subscription.
Only the right to the dividends
XPN to XPN: No pre-incorporation
subscription may be revoked after Thus, all rights are suspended except the right to the dividends.
the submission of the AOI to the
Securities and Exchange Does that mean that he can truly receive the dividends?
Commission. (RCC, Sec. 60) No, because the corporation can validly apply the dividends to the
unpaid subscription.
Consideration for the Purchase of Shares (Section 62, RCC)
Consideration for the issuance of stock may be: A delinquent stockholder losses all his rights except the right to
(a) Actual cash paid to the corporation; dividends. But, even as to the rights of his dividends, the corporation
(b) Property, tangible or intangible, actually received by the can still apply the dividends declared against the unpaid subscription.
corporation and necessary or convenient for its use and
lawful purposes at a fair valuation equal to the par or How does one become a delinquent stockholder?
issued value of the stock issued; If no payment is made:
i. Purchaser must submit the Certificate of 1.) Within 30 days from the “date” specified in the subscription
Registration, Appraisal coming from an instrument or
authorized appraisal company, and 2.) 30 days from the call made by the board
Deed of Assignment to the corporation
(c) Labor performed for or services actually rendered to -Board Resolution is required to declare the SH as delinquent
the corporation;
i. Future services are not allowed GR: A stockholder need not pay his subscription or even full payment
(d) Previously incurred indebtedness of the corporation; of his subscription in order to enjoy all the rights of a stockholder.
(e) Amounts transferred from unrestricted retained
earnings to stated capital; This stops when he becomes delinquent stockholder
i. This happens when there is stock
dividend. When does he become a delinquent stockholder?
(f) Outstanding shares exchanged for stocks in the event
of reclassification or conversion; If the date for payment for his subscription has arrived, either because
(g) Shares of stock in another corporation; and/or the date is specified in the subscription contract, or when there is no
(h) Other generally accepted form of consideration. date specified and the board has made a call for the unpaid
subscription and the stockholder still does not pay. 30 days after that
Promissory Notes and Future Services are NOT ALLOWED AS date, the stockholder may be declared as delinquent.
CONSIDERATION
What happens when the stockholder is declared delinquent?
Value of consideration must not be less than the par value or issued Corporation can now validly exercise three ways when they can get
price of the shares the payment of such subscription.

If less, it becomes a WATERED STOCK
EFFECT: A director or officer of a corporation who:
(a) consents to the issuance of stocks for a consideration less
than its par or issued value;
(b) consents to the issuance of stocks for a consideration
other than cash, valued in excess of its fair value; or
(c) having knowledge of the insufficient consideration, and
does not file a written objection with the corporate secretary
shall be liable.
Effect of a stock declared delinquent to the declared dividends:
(Sec. 42)
1. When a cash dividend is declared, the cash will be first applied to
the unpaid portion of the subscription;
2. When a stock dividend is declared, the corporation will withhold
the stock dividend, it will not be issued until the subscriber paid
the balance of his subscription
Extrajudicial, Judicial, or collect from cash dividends and withholding
of stock dividends.

LIABILITY: Solidarily liable to the corporation or its creditors, with the
stockholder concerned, for the difference between the value
received at the time of issuance of the stock and the par or issued
value of the same.
Consideration need not be paid upon subscription.
Extrajudicial Sale of subscription:
SEC. 67. Delinquency Sale. – The board of directors may, by resolution,
order the sale of delinquent stock and shall specifically state the amount due
on each subscription plus all accrued interest, and the date, time and place
of the sale which shall not be less than thirty (30) days nor more than sixty
(60) days from the date the stocks become delinquent.

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Notice of the sale, with a copy of the resolution, shall be sent to every
delinquent stockholder either personally, by registered mail, or through other
means provided in the bylaws. The same shall be published once a week for
two (2) consecutive weeks in a newspaper of general circulation in the
province or city where the principal office of the corporation is located.
Unless the delinquent stockholder pays to the corporation, on or before the
date specified for the sale of the delinquent stock, the balance due on the
former’s subscription, plus accrued interest, costs of advertisement and
expenses of sale, or unless the board of directors otherwise orders, said
delinquent stock shall be sold at a public auction to such bidder who shall
offer to pay the full amount of the balance on the subscription together with
accrued interest, costs of advertisement and expenses of sale, for the
smallest number of shares or fraction of a share. The stock so purchased
shall be transferred to such purchaser in the books of the corporation and a
certificate for such stock shall be issued in the purchaser’s favor. The
remaining shares, if any, shall be credited in favor of the delinquent
stockholder who shall likewise be entitled to the issuance of a certificate of
stock covering such shares.
Should there be no bidder at the public auction who offers to pay the full
amount of the balance on the subscription together with accrued interest,
costs of advertisement, and expenses of sale, for the smallest number of
shares or fraction of a share, the corporation may, subject to the provisions
of this Code, bid for the same, and the total amount due shall be credited as
fully paid in the books of the corporation. Title to all the shares of stock
covered by the subscription shall be vested in the corporation as treasury
shares and may be disposed of by said corporation in accordance with the
provisions of this Code
The actual sale is done through bidding.
The winning bid is determined through:
1. Highest bid should not be less than the value of the unpaid
subscription including the interests and costs.
2. Smallest number of shares
Example:
1M = unpaid subscription / Minimum amount of the bid
100,000 shares
IF:
A = 100,000 shares
B = 50,000 shares
C = 25,000 shares
So, C will be the winner as long as the total amount can reach 1M
If C will be the winner, who will get the other 75,000 shares?
The delinquent stockholder will get the remaining shares.
Delinquency sale is not based on the highest bid because the amount
is the same. It should be equal to the unpaid subscription. But the
highest bidder will be the one who has the smallest number of shares
for the same amount.
Because the highest bidder is the one who is paying with the highest
price per share. Because in the example, A will bid 100,000 shares at
P10/share. B will have 50,000 shares at P20/share. C will have 25,000
shares at P40/share.
EH 404 | UNIVERSITY OF SAN CARLOS
In all these cases, the amount is the same with P1M. The winning
bidder is the one who gives you the highest price per share. Meaning,
the smallest number of share with the same amount.
Atty. Gaviola:
The winning bidder gives you the highest price per share, meaning the
lowest number of share for the same amount. What happens now?
Since you purchase only the 25, 000 shares that means the delinquent
stockholder gets the other 75, 000 that will not result in watered shares
because the consideration has been paid.
Questions from Students:
Q: Does that mean that the remaining shares are credited to the
delinquent stockholders?
A: Yes, but it is a risk to take. For example, had I been the bidder I
would not bid 25, 000 knowing the delinquent stockholder has not paid.
In fact, most of the bidders will just bid 100, 000, 99, 000 or 98, 000
shares. Logically, I would bid 95, 995 shares and the delinquent
stockholder gets only 5 shares.
Q: Supposedly, the sale is not enough to cover the unpaid portion?
A: It is not allowed. It must not be less than the unpaid subscription. If
no one meets the requirement then the corporation can purchase the
shares itself that will become the treasury shares.
Q: With regard election, is there such thing as campaigning in the
election of Directors or Trustees and Officers?
A: No, it is different from the government elections where you
campaign to be elected. However, the nominees will secure proxies
from existing stockholders. By the time they will go the elections the
nominees already know how many votes they will secure. So if ever
one nominee cannot secure the all of the votes at least he/she secures
the majority of the votes.
Q: Is it prohibited to promise something in return for votes?
A: No, it is not illegal. After all, vote in corporations is a property right.
[Scripless Trading]
Q: Do stockholders holding shares through financial intermediaries
such as BPI have a right to vote?
A: Yes, under Sec 62 on scripless trading of the RCC. That’s how
shares are done if your shares are listed in the stock exchange
because you deliver the certificate to transfer shares but that is not
practical if your shares are listed because it will take a long time. Under
listed trading, you have to go to a stock and transfer agent, cancel the
name of the old owner of the share and transfer to the new owner.
In scripless trading, shares in a corporation that wants to list in a stock
exchange are deposited in the Philippine Depositary Trust Corporation
(PDTC). It is the person who appears in the stock and transfer book, it
has ledgers, name of the owner of the shares, normally in the name of
the broker. So the broker have a list of the their clients who purchase
the shares, but as far as the corporation is concerned but in the stock
and transfer book it is under the name of the PDTC. The person who
purchases the share it is scripless, in other words it has no certificate.
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If you want to have to shares certificated all you have to do is have it
uplifted. Inform your broker, and he/she will inform PDTC and withdraw
the name of the PDTC in the stock and transfer book and have it under
your name in the book of the corporation. In that case, you can attend
the stockholder’s meeting because the share is now under your name
already.
However, this process is lengthy and unpractical. So what happens
now if you don’t want to have you shares certificated, since it is under
the name of PDTC, it will issue a proxy in the name of the broker or his
nominee and in turn the broker will give you a proxy. If you go the
meeting, you have a proxy and you can vote you according the number
of shares in scripless shares.
Q: If ever I am a stockholder but I don’t exercise my right to vote, does
PDTC vote on my behalf?
A: Normally PDTC will just vote whomever the corporation
recommends. If the PDTC will not do this they might not have quorum.
As a rule: In scripless trading, you vote by proxy.
Q: In Sec. 58 of the RCC, why does it provide for that “in the case of a
voting trust specifically required as a condition in a loan agreement,
said voting trust may be for a period exceeding five (5) years but shall
automatically expire upon full payment of the loan”? What’s the reason
behind it?
A: If you are a stockholder and using your share as a pledge, normally
voting trust is the means if they want to exercise their rights.
Status of a Subscriber
Post-incorporation –
He/she is a shareholder. There is already an incorporation even if you
did not pay your subscription you can become a stockholder
Discussion:
There is already an approval by the SEC. Thus, it is no longer
revocable because whether or not the subscription is paid, partially
paid, or not paid at all the subscriber is considered as a stockholder
and his subscription forms part of the asset of the corporation.
Under the trust fund doctrine, the stockholders cannot withdraw their
capital or the assets of the corporation because these assets are
considered as trust fund for the benefit of the creditors of the
corporation. NO REVOCATION ALLOWED.
Pre-incorporation –
Not a shareholder because you still have to pay the subscription price
and the corporation has not yet materialized.
Discussion:
Under Obligations and contracts, if one party has not yet delivered his
obligation, the other party can revoke especially if he has already
complied.
EH 404 | UNIVERSITY OF SAN CARLOS
In order to protect the process of incorporation, the law provides that
6 months from the time you subscribed or from the date of your
subscription, your subscription is irrevocable that would give time the
incorporators to submit the application for incorporations with the
SEC. but if after the end of that 6 months the incorporators have not
yet submitted then subscriber can now revoke the subscription and
ask for his money back because the incorporators have not delivered
on their obligation to have the incorporation approved by the SEC.
But even before the lapse of 6 months as long as other subscribers’
consent, the subscriber can also revoke. After filing with the SEC, the
subscription now becomes irrevocable. There is just that window of
irrevocability 6 months after the date of subscription but before filing of
the articles.
TRUST FUND DOCTRINE
The doctrine considers the subscribed capital as a fund, which is held
in trust as security for satisfaction to creditors in case of corporate
liquidation.
Rights of a stockholder:
2. Right to vote and be voted as a member of BOD
3. Right to dividends (receive money from the corporation)
Whether or not paid or fully paid subscription, the subscriber enjoys
the rights of a stockholder. (Sec. 71)
Section 71. Rights of Unpaid Shares, Non-delinquent. –Holders of
subscribed shares not fully paid which are not delinquent shall have
all the rights of a stockholder.
Is that statement absolutely true?
No, because a subscriber who is a stockholder who has not fully paid
his subscription may not be issued a certificate of stock. (Sec. 63)
Section 63. Issuance of Stock Certificates. – No certificate of stock
shall be issued to a subscriber until the full amount of the
subscription together with interest and expenses (in case of
delinquent shares), if any is due, has been paid.
When does it stop enjoying the rights of a stockholder without full
payment? When the stocks become delinquent.
Difference between a share of stock and a stock certificates:
Share of stock Stock Certificate
Unit of interest in a corporation Evidence of the holder’s
ownership of the stock and
of his right as a
shareholder and of his
extent specified therein.
It is an incorporeal or intangible It is concrete and tangible
property
It may be recognized by the It may be issued only if the
corporation even if the subscription is subscription is fully paid.
not fully paid.
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Transfer of Shares
How do you assign shares?
According to Sec. 62 of the Revised Corporation Code:
Section. 62. Certificate of Stock and Transfer of Shares. –
The capital stock of corporations shall be divided into shares for
which certificates signed by the president or vice president,
countersigned by the secretary or assistant secretary, and sealed
with the seal of the corporation shall be issued in accordance with
the bylaws. Shares of stock so issued are personal property and
may be transferred by delivery of the certificate or certificates
indorsed by the owner, his attorney-in-fact, or any other person
legally authorized to make the transfer. No transfer, however, shall
be valid, except as between the parties, until the transfer is
recorded in the books of the corporation showing the names of the
parties to the transaction, the date of the transfer, the number of
the certificate or certificates, and the number of shares transferred.
The Commission may require corporations whose securities are
traded in trading markets and which can reasonably demonstrate
their capability to do so to issue their securities or shares of stocks
in uncertificated or scripless form in accordance with the rules of
the Commission.
No shares of stock against which the corporation holds any unpaid
claim shall be transferable in the books of the corporation.
Summary:
1. By delivery of certificate coupled with indorsement; or
2. Execution of a deed of assignment
In order to effectively make one a stockholder, the transfer MUST be
RECORDED in the books of the corporation.
The delivery coupled with indorsement or issuance of a deed of
assignment is effective only to make the person the owner thereof,
but does not yet make him a stockholder.
Teng v. SEC
Facts:
Respondent Ting Ping asked for his purchases of stocks be recorded
in the book after the death of Teng Ching and the son, Henry, took
over the management of the corporation. The corporate secretary,
Teng, however, refused.
Ting Ping claims to have purchased the following:
o 480 shares of TCL from Chiu
o 1400 shares from Teng Ching
o 1440 shares from Maluto
The RTC of Manila found Henry to have a better right to the shares of
stocks of Teng Ching. The core question in this case refers to the
shares purchased from Chiu and Maluto.
Teng and TCL filed their respective motions to quash the alias writ of
execution issued by the SEC en banc in a mandamus case filed by
respondent which was ruled in the latter’s favor – the petitioner and
TCL were ordered to issued new certificates of stock.
EH 404 | UNIVERSITY OF SAN CARLOS
Petitioner pointed out that the annexes in respondent’s opposition did
not include the subject certificates of stock – she insists the surrender
is necessary before the transfer should be recorded.
Issue: Whether the surrender of the certificates of stock is a requisite
before registration of the transfer may be made in the corporate books.
Ruling:
No. Surrender of the certificates of stock is not a requisite for the
transfer to be recorded in the corporate books.
The Corporate Secretary has a MINISTERIAL DUTY to record the
transfer. In this case, the registration of the transfer of Chiu’s and
Maluto’s shares in respondent’s favor is a mere formality in confirming
the latter’s status as a stockholder of TCL.
Surrender of the certificates of stock is only necessary before issuance
of new certificates of stock.
So the moment that the assignee can prove that the shares have been
assigned to him, what should he do?
He shall request the corporate secretary to record such transfer in the
books of the corporation.
Can the Corp. Sec. refuse?
No, he cannot refuse since the Secretary’s duty is purely ministerial.
REMEDY:
Mandamus. In order to record the acquisition of the shares by the
transferee. Again, the duty of the Corp. Secretary is ministerial. No
discretion at all. As long as the requirements have been complied with.
Proof of Transfer:
In practice, you show the Deed of Assignment and also the payment
of the taxes, especially the payment of the Documentary Stamp Tax.
You need to show the Certificate Authorizing Registration (CAR). So
the moment you present these documents, it is the duty of the
Secretary to record the transfer in the Stock and Transfer Book.
Ministerial Duty.
Is it necessary that there should be an issuance of a stock certificate
before a person can be a stockholder?
No. Upon recording in the stock and transfer book of the corporation,
a person already becomes a stockholder.
Basically, in order to acquire ownership of shares, there are two
modes:
a. you deliver and indorse the stock certificate;
b. if you do not have the stock certificate, deliver or
execute a deed of assignment — that is sufficient to
transfer ownership, but it is not sufficient to make the
transferee or assignee a stockholder.
What makes the transferee or assignee a stockholder is the recording
of the assignment in the stock and transfer book. So, as long as his
name is not in the stock and transfer book, as far as the corporation
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and third persons are concerned, he is not yet the owner of the shares
or he is not yet a stockholder. He is only the owner as between the
parties to the assignment.
The moment his stockholdings are recorded in the stock and transfer
book, he is already a stockholder even if the shares have not yet been
issued in his name or even if the stock certificate has not yet been
issued in his name.
The stock certificate is not the stock. It is just the evidence of
ownership of stock..
F & S Velasco vs Madrid
Facts:
F&S Velasco Company, Inc. (FSVCI) was duly organized and
registered as a corporation with its incorporators: Spouses Francisco
and Simona Velasco, their daughter Angela Madrid whose husband is
Dr. Rommel Madrid, and Saturnino Velasco. When the parents of
Angela died, she acquired a total of 70.82% of the shareholdings of
the company. When Angela died, her husband, Dr. Madrid had an
equitable interest over the shareholdings of Angela. Believing he
already had the majority of the control of F&S Velasco, Dr. Madrid
called for stockholder’s meeting wherein he sought to have the board
of directors replaced by him and the people of his choosing. He gave
out shares to those people so that they will be nominated and voted
upon in the BOD.
On the other hand, the Corporate Secretary called for an emergency
meeting to fill the vacancies in the BOD. In that meeting, the Saturnino
group was elected to the BOD. Saturnino was questioning the validity
of the Madrid group’s meeting and election, saying that at the time
Madrid called for the stockholders meeting and the election, Dr. Madrid
was not yet the owner of the majority of the shares of the corporation.
To prove he was already the majority shareholder, Dr. Madrid
Presented the General Information Sheet (GIS). But, the SC said the
GIS cannot prevail over the stock and transfer book of the corporation
which is the best evidence to prove the names of the stockholders and
their corresponding shares in the corporation.
Ruling:
The Madrid group’s meeting and election was not valid because
they did not have the proper number of stockholdings (outstanding
capital stock) because Madrid, at that time, although he was already
owner of Angela’s stocks, he was not yet a stockholder with respect
to her shares because they were not yet registered in the stock and
transfer book. The GIS is not sufficient basis for stockholdings and it
cannot prevail over the non-recording in the stock and transfer book.
On the other hand, the meeting and election of the Saturnino group
was also not valid because there was no quorum, thus they could not
validly elect directors as well. There were 5 members of the BOD, so
3 was needed to constitute a quorum. It was only Saturnino and the
corporate secretary. The third board member only sent a proxy. You
cannot attend a board meeting with a proxy. You have to attend it in
person or remotely, but not in proxy.
EH 404 | UNIVERSITY OF SAN CARLOS
There were only two directors present in the meeting; the presence of
the proxy in the Board of Director meeting is not sufficient, they needed
three (3).
So, the Supreme Court said holdover. It was the old directors until
Angela’s shares are recorded as transferred in the stock and transfer
book of the corporation.
The Madrid Group lost because they were not able to establish proper
number of stock holdings (outstanding capital stock) quorum. Madrid
was not yet a stockholder although being owner of Angela’s stocks- he
was not registered in the Stock and Transfer Book, a mandatory step
to become a stockholder. The stock certificate is not even necessary.
The GIS filed is not sufficient basis for stockholdings, and does not
prevail over the non-recording in the Stock and Transfer Book. Neither
did the other side have proper quorum. Therefore, the old directors are
to remain in holdover position.
POWER TO INVEST CORPORATE FUNDS IN ANOTHER
CORPORATION OR BUSINESS OR FOR ANY OTHER PURPOSE
(Section 41)
Requirements (for new investment other than that stated in the
primary purpose of the corporation):
1. Approval by the majority of the Board
2. Ratified by the stockholders representing at least 2/3 of the
outstanding capital stock
Note: If the investment is pursuant to the primary purpose of the
corporation, the requirement is only the approval by the majority of the
Board in a meeting where there is a quorum.
3. Notice to stockholders of the proposed investment and the
time and place of the meeting
4. Give dissenting shareholders their appraisal right
5. Amend the purpose clause of the AOI (by submitting to the
SEC your amended AOI) and secure the approval of the
amendment from the SEC.
Note: If it is beyond the primary purpose, the act is ultra vires.
Lost certificates (Section 72)
1. The registered owner of a certificate of stock in a corporation or such
person’s legal representative shall file with the corporation an
affidavit in triplicate setting forth, if possible, the circumstances as
to how the certificate was lost, stolen or destroyed, the number of
shares represented by such certificate, the serial number of the
certificate and the name of the corporation which issued the same.
The owner of such certificate of stock shall also submit such other
information and evidence as may be deemed necessary;
2. After verifying the affidavit and other information and evidence with
the books of the corporation, the corporation shall publish a
notice in a newspaper of general circulation in the place where
the corporation has its principal office, once a week for three (3)
consecutive weeks at the expense of the registered owner of the
certificate of stock which has been lost, stolen or destroyed. The
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notice shall state the name of the corporation, the name of the
registered owner, the serial number of the certificate, the number of
shares represented by such certificate, and shall state that after the
expiration of one (1) year from the date of the last publication, if no
contest has been presented to the corporation regarding the
certificate of stock, the right to make such contest shall be barred
and the corporation shall cancel the lost, destroyed or stolen
certificate of stock in its books. In lieu thereof, the corporation shall
issue a new certificate of stock. xxx
How can you get a new stock certificate issued earlier?
If you want to have the certificate of stock earlier, you just submit a
bond or any other security good for 1 year to answer for damages that
may occur during that 1 year period. (refer to Section 72)
[Note: on scripless trading, refer to previous discussion
Scrip – stock certificate; Scripless trading – certificate of stock need
not be transferred ]
Scripless trading is normally done by companies who list their shares
in the stock exchange. It is easier to trade without having to deliver the
stock certificates.
CORPORATE POWERS
Types of Corporate Powers:
1. Express – Those specifically mentioned in the AOI, particularly
in the primary purpose; and those expressly provided by the law.
2. Incidental - Reasonably necessary in order to achieve the
primary purpose or to accomplish the express powers.
3. Inherent/ Implied – Those that are present by virtue of the
corporation’s existence as a juridical entity.
So express powers are unique to the corporation. It depends on their
primary purpose. Primary purpose of a corporation determines its
express powers.
Example:
SM Primary (SM Primary is a real estate company)
A real estate company is engaged in buying, selling, leasing and
development of real property, that is their express powers.
Basically, the express power of the corporation depends on the type
of business that the corporation intends to engage in, it has to be
expressly provided in its AOI. That would be the primary purpose in its
AOI
Implied powers, on the other hand, they are may not be expressly
provided for in the articles but they are necessary to achieve the
primary purpose.
Incidental powers, on the other hand, they may be common to all
types of corporations because they are incident to its existence as a
juridical entity.
EH 404 | UNIVERSITY OF SAN CARLOS
Teresa Electric & Power Co. Inc. v. PSC and Filipinas
According to Filipinas by virtue of Paragraph 7 of AOI , it is entitled to
apply for certificate of public conveyance to operate an electrical power
plant. The commission granted its application. The petitioner questions
the grant of certificate. SC ruled that by virtue of implied powers it is
entitled to operate such electric power plant. The provisioning of
electricity is reasonably necessary for its operation as a cement
factory.
How much capacity did Filipinas require for it to operate its cement plant?
6000kw in order to run its plant.
How much is the capacity of Teresa?
200kw
Teresa did not have the capacity to supply the power requirements of Filipinas.
If you were SC, if Teresa had the capacity, would you rule the same?
No. Because, in case there is an entity capable in supplying its needs Filipinas
does not need to.
Why it is allowed in this case?
Because Teresa cannot supply its needs.
The power in this case is necessary to continue its operation. Without
power, the company could not pursue its primary purpose. Setting up
a power plant although not related to the cement business it was
necessary in order to continue with the business. It would have been
different if Teresa were able to supply. Hence, SC would not have
approved. In fact, it is the first thing that you need to prove right now if
you want to set up your own plant. You need to prove that there is no
distribution utility that could supply your power needs. Otherwise, you
will not be allowed. SC said, even if Filipinas is not expressly provided
in its articles it had the power to put up a power plant because it is
necessary for the pursuit of its primary purpose.
Republic v. Acoje Mining Company Inc.
Facts:
Acoje Mining Company, Inc. requested the Director of Post to open a
post, telegraph, and money order offices at its mining camp in
Zambales to service its employees and their families that were living
in the said camp. The Director of Posts agreed on the condition that
aside from free quarters, the company was to assign an employee to
act as the postmaster and in the event of any loss that may be suffered
by the Bureau of Post by reason of dishonesty, carelessness, or
negligence of the company’s employee who acted as postmaster, the
company shall assume direct responsibility. The Company agreed to
this and its board adopted a resolution that its shall accept full
responsibility for the cash received by the postmaster.
The company’s employee who was assigned as postmaster went on
leave and never returned. The company informed the officials of the
Manila Post Office and the provincial auditor of Zambales of the
employee’s disappearance. This resulted to an accounting of the
postmaster’s accounts which yielded a shortage of P13,867.24.
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Several demands were made by the government against Acoje Mining
for the payment of the shortage in line with the liability that it had
assumed. Acoje Mining interposed the defense that the resolution of
the board assuming responsibility for the act of the postmaster is ultra
vires and in any event, the resolution only that the company acts as a
guarantor who answers in the event the principal cannot answer for
the liability.
By virtue of the nature of its business, where would it be normally be located?
In far flung areas – mountainous, rural areas where there would be no access
to communication.
Did Acoje had the power to put up a post office? And what is the basis?
Yes. Acoje had the implied power to put up a post office. This is implied
because of the location of Acoje being in an area where communication was
difficult or unavailable.
(i) To make reasonable donations, including those for the
public welfare or for hospital, charitable, cultural,
scientific, civic, or similar purposes: Provided, That no
foreign corporation shall give donations in aid of any
political party or candidate or for purposes of partisan
political activity;
(j) To establish pension, retirement, and other plans for the
benefit of its directors, trustees, officers, and
employees; and
(k) To exercise such other powers as may be essential or
necessary to carry out its purpose or purposes as stated
in the articles of incorporation.
Power to sue and be sued
It means that the corporation can sue a partner, or another person, or
another person or partner can sue the corporation in its own name.
When a corporation is sued in its own name what does it mean?

What was the establishment of a post office in relation to the business of It establishes that it has its own existence and it has its own personality
Acoje? How is it related to the business of Acoje? and it can transact with third persons and because of that it can be
sued.
It benefits the mining company and thus covered by the implied powers of
Acoje. The corporation has the right to sue and be sued directly under its own
name without having to go through the stockholders.
Ruling:
The Supreme Court said that implied powers covers not only those Difference between 35 (f) and 37:
which are necessary but also those that are beneficial to the
Section 35 (f) Section 37
corporation.
Pertains to unissued but Additional authorized capital
authorized capital
In this case, the establishment of a post office within the compound of
No required approval from the SEC approval is required-
the mining company was not only beneficial to the company but to its
SEC but required only to report increase or decrease- because
employees as well. Hence, the Supreme Court said that since you
AOI is amended hence, the
have been benefitted, it is covered by your powers and authorities and
approval by the SEC
thus cannot claim the act as ultra vires. They had the authority to enter
Voting requirement: majority of Voting requirement: majority of
into that type of transaction- which is basically to open and to operate
the BOD in quorum the BOD in quorum AND vote of
a post office.
the stockholders representing
Express Powers
Section. 35. Corporate Powers and Capacity. – Every corporation
2/3 of the OCS
incorporated under this Code has the power and capacity: no requirement- even if 1 share 25% of the ACS shall be
(a) To sue and be sued in its corporate name; as long as not an additional subscribed and 25% of which
(b) To have perpetual existence unless the certificate of authorized capital, it is still shall be paid
incorporation provides otherwise; within your unissued but
(c) To adopt and use a corporate seal; authorized share so 35 (f)
(d) To amend its articles of incorporation in accordance applies
with the provisions of this Code;
(e) To adopt bylaws, not contrary to law, morals or public
policy, and to amend or repeal the same in accordance
ILLUSTRATION 1 – Depicting Sec. 35(f): Suppose Corporation X
with this Code; has an authorized capital stock of 1,000,000 at a par value of 1 PESO
(f) In case of stock corporations, to issue or sell stocks to per share.
subscribers and to sell treasury stocks in accordance
with the provisions of this Code; and to admit members Corporation X at the inception of its corporate life issued 500,000
to the corporation if it be a nonstock corporation; which were subscribed thus leaving it with another 500,000 unissued
(g) To purchase, receive, take or grant, hold, convey, sell, and unsubscribed shares.
lease, pledge, mortgage, and otherwise deal with such
real and personal property, including securities and
Given:
bonds of other corporations, as the transaction of the
lawful business of the corporation may reasonably and
ACS – 1 000 000 shares at a par value of P1/share
necessarily require, subject to the limitations prescribed Issued and subscribed Shares – 500 000
by law and the Constitution; Unissued and unsubscribed shares – 500 000
(h) To enter into a partnership, joint venture, merger,
consolidation, or any other commercial agreement with What power under the Revised Corporation Code is exercised if the
natural and juridical persons; corporation intends to sell/issue the remaining 500,000 shares?

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iii. Amount of capital stock or number of no-par stock

In issuing or selling the remaining 500,000 shares, the subscribed by each
corporation exercises its power under Section 35(f): iv. Amount paid by each on the subscription in cash or
property or the amount of capital stock or no-par
“xxx…In case of stock corporations, to issue or sell stocks to stock allotted to each stockholder
subscribers and to sell treasury stock in accordance with the v. Any bonded indebtedness to be incurred, created or
provision of this Code; and admit members to the corporation if it increased
be a non-stock corporation; …xxx” vi. Amount of stock represented at the meeting
vii. Vote authorizing the increase or decrease of the
In exercising the power under Section 35(f) what is the approval/voting capital stock
requirement under the Revised Corporation Code? 3. Copies of the certificate kept in the office of the corporation and
filed with the SEC and attached to the original AOI;
What is required to exercise such power would be the majority 4. Approval by the SEC and where appropriate, of the Philippine
vote of the Board of Directors in a meeting where a quorum Competition Commission;
exists. 5. Issuance of the certificate of filing
 In case of increase of capital stock – ADDITIONAL
If we are issuing 300,000. How much will be your subscribed at
REQUIREMENTS
the end of the transaction? 800 000 subscribed.
a) Certificate must be accompanied by a SWORN
Regardless of the increase in the issued shares, the ACS would still
STATEMENT of the treasurer showing:
be 1M.
i. At least 25% of the increase has been subscribed;
and
[REFER TO ILLUSTRATION 1]
ii. At least 25% of the amount subscribed has been
If the:
paid in actual cash or that property, the valuation
ACS - 1 000 000
is equal to 25% of the subscription
Original issued and subscribed shares - 500 000
Proposed no. of shares to be issued- 300 000
NOTE: Even after the filing of these necessary requirements, the
increase or decrease shall only take effect upon the issuance by the
Original subscribed - 500 000
Commission of the certificate of filing.
Proposed no. of shares to be issued - 300 000
Current subscribed - 800 000
[REFER TO ILLUSTRATION 1.5]
If the:
No change in ACS. Only a change in subscribed and outstanding
Original ACS was – 1M
because here we are talking about sale of shares which are unissued
Proposed increase – 1M
but already authorized.
Current ACS – 2M
ILLUSTRATION 1.5 – Depicting Sec. 37:
Original subscribed – 500 000
Given:
Min. required subscription (25%-25%) - 250 000
Original ACS – 1M
Current subscribed: 750 000
Proposed Increase in ACS – 1M
Question from student:
Subscribed – 500 000
Under Sec 37, do you have to issue new shares or can you just do so
Procedure for Sec. 37 before any increase/decrease in ACS may
by increasing the par value?
take effect:
1. Approval of increase or decrease by:
You can increase (Sec 37) without increasing par value by increasing
a) Majority vote of BOD; AND
the number of shares. If you increase the par value, it also depends on
b) 2/3 of the outstanding capital stock at a stockholders
whether or not you are increasing your ACS or just changing the par.
meeting called for that purpose
It can be that you are changing the par but you are not changing your
2. There should be a certificate signed by majority of the directors
ACS, in such case, you have to surrender all the shares and issue all
countersigned by the chairperson and the secretary in the
you want. But, if ordinary increase, just additional shares without
meeting.
changing par.
It should contain the following:
There are some questions from the students but I think not so relevant.
a) Provide that the requirements have been complied with;
Under 37, if you comply with all the requirements, and no corrections,
b) Amount of increase/decrease;
then it will be ministerial for the SEC to approve and they have no
In case of increase:
discretion but, the requirements are stringent, first, you need to prove,
i. Amount of capital stock or number of shares of no-
you did not violate any SEC rule or regulation, prove that you have
par stock ACTUALLY subscribed
updated filings of your GIS and complete all documentary
ii. Names and nationalities and addresses of the
requirements. Once those are done, the SEC shall approve but it’s a
persons subscribing
long process and a lot of documents that the SEC will require.

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If you have complied with all the requirements under Sec. 37, is it
ministerial for the SEC to approve the increase or decrease in the
capital stock or the incurring, creating or increasing of any bonded
indebtedness?
YES. If you can complete all the documentary requirements, no
corrections needed, then it would be ministerial for the SEC to
approve. They have no discretion. But the requirements are so
stringent. First of all, you have to prove that you have not committed a
violation of any SEC Rules or Regulations as the SEC will monitor that.
You also have to prove that you have updated filing of your GIS and
your FS; and then you have to complete all the documentary
requirements. Once that’s done, then the SEC will approve. But it is a
long process. There are a lot of documents that the SEC will require.
DIFFERENCE BETWEEN Sec. 35(g) and Sec. 39:
Sec. 35(g) Sec. 39
Disposition of assets in the Disposition of all or substantially
ordinary course of its business all of the corporation’s
or incidental to its business properties assets including its
goodwill
Does not constitute as a merger Constitutes as a merger of the
of the business with another business with another
corporation corporation
If part of the ordinary course of Majority vote of the BOD plus
business: the vote of the stockholders
Consent of BOD is not representing at least two-thirds
necessary as long as the (2/3) of the outstanding capital
transaction involving the stock, or at least two-thirds (2/3)
corporation’s property is of the members, in a
necessary or incidental to the stockholders’ or members’
regular course of business of meeting duly called for the
the corporation purpose is needed
If incidental: approval of the
majority of the BOD where there
is a quorum
Continuation on the discussion of Sec. 35:
(g) To purchase, receive, take or grant, hold, convey, sell, lease,
pledge, mortgage, and otherwise deal with such real and personal
property, including securities and bonds of other corporations, as the
transaction of the lawful business of the corporation may reasonably
and necessarily require, subject to the limitations prescribed by law
and the Constitution;
How do you know whether the transfer is under Sec. 35(g) or under
Sec. 39?
First, there is a need for us to determine whether the assets disposed
of are all or substantially all of the assets of the corporation. The
disposal is deemed to be of all or substantially all of the assets of the
corporation when after the disposal, the corporation could no longer
continue in its existence or it could no longer continue with its primary
purpose.
Regulatory requirement with respect to Sec. 35(g) and Sec. 39:
EH 404 | UNIVERSITY OF SAN CARLOS
Under Sec 35(g)
 If necessary – consent is not required
Example:
If you are engaged in the real estate business, in order to sell
a condominium:
You just need to have an authorized representative. No board
approval is required. If it’s part of the ordinary course of business
(regular business of the corporation to sell the assets), you don’t
even need board approval, the same is already implied as it is
part of your primary purpose and a part of your operations.
 If incidental -
Example:
If the corporation is not engaged in the buy and sell of real
estate, but it has an idle property that it wants to sell as it has
no use anymore:
Since the transaction is merely incidental to the business of the
corporation (it is not part of your regular operations), you will need
the approval of the majority of the BOD in a meeting where there
is a quorum.
Under Sec. 39
You would need a majority vote of the BOD plus the vote of the
stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, or at least two-thirds (2/3) of the
members, in a stockholders’ or members’ meeting duly called for
the purpose.
KIND OF STOCK REQUIRED TO VOTE:
We are referring to both voting and non-voting stocks pursuant to
Sec. 6 of the Corporation Code.
Holders of non-voting shares shall nevertheless be entitled to
vote on the matter of sale, lease, exchange, mortgage, pledge, or
other disposition of all or substantially all of the corporate property
SECTION 35 (continuation)
(h) To enter into a partnership, joint venture, merger, consolidation, or
any other commercial agreement with natural and juridical persons;
(i) To make reasonable donations, including those for the public
welfare or for hospital, charitable, cultural, scientific, civic, or similar
purposes: Provided, That no foreign corporation shall give donations
in aid of any political party or candidate or for purposes of partisan
political activity;
(j) To establish pension, retirement, and other plans for the benefit of
its directors, trustees, officers, and employees; and
(k) To exercise such other powers as may be essential or necessary
to carry out its purpose or purposes as stated in the articles of
incorporation.
Section 35 gives you the incidental powers of a corporation.
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SECTION 36, RCC – Power to Extend of Shorten Corporate Term He can buy 200,000 but he cannot insist on 500,000. Only if there are
Requisites: other shareholders who will waive their shares and no one wants to
1. Approved by a majority vote of the board of directors or trustees, take it up, then you can buy the excess. It is NOT a matter of right.
and
2. Ratified at a meeting by the stockholders or members Application of Pre-emptive right:
representing at least two-thirds (2/3) of the outstanding capital Applies to all issued shares
stock or of its members.
3. AOI must be amended and approved by SEC Discussion of Atty Gaviola:
4. A written notice must sent to stockholders or members at their If you are strict about it, the law says it applies to all issues or
respective place of residence as shown in the books of the disposition of shares of any class. So there have been opinions that
corporation says that pre-emptive right even applies to treasury shares. Because
again, you look at the purpose. The purpose is to maintain your pro
SECTION 38, RCC – Power to Deny Pre-emptive Right rata shareholding in the corporation.
Pre-emptive right – the right of the shareholder of the opportunity to
buy the share newly issued the corporation before it is offered for sale General Rule: Pre-emptive right can be availed of even if it is not
to the public. expressly granted in the Articles of Incorporation. But may be limited
by incorporating it in the Articles of Incorporation.
This right is not necessarily granted in the corporation for the
shareholder to exercise. It is manifested if the BOD issues new shares Pre-emptive right can be fully denied as long as it is expressed in the
in which case a stockholder has the option to buy in proportion to AOI.
his/her shareholding.
XPN: As provided by Section 39 of RCC, which admits three (3)
Example: exceptions:
A corporation has:
Subscribed Shares – 1 Million 1. By complying with laws recurring stock offerings or minimum
New Issuance of BOD - 1 Million stock offerings required by the public.
Stockholder has 200 shareholdings.
In case of initial public offering, and there is a minimum stock
The stockholder, in this case, then has a right to buy an additional offering required for the public, then, of course since that will
share of 200 shares from the newly issued shares of 1 million, which be publicly owned then the shareholder shall not exercise their
is in proportion to his/her shareholding. pre-emptive rights.
2. Share is to be issued in good faith with the proper approval of
The proportion is one-fifth (1/5). 2/3 of the shareholders representing the outstanding capital
stock in exchange of the property needed for the business of
200,000 outstanding capital, divided by the total outstanding capital, the corporation.
that would mean that your share in the total outstanding capital is? 3. If the share is to be issued in good faith with the approval of 2/3
of the shareholders representing the outstanding capital stock
200 000 OC = 1 for the payment of the debts of the corporation
Total OCS 5
In these 3 instances, even if the right is not denied in the articles,
In this case, you are entitled to buy 200 000 (1/5 or 20%) shares from meaning the articles are silent, the stockholders will not exercise
the new issuance. the pre-emptive rights.

It is based not in the number of shares but on the ratio. MAJORITY STOCKHOLDERS OF RUBY INDUSTRIAL
If this was, let’s say 500,000 is the additional issuance, then that would CORPORATION vs MIGUEL LIM et al.
only entitle you to 100,000 shares. One fifth or 20% because you do
not base it in the number of shares, you base it on the pro rata
Topic: POWER of CORPORATION, Pre-emptive right
shareholding.
Ruby Industrial Corporation (RUBY) is a domestic corporation
Purpose of pre-emptive right:
engaged in glass manufacturing. Reeling from severe liquidity
It is to give the stockholders the opportunity to maintain their pro rata
problems beginning in 1980, RUBY filed on December 13, 1983 a
shareholdings in the company and not to dilute the shares for example
petition for suspension of payments with the Securities and Exchange
to those who are not yet stockholders.
Commission (SEC).
As a result of that rule, a stockholder cannot insist on purchasing more
On August 10, 1984, the SEC Hearing Panel created the management
than his proportionate share.
committee (MANCOM) for RUBY to perform the following functions:
(1) undertake the management of RUBY; (2) take custody and control
over all existing assets and liabilities of RUBY; (3) evaluate RUBYs
existing assets and liabilities, earnings and operations; (4) determine

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the best way to salvage and protect the interest of its investors and
creditors; and (5) study, review and evaluate the proposed
rehabilitation plan for RUBY.
Subsequently, two (2) rehabilitation plans were submitted to the SEC:
the BENHAR/RUBY Rehabilitation Plan of the majority stockholders
led by Yu Kim Giang, and the Alternative Plan of the minority
stockholders represented by Miguel Lim (Lim).
Plan 1 (BENHAR/RUBY): Benhar International, Inc. (BENHAR) — a
domestic corporation engaged in the importation and sale of vehicle
spare parts which is wholly owned by the Yu family and headed by
Henry Yu, who is also a director and majority stockholder of RUBY —
shall lend its P60 million credit line in China Bank to RUBY, payable
within ten (10) years. Moreover, BENHAR shall purchase the credits
of RUBY's creditors and mortgage RUBY's properties to obtain credit
facilities for RUBY. Upon approval of the rehabilitation plan, BENHAR
shall control and manage RUBY's operations. For its service, BENHAR
shall receive a management fee equivalent to 7.5% of RUBY's net
sales.
Plan 2 (Alternative/Minority): On the other hand, the Alternative Plan
of RUBY's minority stockholders proposed to: (1) pay all RUBY's
creditors without securing any bank loan; (2) run and operate RUBY
without charging management fees; (3) buy-out the majority shares or
sell their shares to the majority stockholders; (4) rehabilitate RUBY's
two plants; and (5) secure a loan at 25% interest, as against the 28%
interest charged in the loan under the BENHAR/RUBY Plan.
Both plans were endorsed by the SEC to the MANCOM for evaluation.
In 1988, SEC approved BENHAR/RUBY Plan.
Meanwhile, BENHAR started to pay off secured creditors of RUBY and
executed deeds of assignments of credit and mortgage rights in favor
of BENHAR. These were done despite the TRO and injunction and
even before the SEC Hearing Panel.
AFLC and Lim moved to nullify the deeds of assignment in favor of
BENHAR and cite the parties in contempt for willful violation of SEC
order on suspension of payments. They also charged that in paying of
FEBTC debts, it was given undue preference over the other creditors
of Ruby. SEC nullified the deeds of assignments, upon appeal SEC En
Banc denied appeal for BENHAR et al, CA affirmed SEC ruling
nullifying the deeds.
On the other hand, it appears that even during the pendency of
appeals, BENHAR and Ruby have performed other acts in pursuance
of BENHAR/RUBY Plan approved by SEC (even if there was an
injunction).
Lim received a notice of stockholder’s meeting signed by Mr Magtalas
the “designated secretary” of Ruby and stating the matters to be taken
up in said meeting which includes extention of Ruby’s corporate term
for another 25 years and election of directors. At the scheduled
stockholder’s meeting, Lim together with other minority stockholders
appeared in order to put on record their objections on the validity of the
holding thereof and the matters taken therein. Specifically, they
questioned the percentage of stockholders present in the meeting
which the majority claimed stood at 74.75% of Ruby. Lim also argued
EH 404 | UNIVERSITY OF SAN CARLOS
that a majority of the stockholders claiming to be 74.75% of Ruby
increased their shares to 75.75% by subscribing from the unissued
shares of the authorized capital stock as “capital infusion”.
Accordingly, Lim said that the extension of corporate term and
increase in capital stock were done in violation CA and without
compliance to legal requirements of Corporation Code.
ISSUE: Whether the minority’s pre-emptive rights were violated by the
BOD meeting conducted to issue additional shares and to extend the
corporate term of Ruby to 25 years?
RULING:
Yes, there was a blatant violation of the pre-emptive right of minority
stockholders.
Pre-emptive right under Sec. 39 of the Corporation Code refers to the
right of a stockholder of a stock corporation to subscribe to all issues
or disposition of shares of any class, in proportion to their respective
shareholdings. The right may be restricted or denied under the articles
of incorporation, and subject to certain exceptions and limitations. The
stockholder must be given a reasonable time within which to exercise
their preemptive rights. Upon the expiration of said period, any
stockholder who has not exercised such right will be deemed to have
waived it.
The validity of issuance of additional shares may be questioned if done
in breach of trust by the controlling stockholders. Thus, even if the pre-
emptive right does not exist, either because the issue comes within the
exceptions in Section 39 or because it is denied or limited in the articles
of incorporation, an issue of shares may still be objectionable if the
directors acted in breach of trust and their primary purpose is to
perpetuate or shift control of the corporation, or to “freeze out” the
minority interest.
Lamentably, the SEC refused to heed the plea of the minority
stockholders and MANCOM for the SEC to order RUBY to commence
liquidation proceedings, which is allowed under Sec. 4-9 of the Rules
on Corporate Recovery.
Under the circumstances, liquidation was the only hope of the minority
stockholders for effecting an orderly and equitable settlement of
RUBYs obligations, and compelling the majority stockholders to
account for all funds, properties and documents in their possession,
and make full disclosure on the nullified credit assignments.
Oblivious to these pending incidents so crucial to the protection of the
interest of the majority of creditors and minority shareholders, the SEC
simply stated that in the interim, RUBYs corporate term was validly
extended, as if such extension would provide the solution to RUBYs
myriad problems.
Extension of corporate term requires the vote of 2/3 of the outstanding
capital stock in a stockholders meeting called for the purpose. The
actual percentage of shareholdings in RUBY as of September 3, 1996
— when the majority stockholders allegedly ratified the board
resolution approving the extension of RUBY’s corporate life to another
25 years was seriously disputed by the minority stockholders, and we
find the evidence of compliance with the notice and quorum
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requirements submitted by the majority stockholders insufficient and
doubtful. Consequently, the SEC had no basis for its ruling denying the
motion of the minority stockholders to declare as without force and
effect the extension of RUBY’s.
Discussion of Atty. Gaviola on the case:
SC held that there was a violation of the preemptive right of
stockholders since not all the existing stockholders were given such
right. In case of increase in authorized capital stock, all of the existing
stockholders must be given the right to subscribe to the additional
issuance in proportion to their interest in the corporation. However, Lim
and other minority stockholders were deprived of such right because
the additional stocks were only offered to particular majority
stockholders.
It does not matter if the majority stockholders were also creditors of the
corporation. The exception that the issuance for shares for previously
contracted debt is not a violation of preemptive right does not apply in
this case. SC said that even if it falls under the exceptions to
preemptive right under Sec. 39[now 38] or even if the AOI deny the
pre-emptive right, the issuance of new shares may be objectionable
for violating the preemptive rights if the issuance is in breach of trust
and their primary purpose is merely to shift the control of the
corporation. It is done specifically to dilute the shares of minority
stockholders.
SALE OR OTHER DISPOSITION OF ASSETS (SEC. 39)
Requirements for the Sale, Lease, Exchange, Mortgage, Pledge, or
other dispose of property and assets
1. Approval of BOD/BOT
2. Approval of stockholders/members
3. Notify Philippine Competition Commission (PCC) if the
transactions exceeds P1 Billion
Vote Required:
GR: Majority votes of its BOD or BOT
EXC: When the sale or disposition involves all or substantially all of the
property and assets
 Stockholders representing 2/3 of the OCS or at least 2/3 of
the members
 Where there is no members with voting rights, majority of
the trustees in office
Consideration:
1. Money,
2. Stocks,
3. Bonds, or
4. Other instruments for the payment of money or other property or
consideration.
Valuation of the Property
Determination of whether or not the sale involves all or substantially all
of the corporation’s properties and assets must be computed based on
its net asset value, as shown in its latest financial statements.
Substantially all of the corporate property and assets
Sale or other disposition shall be deemed to cover substantially all of
the corporate property and assets if:
EH 404 | UNIVERSITY OF SAN CARLOS
1. The corporation would be rendered incapable of continuing the
business or
2. The corporation would be rendered incapable of accomplishing
the purpose for which it was incorporated
Y-1 Leisure Philippines v. Yu
Facts:
MADCI, a real estate development corporation offered for sale shares
of a gold and country club. Yu bought 500 golf and 150 club shares for
a total of P650 000 which he paid by installment with 14 checks.
Upon full payment, Yu visited the supposed site and found that it was
non-existent. Yu demanded for his payment to be returned. While
MADCI acknowledged his investment, they did not give him his refund.
This compelled Yu to file a complaint for collection of sum of money
and damages against MADCI and Sangil, the president of the
corporation.
Sangil testified that MADCI failed to develop the golf course because
its properties were taken over by YIL after he allegedly violated the
MOA. The lands of MADCI were eventually sold to YICRI.
RTC: ruled that MADCI was liable – Sangil solidarily liable for using
the corporation as a mere alter ego
CA: Partly granted the appeal and modified RTC decision – YIL and
its companies are jointly and severally liable
Issue: WON fraud must exist in the transfer of all corporate assets in
order for the transferee to assume the liabilities of the transferor.
Ruling:
No. Under the Nell Doctrine:
Generally, where one corporation sells or otherwise transfers all of its
assets to another corporation, the latter is not liable for the debts and
liabilities of the transferor, except:
1. Where the purchases expressly or impliedly agrees to
assume such debts;
2. Where the transaction amounts to a consolidation or merger
of the corporations;
3. Where the purchasing corporation is merely a continuation of
the selling corporation; (business-enterprise transfer) and
4. Where the transaction is entered into fraudulently in order to
escape liability for such debts.
Sec. 40 (now Sec 39) refers to the sale, lease, exchange or disposition
of all or substantially all of the corporation’s assets, including its
goodwill. The transfer is of such degree that the transferor corporation
is rendered incapable of continuing its business or its corporation
purpose.
Sec. 40 suitably reflects the BUSINESS-ENTERPRISE TRANSFER
under the Nell Doctrine.
Notably, fraud is not an essential element for the application of the
business-enterprise transfer. The purpose of this rule is to protect the
creditors of the business by allowing them a remedy against the new
order of the assets and business enterprise. Otherwise, creditors
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would be left “holding the bad”, because they may not be able to
recover from the transferor who has “disappeared with the loot”.
For this rule to apply two requisites must concur:
1. Transferor corporation sells all or substantially all of its
assets to another entity; and
2. The transferee corporation continues the business of the
transferor corporation
When MADCI violated the MOA entered into by the parties, MADCI
was made to transfer all of its assets to the petitioners. MADCI was left
without any property to develop eventually rendering it incapable of
continuing the business or accomplishing the purpose.
Sec. 40 (now Sec 39) must apply. Petition is DENIED.
Discussion of Atty. Gaviola:
The question is whether or not the sale of all or substantially all of the
assets of a corporation includes a transfer of its liabilities to the
transferee.
Nell Doctrine
The Nell Doctrine states that the general rule is that the transfer of all
or substantially all of the assets of the corporation will not make the
transferee liable to its corporate liabilities of the transferor. However,
there are four exceptions.
EXCEPTIONS:
1. Where the purchaser expressly or impliedly agrees to assume
such debts.
2. Where the transaction amounts to a consolidation or merger of
corporations. (RATIONALE: combining of assets –
continuation of the corporate existence)
3. Where the purchasing corporation is merely a continuation of
the selling corporation. (Business Transfer Rule)
4. Where the transaction is entered into fraudulently in order to
escape liability for such debts.
In this case, it was found out that the transfer of the 120 hectare land
which was indicated in the MOA that the president of the transferee
corporation would assume all the liability. When the transferor could
no longer continue its business or operate its business to achieve its
corporate purpose, in effect it cannot function anymore as a
corporation. The Supreme Court ruled that the petitioners Y1 is
already liable to James Yu for the refund of his shares.
When by virtue of their transfer, the corporation is incapable of
performing the business or to achieve its corporate purpose. This was
found applicable in the case
The Supreme Court said, if you transfer your business or all or
substantially all of your assets that you cannot continue your business
anymore, then the liability is deemed transferred to the transferee with
or without bad faith. In fact, bad faith is also another exception
separate from the business transfer rule.
That is why if you sell all or substantially all of your assets it would be
best to notify all of your creditors otherwise your transferee will be held
liable.
EH 404 | UNIVERSITY OF SAN CARLOS
POWER TO ACQUIRE OWN SHARES (Sec. 40)
SECTION 40. Power to Acquire Own Shares. — Provided that
the corporation has unrestricted retained earnings in its books to
cover the shares to be purchased or acquired, a stock corporation
shall have the power to purchase or acquire its own shares for a
legitimate corporate purpose or purposes, including the following
cases:
a. To eliminate fractional shares arising out of stock
dividends;
b. To collect or compromise an indebtedness to the
corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent shares
sold during said sale; and
c. To pay dissenting or withdrawing stockholders entitled
to payment for their shares under the provisions of this
Code.
Requirements for corporation to acquire its own share
1. Existence of unrestricted retained earnings
2. Existence of legitimate purpose
Retained Earnings – is the accumulated profits of the corporation
from its previous operations
Kinds of Retained Earning
1. Restricted – BOD can make restriction on retained earnings based
on company planned expansion project, contractual covenant (ex.
Loan agreement), as special reserve for probable contingencies.
General rule: Stock corporations are prohibited from
retaining surplus profits in excess of one hundred percent
(100%) of their paid-in capital stock.
Exceptions under the 2nd par of Sec. 42 of the RCP:
a. When justified by definite corporate expansion
projects or programs approved by the board of
directors; or
b. When the corporation is prohibited under any loan
agreement with financial institutions or creditors,
whether local or foreign, from declaring dividends
without their consent, and such consent has not yet
been secured; or
c. When it can be clearly shown that such retention is
necessary under special circumstances obtaining in
the corporation, such as when there is need for special
reserve for probable contingencies.
What then is a contingency?
Something that may or may not happen.
Remember: Retained earnings is not something arbitrary.
Remember the purpose of the corporation is for profits. And in
order for you to distribute the profits, you must have retained
earnings. If you cannot distribute, that is circumventing your
purpose.
Example of the 3rd exception which is ‘special reserve for
probable contingencies:
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If it is a party to a litigation. The lawyers may determine that at the a. It has unrestricted retained earnings
end of the case, there is a chance that the corporation will be held b. It is for a legitimate purpose such as:
liable. Then the Board of Directors will then have a ground to 1. elimination of fractional shares
restrict retained earnings. 2. purchase of delinquent shares
3. in case in the exercise of an appraisal right in the case
NOTE: Do not be misled in saying that this ‘contingency’ means of a dissenting stockholder
natural calamities. That is wrong. That is supposed to be
answered by your Insurance Company. These instances are not exclusive. It can be for any legitimate
purpose.
Once the retained earnings of the corporation are restricted, the
Corporation cannot use this amount for just any purpose. They Vote Required:
can only be used for the purpose in which they are reserved.? The number of vote required to make a decision in a Board of
Director’s Meeting:
2. Unrestricted – Majority of the number of directors where there is quorum.

Example: Basis of Quorum:

If the Corporation has: Quorum is used to determine the validity of the meeting.

50 million as retained earnings;
BOD has declared that 10M is needed for expansion;
5M is required by a loan covenant to be restricted
Treasury shares for 5M
That leaves you with an unrestricted retain earnings of 30M.
This 30M is now the amount that you can use to purchase your
own shares and declare as dividends.
Legitimate Corporate Purpose
Relevant Provision: (list is not exclusive)
Section 40. Power to Acquire Own Shares. – Provided that the
corporation has unrestricted retained earnings in its books to cover
the shares to be purchased or acquired, a stock corporation shall
have the power to purchase or acquire its own shares for a
legitimate corporate purpose or purposes, including the following
cases: (a) To eliminate fractional shares arising out of stock
dividends; (b) To collect or compromise an indebtedness to the
corporation, arising out of unpaid subscription, in a delinquency
sale, and to purchase delinquent shares sold during said sale; and
(c) To pay dissenting or withdrawing stockholders entitled to
payment for their shares under the provisions of this Code.
Fractional Shares:
A share that is less than one full share of equity or a share that’s not
whole. Stock dividends may give rise to fractional shares.
Example:
If someone has 50 shares, and the stock dividend is 25%. Out of 50
shares, you are entitled to 12.5 stocks or shares — 12 full shares and
.5 is your fractional share.
Atty G: So, a stock dividend gives rise to a fractional share. The
corporation has the right or power to purchase that fractional share.
Technically, fractional shares are useless. They cannot be voted on;
they cannot earn dividends. It’s useless to own fractional shares.
Therefore, the corporation has the right to purchase the fractional
shares.
ACQUISITION BY THE CORPORATION OF ITS OWN SHARES,
WHEN ALLOWED
If there is no quorum, the meeting is invalid. No votes are even cast. If
there is quorum, that is the time you can vote, and the voting is
dependent on the majority of the directors present, provided there is a
quorum.
There is a difference between majority of the board and majority
of the quorum.
Majority of the Board: Always needs 8 votes.
Majority of the Quorum: Dependent on the number of directors present
provided there is quorum.
To illustrate:
If there are 15 directors
- Majority of the board:
8 votes needed
- Majority of the quorum:
5 votes needed
Under section 40, the type of shares referred to all types of shares
except redeemable shares (No need to comply). Said shares must
comply with the requisites under section 40, the corporation must
have:
1. Unrestricted retained earnings
2. Shares are owned for a legitimate corporate purpose.
With regard to redeemable shares:
The corporation has to redeem it on the date specified by the Articles
of Incorporation; even if there is no board declaration, no unrestricted
retained earnings or purpose. They are redeemable by right.
POWER TO INVEST CORPORATE FUNDS IN ANOTHER
CORPORATION OR BUSINESS OR FOR ANY OTHER PURPOSE
(Section 41)
Requirements (for new investment other than that stated in the
primary purpose of the corporation):
1. Approval by the majority of the Board
2. Ratified by the stockholders representing at least 2/3 of the
outstanding capital stock

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Note: If the investment is pursuant to the primary purpose of the
corporation, the requirement is only the approval by the majority
of the Board in a meeting where there is a quorum.
3. Notice to stockholders of the proposed investment and the
time and place of the meeting
4. Give dissenting shareholders their appraisal right
5. Amend the purpose clause of the AOI (by submitting to the
SEC your amended AOI) and secure the approval of the
amendment from the SEC.
Note: If it is beyond the primary purpose, the act is ultra vires.
If the corporation wants to invest or undertake in an operation that is
not it’s primary purpose, what does it need to do to legitimize that
investment?
It must amend its purpose clause in the articles, it must secure the
approval of the board and 2/3 of the stockholders representing the
outstanding capital stock.
. corporation is not liable to issue dividends. Upon declaration date
The SEC will not allow a corporation to engage in a business that is
not it’s primary purpose. That business will be considered as ultra
vires.
You need to amend the AOI to include that business or operation as
part of the corporation’s primary purpose.
Vote required needed to allow the corporation to invest in a new
venture:
1. Majority of BOD
2. Vote of Stockholders representing 2/3 OCS
It is considered effective UPON approval by the SEC of the
amendment.
POWER TO DECLARE DIVIDENDS (Sec. 42)
Types of dividends:
1. Cash dividends
2. Property dividends
3. Bank dividends
Voting requirements:
If cash or property dividends, then you need approval of the majority
of the BOD present in a meeting where is a quorum
If stock dividends, approval of the BOD and majority present in a
meeting where there is a quorum and the vote of stockholders holding
2/3 of the outstanding capital stock.
Rule on Dividends
GR: Dividends can only be declared out of unrestricted retained
earnings not out of capital. Because declaring dividends out of capital
is a violation of the trust fund doctrine.
Trust Fund Doctrine: Prohibits the distribution of assets to the
stockholders before the payment of creditors.
Exception to Trust Fund Doctrine: Liquidating dividends.
EH 404 | UNIVERSITY OF SAN CARLOS
In case of liquidation, generally, the liquidating dividends can only be
distributed after the creditors have already been paid. So no payment,
no liquidating dividends. This is not a violation of the trust fund doctrine
as the presumption is, you already paid your creditors or you have set
aside sufficient assets to pay off your creditors.
So liquidating dividends is return of capital but its not a violation of trust
fund doctrine.
But again, before any kind of dividend is declared, there must first be
sufficient unrestricted retained earnings.
The significant dates for dividend declaration:
1) Date of declaration
It is the date when the dividends were approved to the shareholders
on record. The corporation is not obliged to declare dividends. The
Board of Directors is not obliged to declare dividends even if there
are unrestricted retained earnings. Prior the declaration date the
that is the time when the corporation will now record the dividend
liability.
2) Date of record
It is the date, which determines which shareholders, will be entitled
to the dividends.
Example:
Declaration date – Apr 15
Record date – May 15
Transfer of shares
A to B – Apr 13
B to C – May 10
C to D – May 25
C is entitled to the dividends; C is the shareholder on record.
The record date determines which stockholder is entitled to
dividends. When shares are transferred after declaration date but
before the record date we say that the transfer is dividends on. The
transfers of shares carry with it the transfers of the dividends. So
when A transfers to B and B to C the transfers is dividends on
because it is before the record date. Whoever owns the share as
of the record date is entitled to the dividends. After the record date,
when C transfers to D the transfers is now dividends off. It is
because the transfer of the shares does not carry with it the
transfer of the dividends. The dividends remains with C, as based
on the record date.
Generally, the price of the share dividends on, would be higher,
because it carries with it the right to receive the dividends. The
transfers after the dividends off are lower in price.
3) Date of payment
Three dates to remember:
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1. Declaration date - the time when the dividends becomes the
liability of the corporation. Before, no dividend payable even
if the shares are cumulative. The stockholder as of the
record date are the ones entitled to receive.
2. Record date – determination who is entitled.
3. Payment date – dividends actually paid. If the record date is
not set then the record date is the declaration date
TAKE NOTE: if there is no record date then declaration date becomes
the record date.
Corporation cannot declare dividends unless it has unrestricted
retained earnings.
General Rule: A corporation cannot be compelled.
Exception: If retained earnings more than 100% of its capital.
Exception to the Exception: (when corporations can retain even
in excess of the 100% of the paid-in capital stock)
1.) Definite corporate expansion projects approved by the board
2.) Loan agreement with any financial institution or creditor
3.) When it can be clearly shown that retention is necessary
under special circumstances (i.e. corporation is under
litigation)
Illustration: Corporation X has a Paid up capital worth 50 million, it
has retained earnings amounting to 60 million, 30 million of which is
restricted.
Can the corporation be required to declare dividends?
No, the corporation cannot be compelled. As a rule, a corporation is
required to declare dividends when its retained earnings are more than
the paid-up capital. However, if the retained earnings are restricted
under the valid grounds provided for under the Corporation Code then
it may not be compelled to declare dividends.
The prohibition thus applies only to UNRESTRICTED RETAINED
EARNINGS not to the TOTAL RETAINED EARNINGS.
In this case, the total retained earnings of 60 million has exceeded the
50 million paid up capital, however 30 million of which is unrestricted.
Hence, only 30 million in essence is considered UNRESTRICTED and
it does not exceed the 50 million paid-up capital.
SEC penalty is 10% of RE. BIR also imposes improperly accumulated
stocks is also 10%.
Restricting your RETAINED EARNINGS will be a way to get out of the
prohibition.
Why would corporations not want to pay dividends? For close
corporations, corporations do not want their stockholders to be taxed
with Final Tax of 10%. Ordinarily, the corporation cannot be compelled
to declare dividends. But cannot RE in excess of 100% of its paid in
capital. If it does so, it will be subject to penalties.
Exceptions—if it will restrict its retained earnings.
EH 404 | UNIVERSITY OF SAN CARLOS
A board resolution is needed to declare to use money as RE. No
prohibition as to how much you’ll use as RE, depends on the needs of
the corporation. But if 25 years ago, you say you’ll expand, but never
did, BIR will look into it and it could be a ground for penalties. For
example, you’ll restrict 1B but you only need 1M, BIR can also look
into that.
POWER TO ENTER INTO MANAGEMENT CONTRACT (Sec. 43)
Requirement for a corporation to enter into a management
contract:
1. Vote in both the managing and the managed corporation which
consists of:
-majority of the BOD constituting a quorum and
-stockholders representing majority of the OCS
2. Instances where there is a need of vote of stockholders
representing 2/3 of the OCS from the managed corporation.
1. Where a stockholder or stockholders representing the
same interest of both the managing and the managed
corporations own or control more than one-third (1/3) of the
total OCS entitled to vote of the managing corporation; or
2. Where a majority of the members of the board of directors
of the managing corporation also constitute a majority of the
members of the board of directors of the managed
corporation
Term of Management Contract - It should not exceed 5 years in one
term. Renewable, as long as, for each term, it shall not exceed 5 years.
University of Mindanao (UM) v BSP
Facts:
This involves spouses: shareholders in the university and
incorporators of two banks. They incurred an emergency credit in favor
of one of the banks from the BSP. They secured it initially with PNs but
some properties of the UM were used as security. There were liquidity
problems which led to the merger of the banks, hence a new bank was
formed. The new bank was not able to pay the loan as it was bankrupt.
This led to the foreclosure of the lot securities owned by UM in favor
of BSP.
BSP contended that the spouses were shareholders of both the bank
and the school, so they have the right to foreclose the properties.
However, UM now contended that they did not execute the REM
because it was an ultra vires act.
SC: It was an ultra vires act because the school’s purpose is to render
educational services which has no connection with the execution of the
REM in behalf of the bank debtor.
The certificate of the secretary favoring the REM had no board
resolution attached so even though granting that there was ratification
by silence, it was not the case as there was no board resolution and
the BSP, imbued with public interest should have known that when a
corporation executes a REM, they should look into to the corporate
powers and check if there is a board resolution. And, the mere fact that
spouses are shareholders of both concerned corporations, it does not
give the UM powers by virtue alone of the fact that the spouses were
engaged in both.
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Stockholdings in one corporation does not give the other corporation unenforceable contract. So for me yes, if the question is what is the
new invested powers. effect of ultra vires acts, the answer would be that the acts are
unenforceable. That would mean that it can have no effect at all unless
Is the benefit to the stockholder sufficient to consider the transaction ratified. When you say voidable, it is valid unless you annul it, so it can
as not ultra vires? NO. take effect. Whereas if the contract is unenforceable, if it is still
executory, it cannot be executed at all. But if it is already ratified or is
Remember: In the Acoje Mining case, we said that the benefit to the partially executed, then it can take effect.
corporation will render the transaction as not ultra vires. In that case,
the establishment of the post office was not under the express powers
of the corporation but it was ruled that the same was not ultra vires
because it benefited the corporation. In this case however, it is clear
that the loan did not benefit the university. It only benefitted a particular
stockholder.

Does a benefit to a stockholder count as an exception to the ultra vires

rule?
No. The corporation has a separate juridical personality from its
stockholders. So here, the loan was in favor only of the stockholders
but not the corporation, so it does not fall under the exception.

In this case the SC held that it was an ultra vires act therefore UM
cannot be held liable to the loan.

What is the effect of an ultra vires act? What happens to the

transaction? What type of contract does it create?

It creates an unenforceable contract: valid but the same cannot be

enforced as it is beyond the corporate powers. Similar if your agent
acts beyond its powers, it is an unenforceable contract, not a void
contract.

When is the act considered void as far as the corporation is

concerned? If the acts are illegal.

Difference between an ultra vires act and an illegal act:

Ultra vires: acts that are beyond the powers of the corporation
Illegal: acts that are contrary to law, morals, good customs, public
order and public policy.

Difference between an ultra vires and an illegal act, in terms of

consequence:
Ultra vires: unenforceable but they can be ratified
Illegal: void ab initio

Ultra vires acts may be considered as unenforceable but they can be

ratified, whereas an illegal act is void from the very beginning. There
can be no consequence to an illegal act.

Question from a classmate:

In the cases of San Miguel and Bernas v. Cinco discussing the
distinction between an unenforceable act and an illegal act, the
reference made to ultra vires act is merely voidable. So when it
comes out in the exam, do we now consider the 2016 case of UM
as the controlling doctrine holding that ultra vires acts are
unenforceable?

Voidable contracts are valid until annulled. The consensus when it

comes to ultra vires act is that it is not valid at all. Meaning, it can have
no effect but it can be ratified, and that is the nature of an

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Meetings
STOCKHOLDERS’ MEETING
REGULAR SPECIAL
When Annually At any time when deemed necessary or as
GR: at a specified date as stated in the bylaws provided by the bylaws
EXC: if none, at a date after April 15
Notice Sent to all stockholders or members Sent to all stockholders or members
GR: at least 21 days prior to the meeting GR: at least 1 week prior to the meeting
EXC: a different period is provided under the bylaws, laws, or EXC: a different period is provided under the
regulation bylaws, laws, or regulation
Matters to be taken up 1. Everything taken up in the last stockholders’ meeting
(naa list ani sa RCC)
2. Members’ list for non-stock corporations and, for stock
corporations, material information on the current
stockholders, and their voting rights
3. Detailed, descriptive, balanced and comprehensible
assessment of the corporation’s performance, which shall
include information on any material change in the corporation’s
business, strategy, and other affairs
4. A financial report for the preceding year, which shall include
financial statements duly signed and certified in accordance
with this Code and the rules the Commission may prescribe, a
statement on the adequacy of the corporation’s internal controls
or risk management systems, and a statement of all external
audit and non-audit fees;
(3 and 4 are known as the President’s Report - President will
report to the stockholders the result of the previous operations)
5. Explanation of the dividend policy and the fact of
payment of dividends or the reasons for nonpayment thereof
6. Director or trustee profiles which shall include, among
others, their qualifications and relevant experience, length of
service in the corporation, trainings and continuing education
attended, and their board representations in other corporations
7. Director or trustee attendance report, indicating the
attendance of each director or trustee at each of the meetings
of the board and its committees and in regular or special
stockholder meetings
8. Appraisals and performance reports for the board and
the criteria and procedure for assessment
9. Director or trustee compensation report prepared in
accordance with this Code and the rules the Commission may
prescribe
10. Director disclosures on self-dealings and related party
transactions; and/or
11. Profiles of directors nominated or seeking election or
reelection

validity of the meeting even if some stockholders were not able to

Guy v. Guy, G.R. No. 184068, April 19, 2016
Facts: The stockholders did not receive the notice but it was sent.
Issue: Whether or not the meeting was valid.
Held: Yes. The law and the bylaws of the corporation were
unambiguous. It only requires the sending of the notice. Nothing in the
law requires that it should be received by the stockholders. Since the
President sent notices to all the stockholders, the SC upheld the
receive the notice.
Depositing in the mail is sufficient as part of sending. Receipt is not
required so the corporation need not show that the notice was
received, it is sufficient that they can show that it was sent, unless the
by-laws specify otherwise.
Atty. Gaviola: There’s a lot of things that the Revised Corporation
Code now provides as to the report to the stockholders. If you consider
it, the stockholders only meet once a year, so this is the only chance

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to be appraised of the corporation. This is justified that these items
should be discussed by management to the stockholders.
Who can call the meeting?
Any person designated in the by-laws can call the meeting or in the
absence of that person or when that person refuses to call the meeting,
the stockholder may petition the SEC to call the meeting so the SEC
may issue an order directing the petitioning stockholder or member to
call the meeting.
Remember in the case of Bernas vs Cinco, it was an issue of the
oversight committee calling the meeting because they wanted to
overthrow the current BOD so in that case the SC ruled that the
meeting was improperly called because the oversight committee didn’t
have authority to call the meeting.
The SC said it would have been okay if there was no other option for
the stockholders but the by-laws and the law provides an option there
was that the incumbent officers wouldn’t call a meeting to oust
themselves so the SC said that well that may be true but you are not
left without recourse bec you can always go to the SEC and petition
them to call a meeting. In this case the calling of the meeting was
invalid because the people who called the meeting were not authorized
so the election was also invalid.
Meetings; Where Held:
A stockholders meeting should be held at the Principal office of the
business.
If it cannot be held in the principal office but they all want to attend, it
can be held at the city or municipality where the principal office is
located.
What happens if the meeting of the stockholders is improperly held or
called (eg. Held outside the city/municipality where the principal office
is located, lacking in notice)?
GR: When a meeting of a stockholder is improperly held/called, the
meeting is invalid
EXEPTION: If all the stockholders are present or represented during
the meeting
EXCEPTION TO THE EXCEPTION: IF any of hose stockholders
present are present because they just want to register their objections
to the invalid calling or holding of the meeting in which case we go
back to the general rule the meeting is still invalid
If the meeting is validly held or called, how do you determine that the
meeting is sufficient to validly approve a transaction?
 The quorum is determined by the stockholders holding
majority of the outstanding capital stock entitled to vote.
Unless the transaction is being voted on is one which
requires a higher number of votes and requires the
participation of the non-voting shares but ordinarily, election
of directors, ratification of the acts of the management these
are only required to be approved by the voting stockholders
EH 404 | UNIVERSITY OF SAN CARLOS
Why is the rule that way?
Its because the law does not want to trouble the stockholders to go to
wherever places that the meeting may be held.
Example:
If the seating directors or the majority stockholders will call for a
meeting outside of the country and the minority stockholders cannot
afford to go there. In this case, the minority stockholders will be
disenfranchised. They cannot exercise their rights as a stockholder to
vote during the meeting.
The place of the meeting of the stockholders is always fixed. It is
always at the principal office of the corporation or in the city or
municipality where the principal office is located.
IMPROPERLY HELD OR CALLED MEETINGS
Even if the meeting is improperly held or improperly called, all
transactions or resolutions approved during the stockholders
meeting can still be considered as valid provided that all stockholders
attend or are duly represented during that meeting.
The new amendment added another caveat, provided that not any
one of those stockholders attended just for the purpose of objecting to
the calling or the holding of the meeting.
Even if all the stockholders are duly represented or are present but
one of them was just there to object to the calling or the holding of the
meeting then you cannot apply the exemption that the meeting is still
valid even if it is improperly held or called provided that all stockholders
are present.
QUORUM
Ordinarily, the quorum for the stockholders is majority of the
outstanding capital stock or majority of members in case of non-
stock corporations.
In ordinary approval, by the stockholders you just need to take a look
at 50% plus 1 of the OCS. Meaning you do not include treasury shares.
But there are certain instances where 2/3 vote is required. Those are
exceptions to the rule that quorum is majority. In those instances where
2/3 vote is required you don’t use 50% plus one. The required vote is
2/3.
To summarize, the voting required could either be:
General Rule: Majority vote, which is 50% + 1
XPN: 2/3 vote in specific cases
Who shall preside over the meeting of the stockholders?
Old Corporation Code: President
Revised Corporation Code: The chairman, or in his absence, the
president, shall preside over the meetings of the stockholders; as well
as the meetings of the board of directors.
Tan v Sycip
Facts:
It involves a non-stock non-profit corporation involving 15 members as
the board of trustees. 4 out of the 15 were already dead so 11 was lift.
Among the 11 only 7, attended a special meeting. The purpose of the
meeting to replace the 4 deceased. However, some of the 4 remaining
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trustees contested the meeting arguing that no quorum was achieved
because they should base the number of trustees to the 15 including
the dead members but the petitioners argued that the requirement
must be based on alive members, so only 11, thus 7 out of the 11
constitutes a quorum therefore the corporate act that they voted on
was valid.
The court differentiated a stock and non-stock corporation.
In stock corporations: Since the shares are capable of succession,
they can base it on deceased members. It must be based on
outstanding shares regardless of the existence of the owner of the
share since the someone succeeds him/her.
For non-stock corporation: Since there are no shares and the rights
of a member in a non-stock is personal, so his standing as a member
ceases when he/she dies while in a stock corporation, once a
stockholder dies a person may succeed to it. It must be based on the
members representing ACTUAL VOTING RIGHTS.
Discussion of Atty. Gaviola:
In TAN V SYCIP. It emphasizes the principle that a stock corporation
has the right of succession in such a way that the passing of any of the
stockholder will not affect the quorum requirements for the meeting of
the stockholder because you always count it by outstanding capital
stock.
Even if the original stockholder is already dead, the estate of that
stockholder will still have the right to vote on the shares, so it is still
considered as part of the outstanding capital stock it will not be retired.
On the other hand, if a corporation is non-stock, you based the quorum
on the number of the actual surviving members especially if the
membership is non-transferable.
Manner of Voting; Proxies
Section 57. Manner of Voting; Proxies – Stockholders and
members may vote in person or by proxy in all meetings of
stockholders in all meetings of stockholders or members.
When so authorized in the bylaws or by a majority of the board of
directors, the stockholders or members of corporations may also
vote through remote communication or in absentia: Provided, That
the votes are received before the corporation finishes the tally of
votes.
A stockholder or member who participates through remote
communication or in absentia shall be deemed present for
purposes of quorum.
The corporation shall establish the appropriate requirements and
procedures for voting through remote communication and in
absentia, taking into account the company’s scale, number of
shareholders or members, structure and other factors consistent
with the basic right of corporate suffrage.
Proxies shall be in writing, signed and filed, by the stockholder or
member, in any form authorized in the bylaws and received by the
corporate secretary within a reasonable time before the scheduled
meeting. Unless otherwise provided in the proxy form, it shall be
valid only for the meeting for which it is intended. No proxy shall be
valid and effective for a period longer than five (5) years at any one
time.
EH 404 | UNIVERSITY OF SAN CARLOS
How can the stockholders vote during the meeting?
1. In person
2. By proxy
It is an assignment of another person, the proxy holder, to
attend and vote in the meeting, in behalf of the stockholder.
3. Remote communication (new)
4. In absentia (new)
The last two are new. The stockholder need not be present, but are
deemed present for the purposes of quorum.
Requirements for remote communication or in absentia:
1. Authorized in the bylaws or by a majority of the board of
directors
2. The votes are received before the corporation finishes the
tally of votes
Previously we’ve talked about separating the beneficial ownership
from the legal ownership of shares. What happens if, for example, a
person mortgages or pledges his shares? Who has the right to vote?
Section 54. Right to Vote of Secured Creditors and
Administrators. – In case a stockholder grants security interest in
his or her shares in stock corporations, the stockholder-grantor
shall have the right to attend and vote at meetings of stockholders,
unless the secured creditor is expressly given by the stockholder-
grantor such right in writing which is recorded in the appropriate
corporate books.
Executors, administrators, receivers, and other legal
representatives duly appointed by the court may attend and vote in
behalf of the stockholder or members without need of any written
proxy.
Rule if the shares are used to secure a loan:
The stockholder has the right to vote.
Exception: Voting Trust Agreement; there is an express authority, in
writing, by the stockholder which must be recorded in the STB.
 SO: The right to vote given to the security holder should be
recorded in the books of the corporation. The stock and
transfer book.
 The right granted, right to vote, which is not in the stock and
transfer book is not a valid grant of a voting right.
 EXC: if we are talking about a proxy. A proxy is a specific
form of voting.
Procedural requirements and limitations imposed on VTA’s:
1. The agreement must be in writing and notarized and specify the
terms and conditions thereof;
2. A certified copy of such agreement shall be filed with the
corporation and with the SEC, otherwise, it is ineffective and
unenforceable.
3. The certificate/s of stock covered by the VTA shall be cancelled.
4. A new certificate shall be issued in the name of the trustee/s
stating that they are issued pursuant to the VTA.
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5. The transfer shall be noted in the books of the corporation, that
it is made pursuant to said VTA.
6. The trustee/s shall execute and deliver to the transferors voting
trust certificates, which shall be transferable in the same manner
and with the same effect as certificates of stock.
7. General Rule: No VTA shall be entered into for a period
exceeding 5 years at any one time (i.e., for every voting trust)
XPN: In case of a voting trust specifically requiring a longer
period as a condition in a loan agreement, the period may
exceed 5 years but shall automatically expire upon full payment
of the loan.
8. No VTA shall be entered into for the purpose of circumventing
the law against monopolies and illegal combinations in restraint
of trade.
9. The agreement must not be used for purposes of fraud (RCC,
Sec. 58).
NOTE: Unless expressly renewed, all rights granted in a voting trust
agreement shall automatically expire at the end of the agreed period,
and the voting trust certificates as well as the certificates of stock in
the name of the trustee or trustees shall thereby be deemed cancelled
and new certificates of stock shall be reissued in the name of the
transferors (RCC, Sec. 58).
PLEDGED OR MORTGAGED SHARES
It is the pledgor or mortgagor who has the right to vote. If the pledgee
or mortgagee wants to have that right, such right should be recorded
in the stock and transfer book of the corporation; otherwise, it is still
the pledgor or mortgagor, as the stockholder, who has the right to vote.
VOTING TRUST AGREEMENTS
Here, you need to cancel the original certificate and you need the
voting trust certificate issued in favor of the trustee. The voting trust
certificate will allow the trustee to vote on the shares.
Clarification: Independent directors are still directors they need to
own shares in the corporation. But they have to own shares not as a
nominee but under their own name. In fact the rule under the Philippine
Stock Exchange (PSE), an independent director is allowed to
purchase shares corporation where he/she is an independent director
which shall not exceed five (5%) percent of the total outstanding
shares, otherwise said director is not independent but a
majority/principal stockholder.
BOD MEETINGS
Meetings:
1. Regular
When: The date fixed in the by-laws; or if there is no date in the
by-laws – shall be held monthly.
2. Special
When: At any time deemed necessary or as may be provided in
the bylaws.
Notice Requirement:
1. State the date, time and place of the meeting;
2. Be sent to every director or trustee
a. Within the period provided in the by- laws.
EH 404 | UNIVERSITY OF SAN CARLOS
b. In the absence of provision in the by-laws at least
2 days prior to the scheduled meeting.
A director or trustee may waive this requirement, either expressly or
impliedly.
Venue:
1. Venue fixed by the by-laws; or
2. If venue is not provided by the by-laws, anywhere in or
outside of the Philippines.
The rule for the place for holding the meeting is more lenient for the
board of directors, because it is presumed that the board of directors
will go to the place where the meeting is held.
In fact, it is normally the corporation who pays for the travel expenses,
and the board gets paid to go to the meetings. Unlike stockholders,
they have to pay for their own expenses.
Quorum
Majority of the members of the Board as stated in the AOI.
The decisions reached by the majority of the directors constituting a
quorum shall be valid.
The only exception to this rule is the election of officers, wherein the
vote required is majority of all the board, not merely quorum.
Vote Required
For every corporate act, the members of the board of at least majority
of the members present in the meeting, where there is a quorum.
Procedure for voting
A director can vote:
1. In person,
2. Remote communication or in absentia
3. Teleconferencing, as provided in the by-laws.
It cannot be by proxy.
So a director is allowed to vote in person, remotely, or even by
absentia but cannot be by proxy. What is the difference? Why not by
proxy?
It is because of the trust and confidence reposed by the stockholders
upon the directors. Moreover, the directors are voted on by the
stockholders based on their qualifications.
It is not right to assign someone else to attend on your behalf because
that would be a breach of your duty to the stockholders who voted for
you because of your experience, qualifications, and familiarity with the
operations. If they send someone else, that person may not have the
same capacity as the stockholder. It is unfair that they voted for you,
but you’re sending someone else to vote on your behalf who has less
qualifications. And that person may not vote correctly, or would not
have voted in the same way you would’ve voted.
Deceased Stockholder:
In case of death, as ruled in Tan v. Sycip for purposes of voting in stock
corporations, insofar as the quorum is concerned, the deceased
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stockholder shall be represented by the executor or administrator of
his estate.
There needs to be a court order saying that such person is the
executor or administrator.
Once you have a court order, there is no longer a need to present other
documents like proxy or a VTA.
 Once the executor or the administrator is appointed by the
court, automatically that person will have the authority to
vote on the shares. There is no need for that person to
present a proxy or any other authority.
Jointly Owned Shares
All of the owners shall vote.
If there are 10 of them, the 10 of them must vote.
Unless otherwise there is a written proxy agreed upon by the co-
owners.
 If there is a proxy giving one of them the right to vote, then
that person granted the right can vote without the others.
And when they are in a “AND/OR” capacity. In such case, the vote of
one is considered to be a vote of the other co-owners.
 So, when the capacity is in a “AND/OR” capacity, or even
“OR”, any of the co-owners may vote on the shares. It does
not need the vote of all.
Implementation of VTA:
 It has to be in writing, notarized and filed with the Securities
and Exchange Commission.
For notice, do you need to specify the agenda in a special
meeting? If so, what if the meeting decides upon issues outside
the agenda?
It can be a ground for objection. But if no one objects, that should be
okay. But if someone objects, and even if that person was not in the
meeting, he can still object because he could say that I would’ve been
in the meeting if I had known we would take this up. But if he does not
object, they will just object. But this pertains to BOD meeting only. If
stockholders meeting, and you have an improper agenda, that is an
invalid meeting, unless everyone is present.
Corporate Books and Records
TYPES OF CORPORATE BOOKS
1. Books of minutes of stockholders’ meetings
2. Books of minutes of board meetings
3. Record or Book of all business transactions
4. Stock and transfer book
These are the books that are required to be kept by the corporation.
Minutes of the meeting
EH 404 | UNIVERSITY OF SAN CARLOS
It is a record of what transpired during the meeting including the
transactions approved during the said meeting.
It shall set forth in detail, among others; the time and place of the
meting held, how it was authorized, the notice given, the agenda
therefor, whether the meeting was regular or special, its object if
special, those present and absent, and every act done or ordered done
at the meeting. Upon the demand of a director, trustee, stockholder or
member, the time when any director, trustee, stockholder or member
entered or left the meeting must be noted in the minutes; and on a
similar demand, the yeas and nays must be taken on any motion or
proposition, and a record thereof carefully made. The protest of a
director, trustee, stockholder or member on any action or proposed
action must be recorded in full upon their demand. (SEC. 73(g))
Record or Book of all business transactions
This is the record of the operations which are the financial statements
including the journals and ledgers.
Stock and transfer book
The corporate secretary is the officer who is duly authorized to make
entries on the stock and transfer book. The stock and transfer book is
the best evidence of the transactions that must be entered or stated
therein. However, the entries are considered prima facie evidence only
and may be subject to proof to the contrary.
Contents of the stock and transfer book:
1. A record of all stocks in the names of the stockholders
alphabetically arranged;
2. The installments paid and unpaid on all stocks for which
subscription has been made, and the date of payment of any
installment;
3. A statement of every alienation, sale or transfer of stock made,
the date thereof, by and to whom made; and
4. Such other entries as the bylaws may prescribe.
DOCUMENTS REQUIRED TO BE KEPT BY THE CORPORATION
(SEC. 73)
1. The articles of incorporation and bylaws of the corporation and
all their amendments;
2. The current ownership structure and voting rights of the
corporation, including lists of stockholders or members, group
structures, intra-group relations, ownership data, and beneficial
ownership;
3. The names and addresses of all the members of the board of
directors or trustees and the executive officers;
4. A record of all business transactions;
5. A record of the resolutions of the BOD/BOT and of the
stockholders or members;
6. Copies of the latest reportorial requirements submitted to the
SEC; and
7. The minutes of all meetings or stockholders or members, or of
the board of directors or trustees.
*Not technically considered as corporate books but is nevertheless
required to be kept.
RIGHT OF STOCKHOLDERS TO INSPECT CORPORATE BOOKS
(Sec. 73)
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Section 73. RIGHT OF STOCKHOLDERS TO INSPECT
CORPORATE BOOKS
Corporate records, regardless of the form in which they are stored,
shall be open to inspection by any director, trustee, stockholder or
member of the corporation in person or by a representative at
reasonable hours on business days, and a demand in writing may
be made by such director, trustee or stockholder at their expense,
for copies of such records or excerpts from said records. The
inspecting or reproducing party shall remain bound by
confidentiality rules under prevailing laws such as the rules on
trade secrets or processes under the Intellectual Property Code of
the Philippines, the Data Privacy Act of 2012, The Securities
Regulation Code and the Rules of Court.
Requirements for the exercise of the right of inspection
1. It must be exercised at reasonable hours on a business days;
2. The stockholder has not improperly used any information he
secured through any previous examination; and
3. Demand is made in good faith or for a legitimate purpose.
Can the corporation deny the stockholder the right to inspect the
corporate books?
General Rule: No. The corporation cannot deny the stockholder the
right to inspect the corporate books.
Exceptions:
The person demanding to examine and copy excerpts from the
corporation’s records and minutes
1. Has improperly used any information secured through any prior
examination of the records or minutes of such corporation or of
any other corporation, or
2. Was not acting in good faith or for a legitimate purpose in making
the demand to examine or reproduce corporate records, or
3. Is a competitor, director, officer, controlling stockholder or
otherwise represents the interest of a competitor.
What happens if the corporation denies the stockholder the right to
inspect the books with proper justification?
If the corporation denies or does not act on a demand for inspection
and/or reproduction, the aggrieved party may report such denial or
inaction to the SEC. Within 5 days from receipt of such report, the SEC
shall conduct a summary investigation and issue an order directing the
inspection or reproduction of the requested records.
Mandamus is a proper remedy if the stockholder is being improperly
deprived of his right to inspect.
Terelay v. Yulo
Facts:
Terelay Investment and Development Corporation denied Cecilia
Teresita Yulo’s request to examine the corporate books and records
since she has an insignificant holding of only 0.001% of the
corporation’s stockholders and she does not have sufficient and valid
reasons.
Issue: Whether or not Yulo has the right to inspect the corporate
books.
EH 404 | UNIVERSITY OF SAN CARLOS
Held: Yes. The Corporation Code has granted all stockholders the
right to inspect the corporate books and records and has not required
any specific amount of interest for the exercise of the right to inspect.
Ubi lex non distinguit nec nos distinguere debemos. When the law has
made no distinction, we ought not to recognize any distinction.
The right of the shareholder to inspect the books and records of the
petitioner should not be made subject to the condition of a showing of
any particular dispute or of proving any mismanagement or other
occasion rendering an examination proper, but if the right is to be
denied, the burden of proof is upon the corporation to show that the
purpose of the shareholder is improper, by way of defense.
Discussion:
The law itself does not distinguish. It does not say that you have to be
a majority stockholder or that you have to own more than 1 share. Even
if it’s 1 out of 100,000,00 outstanding shares, the stockholder has the
right to inspect the books.
The right is inherent in the stockholder so there is no need for
justification. But if you use the information in bad faith like disclose the
information to competitors, then the corporation can deny such right.
The Supreme Court here said it is not, .001% ownership does not
justify the refusal of the right of a stockholder. Because as long as you
own one share of stock, even out of millions, you are still considered a
stockholder and a stockholder has the right to inspect the books or
records of the corporation or have them reproduced. So it’s granted to
all stockholders. No distinction on the ownership/number of shares
owned.
Absent any showing it is the stock and transfer book which
should determine whether or not a person is a stockholder. But if
the person can present other evidence as basis of his stockholdings
then he is not precluded from bringing up his contention that he or she
is a stockholder.
In this case is the corporation refused to present the stock and transfer
book and the reason why they refused is that they said based on the
stock and transfer book he is not a stockholder. But they refused to
show the STB.
Supreme Court said, while you say that they are not in the stock and
transfer book, we cannot just take your word for it. Because the stock
and transfer book is not the only proof that the person is a stockholder
and besides there is that rule in the Rules of Court that if an evidence
suppressed would be adverse if produced. So the Supreme Court said
that you cannot just say that no need to present the STB because it is
not the only source of proof if a person is a stockholder.
Remember:
In F & S Velasco v. Madrid, the Supreme Court said that the GIS is not
sufficient to show the record of stockholder. It was where the wife died
and the husband inherited all the 75% shares of the corporation. The
husband called a meeting. In that case, the husband presented the
general information sheet. Well, the Supreme Court said between the
STB and the GIS, the STB would prevail. But of course, the general
information sheet can also be considered as a secondary source. It’s
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not the primary source. The primary source will always be the stock
and transfer book. Other documents can be used to show that a person
is a stockholder of a corporation.
Legal Provisions Cited in the case:
Under the old code, the penalty used to be under Section 141, now it
is under Section 161.
The difference between the penalties is that under the Old Code the
penalty was criminal in nature (in addition to administrative liabilities,
the penalty also included imprisonment).
SECTION 161. Violation of Duty to Maintain Records, to Allow
Their Inspection or Reproduction; Penalties. — The unjustified
failure or refusal by the corporation, or by those responsible for
keeping and maintaining corporate records, to comply with
Sections 45, 73, 92, 128, 177 and other pertinent rules and
provisions of this Code on inspection and reproduction of records
shall be punished with a ne ranging from Ten thousand pesos
(P10,000.00) to Two hundred thousand pesos (P200,000.00), at
the discretion of the court, taking into consideration the seriousness
of the violation and its implications. When the violation of this
provision is injurious or detrimental to the public, the penalty is a
fine ranging from Twenty thousand pesos (P20,000.00) to Four
hundred thousand pesos (P400,000.00).
The penalties imposed under this section shall be without prejudice
to the Commission's exercise of its contempt powers under Section
157 hereof.
SECTION 73….Any officer or agent of the corporation who shall
refuse to allow the inspection and/or reproduction of records in
accordance with the provisions of this Code shall be liable to such
director, trustee, stockholder or member for damages, and in
addition, shall be guilty of an offense which shall be punishable
under Section 161 of this Code: Provided, That if such refusal is
made pursuant to a resolution or order of the board of directors or
trustees, the liability under this section for such action shall be
imposed upon the directors or trustees who voted for such refusal:
Provided, further, That it shall be a defense to any action under this
section that the person demanding to examine and copy excerpts
from the corporation's records and minutes has improperly used
any information secured through any prior examination of the
records or minutes of such corporation or of any other corporation,
or was not acting in good faith or for a legitimate purpose in making
the demand to examine or reproduce corporate records, or is a
competitor, director, o cer, controlling stockholder or otherwise
represents the interests of a competitor.
If the corporation denies or does not act on a demand for inspection
and/or reproduction, the aggrieved party may report such denial or
inaction to the Commission. Within five (5) days from receipt of
such report, the Commission shall conduct a summary
investigation and issue an order directing the inspection or
reproduction of the requested records.
Yujuico v. Quiambao
In view of the amendment of the Corporation Code, it is no longer
relevant. For one, the refusal to allow inspection is now penalized
under Sec. 161 and it is no longer a criminal offense. Before, it used
to be a criminal offense so a lot of corporate secretaries get
imprisoned. In corporate disputes, it’s normally the corporate
secretaries who go to jail because they favor one party so they refuse
EH 404 | UNIVERSITY OF SAN CARLOS
inspection. Now, it’s no longer a criminal offense. It’s merely a civil
penalty.
The ruling in the Yuijuico case is no longer applicable. Here, the SC
said that there is a criminal offense but the SC also dismissed the case.
It’s not anyone who can be criminally liable. The law is specific. It can
only be applied to directors or officers who denied the right.
Unfortunately in this case, it was not a director or an officer who denied
the inspection of the books. Again, this is no longer relevant because
it is no longer criminal in nature.
There are other documents to show that the person is a stockholder.
That is the ruling of the Insigne case. Of course the general information
sheet can also be considered as a secondary source. But the primary
source will always be the stock and transfer book.
In the old corporation code it is the expressly stated that an
independent auditor must sign the financial statement. However, in the
new corporation code it was omitted because there was a provision in
the Securities Regulation Code on who will the person to sign the
financial statements.
Generally all public corporations
1. those listed
2. those with registered securities
3. those with assets 50 million or more and having 200
stockholders owning more than 100 shares each
They are required to be signed by an independent auditor. Outside
public corporation, there is no need. Hence, the requirements in
regards to the financial statements are now under the SRC.
Merger and Consolidation
Merger is when two corporations combine, whereby one is dissolved
and the other one is the surviving corporation. It is A + B = A or B
Consolidation is when two corporations combine; the new identity is
a totally different corporation. None of the combining corporations
survived. A new corporation is created in this case. It means, A + B =
C.
Requirements in case of merger or consolidation:
First: The BOD of the corporation should first draw up and approve a
plan of merger/ consolidation.
That is the first document that they need to create. There has to be a
plan. The plan must specify what will happen to the surviving corp or
the newly created corp.
Second: Approval of this plan should by the stockholders representing
at least 2/3 of the outstanding capital stock (OCS) of each corporation
or 2/3 of the members, if non stock.
A merger/consolidation is one of the grounds for the appraisal right for
any dissenting stockholder.
In case of amendments:
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If there are amendments to the plan of merger/approval, same
approval as above. Majority vote of the BOD and vote of the
stockholders representing 2/3 OCS or 2/3 of the members.
Third: The articles of or merger/consolidation should be signed by the
president or VP and certified by the secretary.
Fourth: It should also be submitted to the SEC.
EFFECTIVITY OF MERGER/CONSOLIDATION
Only upon approval by SEC. No approval, No valid
merger/consolidation.
Any mergers or acquisition in excess of 1 million pesos now requires
application with the PCC and has the power to deny such application
and deny the merger or acquisition.
If approved:
If merger, the constituent corps become a single entity.
If consolidation, there is now created a consolidated corp. The
corporate existence of the constituent corporations shall now cease
except of that of the consolidated corporation.
Note: Automatically, the non-consolidated corporation shall now be
dissolved and the surviving consolidated corporation shall now
possess all the rights, privileges, and powers subject to the duties and
responsibilities of corporations organized under the Corporation Code.
The new corporation need not be registered again with the SEC – it
automatically applies whether it is a surviving corporation or a
consolidated corporation.
Further, the surviving or the consolidated corporation shall enjoy the
rights, privileges, and immunities, properties, receivables for
subscription and other interest of the constituent corporations shall be
DEEMED TRANSFERRED to the surviving or consolidated
corporation.
Lastly, the surviving or consolidated corporation shall also be liable for
all the liabilities and obligations of the constituent corporations.
PHILIPPINE COMPETITION ACT
There are three things prohibited:
1. Anti-Competitive Agreements
2. Abuse of Dominant Position
3. Anti-Competitive Mergers and Acquisitions
ANTI-COMPETITIVE AGREEMENTS
There are generally two types of anti-competitive agreements:
Vertical: A supplier or producer of certain goods with enter into an
agreement with the supplier of the raw materials for that certain goods.
Its vertical because it goes up or down the supply chain.
Horizontal: Agreements between parties who are similarly situated. A
supplier of a certain commodity entering into an agreement with
another supplier of the same commodity.
It can be between competitors or between supplier and producer.
EH 404 | UNIVERSITY OF SAN CARLOS
Those agreements are generally not prohibited. They become
prohibited if they become agreements between competitors that
restrict competition as to the price component thereof or as to the other
terms or trade.
Example:
Globe and Smart agree that they will now charge 5peso/text
If they fix the price no one can go against them because they are the
major players in the market. So, if they agree, people have no choice
but to pay-up.
Clearly, if Globe increases, and Smart does not, people will go to
Smart. But if they both agree; the market has no choice.
Any agreement that will restrict competition as to the price
component, since you are not given a choice. That is supposedly the
essence of competition. Any agreement that restricts a choice of the
public, in terms of price or any terms of trade, that can be considered
as an anti-competitive agreement.
FORMS OF BID MANIPULATION
Cover Bidding
It is when the participants in an auction will agree to basically pad their
bid price in order to allow one competitor to win.
Bid Suppresion
They agree that the competitor will not submit their bid again to allow
whoever it is that they want to win the bid. When the other competitors
will not bid, automatically, as the sole bidder, the person they want to
win will win the bid.
Bid Rotation
It is similar to cover bidding and bid suppression except that the parties
agree that for this bidding, this competitor will win, for the next bidding,
another will win, and for the third bidding, the other bidder will win.
Basically, the parties agree and fix as to who will win the bidding or
auction and they take turns in winning.
Those are aforementioned are considered as manipulative practices,
which if there are any, will be considered as anti-competitive
agreements and are prohibited under the Philippine Competition
Act.
Any other agreement which will have the effect of preventing or
restricting competition such as:
(1) Setting, Knitting, or controlling production, markets,
technical development, or investment;
- In the form of vertical agreement, where there is an
agreement with the supplier that any raw materials they
produce will only be supplied to one producer or have
the production of a certain raw material, so that other
competitors will have less or have any access to the
said raw material for production.
(2) Dividing or sharing the market, whether by volume of sales
or purchases, territory, type of goods or services, buyers or
sellers or any other means;
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- For example, the competitors agree that for this
competitor, their area would be Luzon and they would
not enter Visayas which is the area of another
competitor. Basically creating a monopoly which is not
allowed.
Any agreement which restricts competition is considered as an anti-
competitive agreement and not allowed under the PCA.
ABUSE OF DOMINANT POSITION
In Abuse of Dominant Position, it is basically a situation wherein a
company is a dominant position or has 50% or more of the market
share- hence it is dominant.
Being in a dominant position is not illegal per se, in the same
manner that being an insider is not illegal per se. What is illegal if
there is an abuse of the dominant position in such a way that you do
predatory pricing, impose barriers to entry, or discriminate in price and
you do tying and bundling.
Section 15. Abuse of Dominant Position. – It shall be prohibited
for one or more entities to abuse their dominant position by
engaging in conduct that would substantially prevent, restrict or
lessen competition:
(a) Selling goods or services below cost with the object of
driving competition out of the relevant market: Provided,
That in the Commission’s evaluation of this fact, it shall
consider whether the entity or entities have no such object
and the price established was in good faith to meet or
compete with the lower price of a competitor in the same
market selling the same or comparable product or service of
like quality;
(b) Imposing barriers to entry or committing acts that prevent
competitors from growing within the market in an anti-
competitive manner except those that develop in the market
as a result of or arising from a superior product or process,
business acumen, or legal rights or laws;
(c) Making a transaction subject to acceptance by the other
parties of other obligations which, by their nature or
according to commercial usage, have no connection with
the transaction;
(d) Setting prices or other terms or conditions that discriminate
unreasonably between customers or sellers of the same
goods or services, where such customers or sellers are
contemporaneously trading on similar terms and conditions,
where the effect may be to lessen competition substantially:
Provided, That the following shall be considered permissible
price differentials:
(1) Socialized pricing for the less fortunate sector
of the economy;
(2) Price differential which reasonably or
approximately reflect differences in the cost of
manufacture, sale, or delivery resulting from
differing methods, technical conditions, or
quantities in which the goods or services are
sold or delivered to the buyers or sellers;
(3) Price differential or terms of sale offered in
response to the competitive price of
payments, services or changes in the facilities
furnished by a competitor; and
EH 404 | UNIVERSITY OF SAN CARLOS
(4) Price changes in response to changing
market conditions, marketability of goods or
services, or volume;
(e) Imposing restrictions on the lease or contract for sale or
trade of goods or services concerning where, to whom, or in
what forms goods or services may be sold or traded, such
as fixing prices, giving preferential discounts or rebate upon
such price, or imposing conditions not to deal with
competing entities, where the object or effect of the
restrictions is to prevent, restrict or lessen competition
substantially: Provided, That nothing contained in this Act
shall prohibit or render unlawful:
(1) Permissible franchising, licensing, exclusive
merchandising or exclusive distributorship
agreements such as those which give each
party the right to unilaterally terminate the
agreement; or
(2) Agreements protecting intellectual property
rights, confidential information, or trade
secrets;
(f) Making supply of particular goods or services dependent
upon the purchase of other goods or services from the
supplier which have no direct connection with the main
goods or services to be supplied;
(g) Directly or indirectly imposing unfairly low purchase prices
for the goods or services of, among others, marginalized
agricultural producers, fisherfolk, micro-, small-, medium-
scale enterprises, and other marginalized service providers
and producers;
(h) Directly or indirectly imposing unfair purchase or selling
price on their competitors, customers, suppliers or
consumers, provided that prices that develop in the market
as a result of or due to a superior product or process,
business acumen or legal rights or laws shall not be
considered unfair prices; and
(i) Limiting production, markets or technical development to the
prejudice of consumers, provided that limitations that
develop in the market as a result of or due to a superior
product or process, business acumen or legal rights or laws
shall not be a violation of this Act:
Provided, That nothing in this Act shall be construed or interpreted
as a prohibition on having a dominant position in a relevant market
or on acquiring, maintaining and increasing market share through
legitimate means that do not substantially prevent, restrict or lessen
competition:
Provided, further, That any conduct which contributes to improving
production or distribution of goods or services within the relevant
market, or promoting technical and economic progress while
allowing consumers a fair share of the resulting benefit may not
necessarily be considered an abuse of dominant position:
Provided, finally, That the foregoing shall not constrain the
Commission or the relevant regulator from pursuing measures that
would promote fair competition or more competition as provided in
this Act.
An entity which is dominant in the market has control over the market
in the sense that you can decrease price when you have more
customers. But when you do predatory pricing then it’s not allowed.
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Example:
This supplier has products dominant in the market, which they have
ancillary product tied to their main product. Say a printer is limited to
use an ink to what it has produced. Or apple their product is limited to
them. But of course customers have other choice. If they have no
choice, then it becomes an abuse of dominant competition.
This means that you have a product, dominant or preferred in the
market and then you tie up other products to it such that you cannot
use any other products created by other suppliers except the one you
have so tying or bundling.
Mergers and Acquisitions which are considered as Anti-
Competitive
Anti-competitive - any merger or consolidation that restricts or lessen
competition.
Example:
If Globe or Smart will merge, this leaves the public with no choice. That
is the essence of anti-competitive mergers or acquisition.
Mergers or acquisitions may be vertical or horizontal:
 Horizontal, if mergers are consolidation among competitors.
 Vertical, if you as a producer will merge or consolidate with
a supplier. In such a way, that now you can restrict the
source of the raw materials for certain products. That can be
considered as an anti-competitive merger or acquisition,
prohibited under the Competition Act.
As mentioned before, any merger or acquisition (transaction), which
exceeds One Billion Pesos, are prohibited from consummating their
agreement for 30 days after providing notice to the commission.
If the value of the transaction will exceed One Billion Pesos then that
transaction will be subject to a notice requirement to the Philippine
Competition Commission (PCC).
If this provision is violated meaning no notice requirement given to the
PCC then, the transaction can be considered as void and there is the
penalty of 1%-5% of the value of the transaction.
Effect of Notification to the PCC:
RA 10667; SECTION 18. Effect of Notification. — If within the
relevant periods stipulated in the preceding section, the
Commission determines that such agreement is prohibited under
Section 20 and does not qualify for exemption under Section 21 of
this Chapter, the Commission may:
(a) Prohibit the implementation of the agreement;
(b) Prohibit the implementation of the agreement unless and
until it is modified by changes specified by the Commission;
(c) Prohibit the implementation of the agreement unless and
until the pertinent party or parties enter into legally
enforceable agreements specified by the Commission.
In (b), the corporation will be asked to add or modify; whereas in (c),
the removal of certain provisions will be required so that the same
would be legally enforceable and no longer anti-competitive.
EH 404 | UNIVERSITY OF SAN CARLOS
But there can be exemptions to this rule.
Not all mergers or acquisitions should be invalidated.
SECTION 21. Exemptions from Prohibited Mergers and
Acquisitions. — Merger or acquisition agreement prohibited under
Section 20 of this Chapter may, nonetheless, be exempt from
prohibition by the Commission when the parties establish either of
the following:
(a) The concentration has brought about or is likely to bring about
gains in efficiencies that are greater than the effects of any
limitation on competition that result or likely to result from the
merger or acquisition agreement; or
(b) A party to the merger or acquisition agreement is faced with
actual or imminent financial failure, and the agreement represents
the least anti-competitive arrangement among the known
alternative uses for the failing entity's assets:
Provided, That an entity shall not be prohibited from continuing to
own and hold the stock or other share capital or assets of another
corporation which it acquired prior to the approval of this Act or
acquiring or maintaining its market share in a relevant market
through such means without violating the provisions of this Act:
Provided, further, That the acquisition of the stock or other share
capital of one or more corporations solely for investment and not
used for voting or exercising control and not to otherwise bring
about, or attempt to bring about the prevention, restriction, or
lessening of competition in the relevant market shall not be
prohibited.
Discussion:
(a) If two companies combine and in that combination, the
companies would then be able to produce double the
amount of its previous production. And with that double
production, it resulted to lesser production cost, i.e.
economies of scale (greater production=lesser costs).
If it can be shown that the economies of scale resulting from
increased efficiencies in production will redound to the
benefit of the public resulting to reduced prices, then even if
competition is limited, the PCC may still allow the
combination.
(b) If the other party is faced with actual or imminent financial
failure, meaning it is about to go bankrupt.
Even if it restricts competition, it will not be considered
disadvantageous. Because if the other competitor will go
bankrupt, the effect will be the same--the surviving
competitor will still be the sole source in the market. So, this
is is not prohibited; it is an exception from the prohibition.
TAKE NOTE: Do not forget to take a look at the relevant provisions under the
Philippine Competition Act when you study mergers and acquisitions under
the Corporation Code.
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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
Appraisal Right
Instances where appraisal right is allowed:
Section 81. Instances of appraisal right. - Any stockholder of a
corporation shall have the right to dissent and demand payment of
the fair value of his shares in the following instances:
1. In case any amendment to the articles of incorporation has the
effect of changing or restricting the rights of any stockholder or
class of shares, or of authorizing preferences in any respect
superior to those of outstanding shares of any class, or of extending
or shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge
or other disposition of all or substantially all of the corporate
property and assets as provided in the Code; and
3. In case of merger or consolidation. (n)
4. In case of investment of corporate funds for any purpose other
than the primary purpose of the corporation.
Note: In the second instance: If you take a look at the amendments of
the articles of incorporation (Sec. 11), it also expressly provides that
any amendment is subject to appraisal right.
Although technically under the old corporation code, this formally
appeared under the revised corporation code. Technically, if you invest
funds in another corporation, you amend your articles, either the
primary or secondary purposes of your corporation.
Appraisal Right; Definition:
It is the right of stockholder to compel the stockholder to purchase his
share.
Appraisal right is strictly construed because it violates the Trust Fund
Doctrine. It actually is an exception to the Trust Fund Doctrine.
In the Trust Fund Doctrine, all the assets and capital of the corporation
are the trust fund, to the benefit of the stockholders, so the stockholder
cannot just withdraw his shares. Exception to this rule is if pursuant
to the appraisal right.
A stockholder cannot just withdraw his shares or his stockholdings
except to this rule if it is pursuant to the exercise of an appraisal right.
How to exercise appraisal right:
It can only be exercised by a stockholder who actually dissented or
voted against that particular corporate action where the right is
allowed.
Meaning, if a stockholder voted to approve the amendment in the
articles you cannot exercise appraisal right. YOU MUST HAVE
DISSENTED, voted to disapprove the action.
Section 81. How Right is Exercised. — The dissenting
stockholder who votes against a proposed corporate action may
exercise the right of appraisal by making a written demand on the
corporation for the payment of the fair value of shares held within
thirty (30) days from the date on which the vote was taken:
Provided, That failure to make the demand within such period shall
be deemed a waiver of the appraisal right. If the proposed
EH 404 | UNIVERSITY OF SAN CARLOS
corporate action is implemented, the corporation shall pay the
stockholder, upon surrender of the certificate or certificates of stock
representing the stockholder's shares, the fair value thereof as of
the day before the vote was taken, excluding any appreciation or
depreciation in anticipation of such corporate action.
How do you do it?
1) Vote against the corporate action
2) Make a written demand/notice on the corporation within 30
days after the date on which the vote was taken for a fair
value of your shares
3) Failure to make that demand shall deemed a waiver of the
appraisal right. The appraisal right is strictly construed
against the stockholder being violative of the trust fund
doctrine
4) When 10 days after demanding payment the dissenting
stockholder should submit his stock certificate to the
corporation so that it can be annotated in the stock certificate
that he is a dissenting stockholder and the shares and the
stocks are dissenting shares.
5) Failure to do so shall terminate his appraisal right at the
option of the corporation. So, even if you dissented and
notified them but you failed to surrender your stock
certificate, your appraisal right is terminated.
6) If the proposed corporate action is implemented or effected,
the corporation shall pay to the stockholder, upon surrender
of the stock certificate, the fair value thereof as of the date
prior to the date on which the vote was taken, excluding any
appreciation or depreciation in anticipation of such corporate
action.
Section 81 says:
If the proposed corporate action is implemented, the corporation
shall pay the stockholder, upon surrender of the certificate or
certificate of stock representing the stockholder’s shares, the fair
value thereof…
What does this mean?
It means that if the corporation does not push through the action where
the stockholder dissented, the right is also terminated. The appraisal
right can only be pursued if the corporation actually pushes through
the corporate action.
How much is the fair value of the shares?
It is the value of the shares on the day before the actual voting of the
corporation.
This is most applicable in publicly listed corporations because the
corporate action is formally published by the issuer corporation. It can
affect the price of the shares. For example, you acquire another
subsidiary – if the market deems the acquisition advantageous to the
corporation, it can result in an increase in the shares. If the market
deems the acquisition to be disadvantageous, it can result to a
decrease in the price of the shares.
Now, being a dissenting stockholder, who wants to exercise his or her
appraisal right, should be immune from any of those fluctuations. S/he
cannot be benefited or disadvantaged in any change of the price
brought about by the action from which s/he dissented from.
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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
Things to remember in this Section:
1. If the action does not push through, the appraisal right is
terminated
2. The “fair market value” of the share is the fair market value
on the day before the vote was taken
3. Within a period of 60 days from the approval of the corporate
action, if the parties cannot approve on how much is the
value of the share, then there needs to be an appraisal by
three (3) disinterested persons.
4. Appraisal right can only be granted if there is unrestricted
retained earnings in the books of the corporation.
Who determines these disinterested persons:
One will be named by the stockholder, the other will be named by the
corporation, and the third one will be named by the 2 representatives.
Basically, this will be an independent appraisal committee to determine
the value of the shares.
The findings of these appraisers will be final and the award shall be
paid by the corporation within 30 days after the award is made. The
corporation or the stockholder cannot question the findings of the
appraisers.
Requirement of Unrestricted Retained Earnings:
It is not sufficient that there should be retained earnings. There should
be unrestricted retained earnings.
Meaning, you do not take into account those retained earnings that
have been restricted for corporate expansion, retained earnings that
have been restricted because of certain contractual provisions, and
retained earnings that have been restricted for contingencies. Or any
other valid restrictions on retained earnings not included in the
determination.
Why is the exercise of appraisal right very strict such that failure to
comply with one requirement would automatically make one unable to
exercise his appraisal right?
It is because this is an exemption to the trust fund doctrine.
General Rule: The corporation is not allowed to give back the capital
contribution of the stockholder because that capital contribution is
considered as a trust fund in favor of the creditors.
One of the exceptions would be in the exercise of the appraisal right.
Effect of demand of Appraisal Right:
SECTION 82. Effect of Demand and Termination of Right. —
From the time of demand for payment of the fair value of a
stockholder's shares until either the abandonment of the
corporate action involved or the purchase of the said shares by
the corporation, all rights accruing to such shares, including
voting and dividend rights, shall be suspended in accordance with
the provisions of this Code, except the right of such stockholder to
receive payment of the fair value thereof: Provided, That if the
dissenting stockholder is not paid the value of the said shares
within thirty (30) days after the award, the voting and dividend
rights shall immediately be restored.
EH 404 | UNIVERSITY OF SAN CARLOS
Note: From the abandonment of the corporate action, appraisal right
is terminated.
Cessation of Right to Payment:
SECTION 83. When Right to Payment Ceases. — No demand
for payment under this Title may be withdrawn unless the
corporation consents thereto. If, however, such demand for
payment is withdrawn with the consent of the corporation, or
if the proposed corporate action is abandoned or rescinded by
the corporation or disapproved by the Commission where
such approval is necessary, or if the Commission determines
that such stockholder is not entitled to the appraisal right, then
the right of the stockholder to be paid the fair value of the shares
shall cease, the status as the stockholder shall be restored, and all
dividend distributions which would have accrued on the shares
shall be paid to the stockholder.
Note: If the appraisal right is terminated, the status as a stockholder is
restored and all dividends that should have issued would accrue to his
shares. But any termination o the appraisal right in any of the grounds,
his right to the dividend shall also be restored.
Questions by students:
What if there was no unrestricted retained earnings so the appraisal
rights were not exercised but after 10 years, there are unrestricted
retained earnings. Can the appraisal right be exercised?
No. At the time of the exercise of appraisal right, there must be
unrestricted retained earnings.
The concept there for appraisal right is that it is in the sense: Appraisal
right is not an inherent right in a stockholder. It can only be exercised
in accordance with the restrictions under the law. The thing about
being a stockholder is that when you invest in a corporation, there is
an understanding that you don’t manage the corporation.
Technically, as a stockholder, you have no say in the management of
the corporation. If you invest in the corporation, you have to be
resigned to the fact that you are at the mercy of the board of directors
and majority stockholders. That should be understood the moment you
invest. The exercise of the appraisal right is inconsistent with that. So
it should be strictly construed. If one of the requirements is not there,
then the appraisal right cannot be exercised because as mentioned, it
is not inherent in being a stockholder. It is basically a concession given
to a dissenting stockholder. Again, it is strictly construed.
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