Corpo Finals PDF

CORPORATION LAW (2019) REVIEWER ATTY.
GAVIOLA-CLIMACO
TITLE XI – NONSTOCK CORPORATION to vote in a non-stock Corporation. Whereas, quorum is

DEFINITION
determined on the basis of the majority of the members of a
Sec. 86. A nonstock corporation is one where no part of its
income is distributable as dividends to its members, trustees, non-stock corporation under Section 52.
or officers. Provided, that any profit which a nonstock
corporation may obtain incidental to its operation shall, A. Quorum
whenever necessary or proper be used for the furtherance of 1. Stock corporation - Quorum is determined by the number of
the purpose or purposes for which the corporation was
organized, subject to the provisions of this Title. outstanding shares. Thus, 1 share is 1 vote.
2. Non stock corporation
The provisions governing stock corporations, when pertinent, - Quorum is determined by the actual number of surviving
shall be applicable to nonstock corporations, except as may
be covered by specific provisions of this Title. members of the Corporation, regardless of how many
members are stated in the Articles of Incorporation. Thus,
2 Aspects of A Nonstock Corporation: 1 member is 1 count.
1. Its capital is not divided into shares
2. It does not distribute dividends/income to its members
- Reason: Membership in the Non stock corporation is
-the most important qualification of a non-stock corporation personal and non transferrable, unless otherwise allowed
in the By-laws or Articles of Incorporation. It is different
with stock corporation where the shares are
PURPOSES
Sec. 87. Nonstock corporations may be formed or organized transferrable.
for:
A. Charitable CASE: LIM V MOLDEX
B. Religious There was no quorum in the case.
C. Educational
D. Professional The contention of Moldex that if you own 5 units in the
E. Cultural condominium corporation such person should be given 5
F. Fraternal membership for purposes of quorum is misplaced. The
G. Literary Supreme Court held that for non stock corporation only those
H. Scientific who are actual, living members with voting rights shall be
I. Social counted in determining the existence of a quorum. Therefore,
J. Civic service regardless of how many many units you own in the
K. Or similar purposes like trade, industry, agricultural and condominium corporation for purposes of determining quorum
like chambers, or any combination thereof. should be counted as 1 member.
IOW, it cannot be established primarily for the purpose of

B. Voting
obtaining profits. But it is not prohibited from earning profits
provided that “any profit which a nonstock corporation may
obtain incidental to its operations shall, whenever necessary or 1. Stock corporation - The rule is absolute 1 share 1 vote, no
proper be used for the furtherance of the purpose or purposes for
exception.
which the corporation was organized. (Sec.86, 1st par.).”
2. Non stock corporation - Voting rights can be limited,
broadened, or denied in the Articles of Incorporation. If,
RIGHT TO VOTE however, the Articles of Incorporation is silent the
Sec. 88. The right of the members of any class or classes to
presumption is 1 member 1 vote.
vote may be limited, broadened, or denied to the extent
specified in the articles of incorporation or the bylaws. Unless
so limited, broadened, or denied, each member, regardless of Atty Gaviola: In the Articles of Incorporation it can provide that
class, shall be entitled to one (1) vote. the member can have more than 1 vote because the right to vote
can be broadened. However, even if the Articles provide that 1
Unless otherwise provided in the articles of incorporation or
the bylaws, a member may vote by proxy, in accordance with member can have more than one vote, for purposes of
the provisions of this Cide. The bylaws may likewise authroize determining Quorum the basis should still be 1 member 1 count.
voting through remote communication and/or in absentia.
Take note: In Non-stock Corporation quorum is not necessarily

the same as voting.
NONTRANSFERABILITY OF MEMBERSHIP
There is a difference because Section 88 only applies to the right
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U N I V E R S I T Y O F S A N C A R L O S | PAGE 1 OF 38
CORPORATION LAW (2019) REVIEWER ATTY. GAVIOLA-CLIMACO
Sec. 89. Membership in a nonstock corporation and all rights Facts

arising therefrom are personal and nontransferable, unless Lim is a registered unit owner of 1322 Golden Empire Tower
the articles of incorporation or the bylaws otherwise provide. (Golden Empire Tower), a condominium project of Moldex
Land, Inc. (Moldex), a real estate company engaged in the
RIGHTS OF STOCKHOLDERS V. MEMBERS construction and development of high-end condominium
projects and in the marketing and sale of the units thereof to
STOCKHOLDERS MEMBERS the general public. Condocor, a non-stock, non-profit
Right to the income of the No right to dividends corporation, is the registered condominium corporation for the
corporation when distributed Golden Empire Tower. Lim, as a unit owner of Golden Empire
as dividends Tower, is a member of Condocor.
Right to remaining assets of To a certain extent have the
the corporation during right to the remaining assets of Lim claimed that the individual respondents are non-unit
liquidation the corporation provided it is buyers, but all are members of the Board of Directors of
indicated in the AOI or bylaws Condocor, having been elected during its organizational
Right to vote: Right to vote: meeting in 2008. They were again elected during the July 21,
1 vote = 1 share GR: 1 member = 1 vote 2012 general membership meeting. Moldex became a member
Except: of Condocor on the basis of its ownership of the 220 unsold
Unless limited, broadened, or units in the Golden Empire Tower. The individual respondents
denied to extent specified by acted as its representatives.
the AOI (Sec.88)
Quorum (stock): Determined Quorum (nonstock): On July 21, 2012, Condocor held its annual general
membership meeting. Its corporate secretary certified, and
by the majority of the Determined by the majority of
Jaminola, as Chairman, declared the existence of a quorum
outstanding capital stock (OCS) the actual, living members
even though only 29 of the 1088 unit buyers were present. The
with voting rights. (Tan vs.
Sycip) declaration of quorum was based on the presence of the
majority of the voting rights, including those pertaining to the
220 unsold units held by Moldex through its representatives.
Rationale: Quorum is not
Lim, through her attorney-in-fact, objected to the validity of
determined by the majority of
members stated in the articles the meeting. The objection was denied. Thus, Lim and all the
of incorporation but by actual, other unit owners present, except for one, walked out and left
the meeting.
living members for being a
member is nontransferable. It
Despite the walkout, the individual respondents and the other
is personal unlike a
stockholder. (Sec.89) unit owner proceeded with the annual general membership
meeting and elected the new members of the Board of
Directors for 2012-2013. All four (4) individual respondents
ELECTION AND TERM OF TRUSTEES
were voted as members of the board, together with three (3)
SEC. 91. The number of trustees shall be fixed in the articles
others whose election was conditioned on their subsequent
of incorporation or bylaws which may or may not be more confirmation. Thereafter, the newly elected members of the
than fifteen (15). They shall hold office for not more than
board conducted an organizational meeting and proceeded
three (3) years until their successors are elected and
with the election of its officers. The individual respondents
qualified. Trustees elected to fill vacancies occurring before
were elected as follows:
the expiration of a particular term shall hold office only for
the unexpired period.
1. Atty. Jeffrey Jaminola - Chairman of the Board and President
2. Ms. Joji Milanes - Vice-President
Except with respect to independent trustees of nonstock
3. Ms. Clothilda Ann Roman - Treasurer
corporations vested with public interest, only a member of
4. Mr. Edgardo Macalintal - Corporate Secretary
the corporation shall be elected as trustee.
5. Atty. Ma. Rosario Bernardo - Asst. Corporate Secretary
6. Atty. Mary Rose Pascual - Asst. Corporate Secretary
Unless otherwise provided in the articles of incorporation or
7. Atty. Jasmin Cuizon - Asst. Corporate Secretary
the bylaws, the members may directly elect officers of a
nonstock corporation.
Consequently, Lim filed an election protest before the RTC.
Said court, however, dismissed the complaint holding that
Board of Trustees there was a quorum during the July 21, 2012 annual
Under the old Corporation Code, it was “may be more than 15” membership meeting; that Moldex is a member of Condocor,
but it is now amended to “may or may not be more than 15”. being the registered owner of the unsold/unused
condominium units, parking lots and storage areas; and that
Term the individual respondents, as Moldex's representatives, were
Each trustee has a term of three (3) years. entitled to exercise all membership rights, including the right
to vote and to be voted. In so ruling, the trial court explained
that the presence or absence of a quorum in the subject
LIM VS. MOLDEX LAND INC. meeting was determined on the basis of the voting rights of all
the units owned by the members in good standing. The total Being a proxy voter gives you the right to vote during the
voting rights of unit owners in good standing was 73,376 and, election but it does not make you a member. So a proxy holder
as certified by the corporate secretary, 83.33% of the voting who is not himself a member of the non-stock corporation is not
rights in good standing were present in the said meeting, qualified to be voted as a trustee of the non-stock corporation.
inclusive of the 5 8,504 voting rights of Moldex. This is because only members are qualified to be voted as
trustees.
Issue:
whether a non-unit owner can be elected as a member of the LIST OF MEMBERS AND PROXIES, PLACE OF MEETINGS.
Board of Directors of Condocor. NO SEC. 92. The corporation shall, at all times, keep a list of its
members and their proxies in the form the Commission may
Ruling: require. The list shall be updated to reflect the members and
proxies of record twenty (20) days prior to any scheduled
NO. Section 23 of the Corporation Code provides: Trustees of election.
non-stock corporations must be members thereof. While
Moldex may rightfully designate proxies or representatives, the The bylaws may provide that the members of a nonstock
latter, however, cannot be elected as directors or trustees of corporation may hold their regular or special meetings at any
Condocor. First, the Corporation Code clearly provides that a place even outside the place where the principal office of the
director or trustee must be a member of record of the corporation is located: Provided, That proper notice is sent to
corporation. Further, the power of the proxy is merely to vote. all members indicating the date, time and place of the
If said proxy is not a member in his own right, he cannot be meeting: Provided, further, That the place of meeting shall be
elected as a director or proxy. within Philippine territory.
Section 25 of the Corporation Code mandates that the Stock corporation:

President shall be a director. As previously discussed, Jaminola
could not be elected as a director. Consequently, Jaminola's Meeting must be held in the principal place of business or in the
election as President was null and void. city or municipality where the office is located.
The same provision allows the election of such other officers as Non-stock corporation:
may be provided for in the by-laws. Condocor's By-Laws,
however, require that the Vice-President shall be elected by
Meeting may be held in any place even outside the place where
the Board from among its member-directors in good standing,
the principal office of the corporation is located so long as it is
and the Secretary may be appointed by the Board under the
within the Philippines.
same circumstance. Like Jaminola, Milanes and Macalintal
were not directors and, thus, could not be elected and
Hence, the place of meeting for non-stock corporation is more
appointed as Vice-President and Secretary, respectively.
lenient than that of stock corporation.
Insofar as Roman's election as Treasurer is concerned, the
RULES OF DISTRIBUTION
same would have been valid, as a corporate treasurer may or
SEC. 93. Rules of Distribution. – The assets of a nonstock
may not be a director of the corporation's board. The general
corporation undergoing the process of dissolution for reasons
membership meeting of Condocor, however, was null and void.
other than those set forth in Section 139 of this Code shall be
As a consequence, Roman's election had no legal force and
applied and distributed as follows:
effect.
a. All liabilities and obligations of the corporation shall be
In fine, the July 21, 2012 annual general membership meeting
paid, satisfied and discharged, or adequate provision
of Condocor being null and void, all acts and resolutions
shall be made therefor;
emanating therefrom are likewise null and void.
b. Assets held by the corporation upon a condition
requiring return, transfer or conveyance, and which
Discussion:
condition occurs by reason of the dissolution, shall be
Moldex owned several units in the condominium. It sent
returned, transferred or conveyed in accordance with
representatives based on the number of units that it had.
such requirements;
Based from this, proxy holders were elected. Lim argued that
they cannot be trustees because they are not members
c. Assets received and held by the corporation subject to
themselves for the reason that they did not own units in their
limitations permitting their use only for charitable,
own rights.
religious, benevolent, educational or similar purposes,
but not held upon a condition requiring return, transfer
SC said he is correct because they are not members in their
or conveyance by reason of the dissolution, shall be
own rights, they cannot be voted as trustees.
transferred or conveyed to one (1) or more corporations,
societies or organizations engaged in activities in the
Philippines substantially similar to those of the dissolving
corporation according to a plan of distribution adopted
pursuant to this Chapter;
Rule on voting for Trustees:
d. Assets other than those mentioned in the preceding A close corporation, within the meaning of this Code, is one
paragraphs, if any, shall be distributed in accordance whose articles of incorporation provides that:
with the provisions of the articles of incorporation or the
bylaws, to the extent that the articles of incorporation or A. all the corporation's issued stock of all classes, exclusive
the bylaws determine the distributive rights of members, of treasury shares, shall be held of record by not more
or any class or classes of members, or provide for than a specified number of persons, not exceeding
distribution; and twenty (20);
B. all the issued stock of all classes shall be subject to one
e. In any other case, assets may be distributed to such (1) or more specified restrictions on transfer permitted
persons, societies, organizations or corporations, by this Title; and
whether or not organized for profit, as may be specified C. the corporation shall not list in any stock exchange or
in a plan of distribution adopted pursuant to this make any public offering of its stocks of any class.
Chapter. Notwithstanding the foregoing, a corporation shall not
be deemed a close corporation when at least two-thirds
Rules on Distribution (2/3) of its voting stock or voting rights is owned or
1. Creditors of the corporation controlled by another corporation which is not a close
2. Returned to the giver, if assets have been received by the corporation within the meaning of this Code.
corporation with the condition that it will be returned to
the giver after dissolution Any corporation may be incorporated as a close corporation,
3. Given to a non-stock corporation of the same purpose, if except mining or oil companies, stock exchanges, banks,
no condition that assets must be held for charitable or insurance companies, public utilities, educational institutions
religious purpose & no condition to return and corporations declared to be vested with public interest in
4. Any other assets, if permitted by the Articles of accordance with the provisions of this Code.
Incorporation may be distributed to the members of the
non-stock corporation or any other persons as specified in
the plan of distribution that was approved by the Board. The provisions of this Title shall primarily govern close
corporations: Provided, That other Titles in this Code shall
apply suppletorily, except as otherwise provided under this
Title.
Requisites to be close corporation

1 | ISSUED STOCK OF ALL CLASSES, EXCLUSIVE OF TREASURY
SHARES, SHALL BE HELD OF RECORD BY NOT MORE THAN A
SPECIFIED NUMBER OF PERSONS, NOT EXCEEDING TWENTY (20)
The number of stockholders must be specified in the AOI and it

must not be more than 20 .
2 | ALL THE ISSUED STOCK OF ALL CLASSES SHALL BE SUBJECT TO

ONE OR MORE SPECIFIED RESTRICTIONS ON TRANSFER
PERMITTED BY THIS TITLE; AND
The AOI must specify a restriction on the transfer of shares. This

means that unlike in an ordinary corporation, where if someone
wants to sell his shares he can share it immediately to anybody
he likes. In close corporation, there should be a restriction on the
transfer of the share, certain procedures must be followed. The
restriction should be in the AOI, otherwise it cannot be
considered a close corporation
Right of First Refusal

- maximum restriction that the law allows
- if someone wants to sell his shares , he must first offer for sale
to the existing stockholders before it can be offered for sale to
third persons
Take Note: Provision in the restriction on transfer must be stated

both in the AOI and in the stock certificate because if it is not
stated in the AOI or stock certificate, purchaser is not deemed to
TITLE XII - CLOSE CORPORATIONS have knowledge of the restriction. Even if it is stated in the AOI
DEFINITION AND APPLICABILITY but not in the stock certificate, purchaser is deemed to have no
knowledge of the restriction and the corporation can be
compelled to recognize the transfer even if it is against the

prohibition. Attorney: So…
: The transfer is Effective
If restriction is stated in the AOI and in the stock certificate and it
is not complied with then the corporation at its discretion may Attorney: If it is Specified the transfer is…
refuse to register the transfer. : Effective. If such Close Corporation has its qualifications in
owning its shares, for it to be VALID and BINDING to a purchaser,
3 | THE CORPORATION SHALL NOT LIST IN ANY STOCK EXCHANGE it must be specified in the Articles of Incorporation and the
OR MAKE ANY PUBLIC OFFERING OF ANY OF ITS STOCK OF ANY Certificate of Transfer
CLASS.
Attorney: So, what happens to the transfer that is in breach of
Public Offering : if shares are offered to more than 20 persons that qualification?
: It is Ineffective
Atty: It’s different when you say “specify the number of persons
owning the shares” vs “ specify the qualifications owning the Attorney: What are the Consequences?
shares “. The requirement for a closed corporation is to specify : The purchaser can rescind the contract and he/she can ask the
the number of persons and not specify the qualifications or stockholder who’s selling the shares to give his/her payment
who can be the stockholders. back and the Corporation CANNOT register the Certificate of
Transfer
VALIDITY OF RESTRICTIONS ON TRANSFER OF SHARES
SECTION 97. Restrictions on the right to transfer shares must Attorney: What if it wants to?
appear in the articles of incorporation, in the bylaws, as well : Then all stockholders must consent to the transfer and they can
as in the certificate of stock; otherwise, the same shall not be amend its Articles of Incorporation
binding on any purchaser in good faith. Said restrictions shall
not be more onerous than granting the existing stockholders Attorney: If that’s done…
or the corporation the option to purchase the shares of the : Such transfer can be Registered by the Corporation
transferring stockholder with such reasonable terms,
conditions or period stated. If, upon the expiration of said Attorney: Whether or Not the transfer is in breach of a
period, the existing stockholders or the corporation fails to qualifying provision in the Articles is at the discretion of the
exercise the option to purchase, the transferring stockholder corporation. It is not automatically ineffective. But the
may sell their shares to any third person. corporation at its discretion may refuse to transfer or recognize
the transfer of shares which is in violation of any such
restriction in its Articles, including a restriction on the
Such restriction must appear in the AOI , in the by Laws, and in Qualification of Stockholders. It is not that the Corporations
Certificate of Stock and in effect it will be binding on any hands are tied, whether they are forced to register or not to
register, the corporation has the discretion whether or not it
purchaser in good faith. wants to recognize the transfer.
It’s not a requirement for a corporation to be a Close
Corporation that there should be a qualification on who can be
NOTE: SO SORRY ABOUT THIS NEXT PORTION. NO TIME TO EDIT its stockholders. What the law requires is that there should
THIS HUHU. STENOGRAPHIC NOTES INCOMING… only be a specific number of stockholders, but not more than
20. But if there is such qualification in the Articles of who can
Attorney: Going back to my question earlier, we said that it is be the stockholders and who makes up the 20 then that would
not a requirement that there should be a qualification on the be a valid qualification or restriction. The Corporation may
stockholders but if there is such qualifications, would it be a refuse to register ANY transfer in violation of that qualification.
valid provision in the Article? Not and Corporation can be considered as a Close Corporation,
: Yes, it is. even if it only has 5 members, it is not automatically considered
a Close Corporation.
Attorney: What is the consequence of not complying with the
qualification? Attorney: We said that one of the characteristics of a close
: It is upon the discretion of the Close Corporation if they are corporation is a restriction on transfer of shares, what does this
going to have qualifications in owning shares in such corporation. mean?
: It means, it is subject to restriction. i.e. if it is specified that
Attorney: If there is such a qualification, what happens to a there is a certain number of shareholders of a closed corporation
transfer in breach of that qualification? wherein if it exceeds the number it is not obliged to register such
: The Close Corporation MUST specify such qualification both in transfer.
the Articles of Incorporation and the Certificate of Transfer for
the transfer to be binding on the purchaser. If it is NOT being Attorney: So, you’re saying that the restriction on transfer is a
specified in the Articles of Incorporation and the Certificate of restriction on the number of stockholders?
Transfer, it is NOT binding on the Purchaser in Good Faith. : It can be. But there are also some restrictions
Attorney: If it is specified?
: It is Valid and Binding
Attorney: What do we mean by the restrictions stated in the Marsal shares and depriving respondents of their
Section 95? preemptive rights.
: For example, on how to transfer shares, a Close Corporation can On April 26, 2013, the RTC, as a Special Commercial Court,
make rules on how a shareholder can sell his/her shares. i.e. it dismissed the complaint. It found that the sale of Teresita's
must refer to the Corporation. Marsal shares of stocks to petitioner Rogelio, being one of the
incorporators and stockholders of Marsal at the time of sale,
Attorney: What do you mean refer to the Corporation? was not a sale to a third party or outsider as would justify the
: The shareholder must first inform the Corporation the he/she restriction on transfer of shares in the AOI. The RTC also found
will sell their shares before being sold to the purchaser. that laches and estoppel had already set in as respondents'
inaction for 17 years constituted a neglect for an unreasonable
Attorney: Once the Corporation is informed the sale is already time to question the same; and that respondents could not
valid. feign ignorance of the transactions as they knew of the same
: For me this is one example of how a Close Corporation can and yet they did not do anything at that time.
restrict the transfer of the shares. The CA found that Teresita's 3,464 Marsal shares of stocks
Attorney: So, when you say a Restriction on Transfer, all that were conveyed by petitioner estate to petitioner Rogelio in a
means is that you need to inform the corporation that you are Compromise Agreement and Deed of Assignment without first
transferring. offering them to the existing stockholders as provided under
: Another example is the eligibility of the person buying the paragraph 7 of the AOI; that since the AOI is considered a
shares. contract between the corporation and its stockholders, the
sale of Teresita's shares in favor of petitioner Rogelio
constituted a breach of contract on the part of petitioner
FLORETE VS FLORETE
estate, hence, null and void; and that it is inconsequential
whether the transfer was made to one of the existing
Facts:
stockholders of the closed corporation.
Marsal and Co., Inc. was organized as a close corporation by
Marcelino Sr., Salome, Rogelio, Marcelino Jr., Ma. Elena, and
Issue:
Teresita (all surnamed Florete).
Whether the CA erred in ruling that the sale of Teresita's 3,464
Paragraph 7 of their AOI provides for the procedure in the sale
Marsal shares of stocks made by petitioner estate of Teresita
of the shares of stocks of a stockholder, to wit:
to petitioner Rogelio was in violation of paragraph 7 of
SEVENTH. - x xx Any stockholder who desires to sell his share of
Marsal's Article of Incorporation and hence null and void and
stock in the company must notify in writing the Board of
must be annulled or rescinded.
Directors of the company of his intention to sell. The Board of
Directors upon receipt of such notice must immediately notify
Ruling:
all stockholders of record within five days upon receipt of the
YES.
letter of said stockholder. Any stockholder of record has the
Petitioners judicially admitted that Marsal is a close
preemptive right to buy any share offered for sale by any
corporation. Rogelio admitted such in his affidavit and in his
stockholder of the company on book value base[d] on the
Answer with Compulsary Counterclaim.
balance sheet approved by the Board of Directors. The
As Marsal is a close corporation, it is allowed under the
aforementioned preemptive right must be exercised by any
Corporation Code to provide for restrictions on the transfer of
stockholder of the company within ten (10) days upon his
its stocks. Please read Art. 97 and 98 of the Old Code for
receipt of the written notice sent to him by the Board of
reference.
Directors of the offer to sell. Any sale or transfer in violation of
Here, Teresita's 3,464 Marsal shares were sold by petitioner
the above terms and conditions shall be null and void. The
estate to petitioner Rogelio in a Compromise Agreement and
above terms and conditions must be printed at the back of the
Deed of Assignment they entered into which was approved by
stock certificate.
the Probate Court. The CA found that such sale of stocks was
null and void as it violated Paragraph 7 of their AOI.
Teresita owned 3,464 shares. She died. Her estate entered into
a Compromise Agreement and Deed of Assignment with
SC does not agree.
petitioner Rogelio ceding all the shareholdings of Teresita. So,
all the shares of Teresita went to Rogelio. Rogelio was
While it would appear that petitioner estate of Teresita,
represented by Atty. Muco, who is also the lawyer of the close
through its administrator Ephraim and petitioner Rogelio, did
corporation.
not comply with the procedure on the sale of Teresita's Marsal
Marcelino and Ma. Elena filed a case for annulment/rescission
shares as stated under paragraph 7 of the AOI, however, it
of sale of shares of stocks and the exercise of their preemptive
appeared in the records that respondents had nonetheless
rights in Marsal corporation and damages against petitioners
been informed of such sale to which they had already given
Rogelio Florete, Sr. and the estate of the late Teresita F.
their consent thereto as shown by the following circumstances:
Menchavez.
Respondents claimed that the sale of Teresita's 3,464 Marsal
First. Teresita died on September 19, 1989. Her husband
shares of stocks made by petitioner estate to petitioner
Ephraim filed a petition for letters of administration of her
Rogelio was void ab initio as it violated paragraph 7 of Marsal's
estate in 1992, and alleged the following:
AOI since the sale was made sans written notice to the Board
x xxx
of Directors who was not able to notify respondents in writing
of the petitioner estate and heirs' intention to sell and convey
6. That the herein petitioner, as one of the legal heirs of the from the compromise and it that was the only time they
deceased, Teresita FloreteMenchavez, had on several alleged that it was invalid. Hence, the transfer was valid.
occasions, requested decedent's brothers and sisters to make a (There was substantial compliance).
settlement and liquidation of the estate left by the said
deceased Teresita FloreteMenchavez and to deliver it to all the Under the law, if the stockholders consent to any transfer
legal heirs what is due to each and every one of them, but this that is in breach of the restrictions that is considered as a
has not been done. x xx valid transfer.
It bears stressing that Atty. Muyco was not only acting as
counsel of petitioner Rogelio but also of Marsal. Thus, it would EFFECTS OF ISSUANCE OR TRANSFER OF STOCK IN BREACH OF
be impossible for Atty. Muyco, who had the duty to protect QUALIFYING CONDITIONS
Marsal's interest in the intestate proceedings of Teresita's Sec. 98.
estate, not to have informed respondents of such compromise (a) If a stock of a close corporation is issued or transferred to
agreement since they are the stockholders and Board of any person who is not eligible to be a holder thereof under
Directors of Marsal who would be deprived of their preemptive any provision of the articles of incorporation, and if the
right to the Marsal shares. certificate for such stock conspicuously shows the
qualifications of the persons entitled to be holders of record
Second. The sale of all of Teresita's shares which she inherited thereof, such person is conclusively presumed to have notice
from her deceased parents which were sold to petitioner of the fact of the ineligibility to be a stockholder.
Rogelio, and which included the 3,464 Marshal shares, had also
been made known to respondents in the intestate proceedings (b) If the articles of incorporation of a close corporation states
to settle the estate of Marcelino Florete, Sr., who died on the number of persons, not exceeding twenty (20), who are
October 3, 1990. entitled to be stockholders of record, and if the certificate for
such stock conspicuously states such number, and the
There was already substantial compliance with paragraph 7 of issuance or transfer of stock to any person would cause the
the AOI when respondents obtained actual knowledge of the stock to be held by more than such number of persons, the
sale of Teresita's 3,464 Marsal shares to petitioner Rogelio as person to whom such stock is issued or transferred is
early as 1995. In fact, respondents had already given their conclusively presumed to have notice of this fact.
consent and conformity to such sale by their inaction for 17
years despite knowledge of the sale. Moreover, they had (c) If a stock certificate of a close corporation conspicuously
already waived the procedure of the stockholder's sale of shows a restriction on transfer of the corporation’s stock and
stocks as provided under Paragraph 7 of the AOI. the transferee acquires the stock in violation of such
Moreover, Section 99 of the Corporation Code provides for the restriction, the transferee is conclusively presumed to have
effects of transfer of stock in breach of qualifying conditions notice of the fact that the stock was acquired in violation of
the restriction.
Clearly, under the above-quoted provision, even if the transfer
of stocks is made in violation of the restrictions enumerated (d) Whenever a person to whom stock of a close corporation
under Section 99, such transfer is still valid if it has been has been issued or transferred has or is conclusively
consented to by all the stockholders of the close corporation presumed under this section to have notice of: (1) the
and the corporation cannot refuse to register the transfer of person’s ineligibility to be a stockholder of the corporation; or
stock in the name of the transferee. (2) that the transfer of stock would cause the stock of the
corporation to be held by more than the number of persons
In this case, We find that the sale of Teresita's 3,464 Marsal permitted under its articles of incorporation; or (3) that the
shares had already been consented to by respondents as We transfer violates a restriction on transfer of stock, and the
have discussed, and may be registered in the name of corporation may, at its option, refuse to register the transfer
petitioner Rogelio. in the name of the transferee.
Discussion of the case: (e) The provisions of subsection (d) shall not be applicable if
the transfer of stock, though contrary to subsections (a), (b)
A Closed Corporation with a restriction on transfer that or (c), has been consented to by all the stockholders of the
before any transfers can be done, there should be a close corporation, or if the close corporation has amended its
notification to the corporation and the stockholders. articles of incorporation in accordance with this Title.
The stockholders alleged that they were not notified that (f) The term “transfer”, as used in this section, is not limited
their brother purchased the share of their deceased sister. to a transfer for value.
SC said that the procedure in the AOI has been substantially (g) The provisions of this section shall not impair any right
complied with, they are already deemed to have notice of the which the transferee may have to either rescind the transfer
transfer because in the first place, the person who arranged or recover the stock under any express or implied warranty.
for the compromise is the husband of one of the complainant
(the lawyer of the purchaser was the husband of one of the IN SEC. 98 SUBSECTION (D), the corporation can refuse to
complainant who was also their lawyer in the 2nd case that register the transfer in case of violation of the restriction. This
they brought against their brother) and it has been 17 years shall not be applicable if the transfer, although contrary to the
restriction, has been consented by all of the stockholder of the 2. Transfers of stocks to others which would increase the
corporation. number of stockholders more than the amount
maximum would be invalid
In relation to the Florete case, the complainants were hit in two
fronts. 3. Corporate acts may be valid even without a board
1) it cannot be said that the restriction has not been complied meeting if the stockholders have knowledge or
with. They had knowledge. Because being parties to the ratified the informal action
case, they should know where the compromise was made.
And the lawyer in that case, representing the buyer, is also 4. Pre-emptive right exists to all stock issues
their own lawyer who was the husband of the one of the
complaining stockholders. They had knowledge and they In ordinary corporations, pre-emptive right is applicable only for
were notified. original issuance. But in a close corporation, pre-emptive rights
2) They did not complain for 17 years. That means that they apply to all issuance, even treasury shares.
are deemed to have consented. And if they have
consented, under sec. 98 (e), the transfer is valid. 5. Deadlocks may be settled by the SEC, on written
petition by any stockholder
AGREEMENTS BY STOCKHOLDERS 6. Stockholder may withdraw or avail of his appraisal
a. Agreements duly signed and executed by and among all right
stockholders before the formation and organization of a close 7. Internal agreements among the stockholders are
corporation shall survive the incorporation and shall continue binding not just among themselves, but also with the
to be valid and binding between such stockholders, if such be corporation and third persons.
their intent, to the extent that such agreements are
consistent with the articles of incorporation, irrespective of Types of internal agreements
where the provisions of such agreements are contained, 1. Any agreement that will make the stockholders
except those required by this Title to be embodied in said appear or make them partners. The agreement will
articles of incorporation. not be invalidated on that ground alone, that it makes
b. A written agreement signed by two (2) or more the stockholders partners among themselves. That is
stockholders may provide that in exercising any voting right, allowed.
the shares held by them shall be voted as provided or as
agreed, or in accordance with a procedure agreed upon by 2. Any agreement that can appear to interfere or pre-
them. empt the powers of the BOD. That’s a valid
c. No provision in a written agreement signed by the agreement – but the consequence of this is that the
stockholders, relating to any phase of corporate affairs, shall stockholders can be held fiduciarily liable to each other
be invalidated between the parties on the ground that its and to third persons. And they can be held liable for
effect is to make them partners among themselves. corporate torts.
d. A written agreement among some or all of the In an ordinary corporation, directors are not liable
stockholders in a close corporation shall not be invalidated on unless they consented, or they voted for, or they are
the ground that it relates to the conduct of the business and guilty of breach of fiduciary duty. But in this case, there
affairs of the corporation as to restrict or interfere with the is no need for that. The stockholders can be held liable
discretion or powers of the board of directors: Provided, That for corporate torts if they are representing a close
such agreement shall impose on the stockholders who are corporation.
parties thereto the liabilities for managerial acts imposed on
directors by this Code. Does this mean that the stockholders are automatically solidarily
e. Stockholders actively engaged in the management or liable with the corporation, in case of close corporation?
operation of the business and affairs of a close corporation
shall be held to strict fiduciary duties to each other and No.
among themselves. The stockholders shall be personally
liable for corporate torts unless the corporation has obtained JOSELITO HERNAND M. BUSTOS VS. MILLIANS SHOE, INC., ET AL
reasonably adequate liability insurance.
Spouses cruz owns a parcel of land which was taken by the city
of Marikina for failure to pay taxes. The lad was auctioned
CHARACTERISTICS OF A CLOSE CORPORATION with petitioner emerging as the highest bidder. Petitioner
1. Stockholders may act as directors without the need of applied for the cancellation of the title of the spouses cruz. But,
election later on, it was found out that a notice was annotated that the
lot was subject to a SEC order. And now the petitioner is asking
the consequence is that he may be liable as a director. In close that the parcel of land will be excluded from such order.
corporation, the personality of the stockholder and the director
is merged. So, stockholders may not vote or elect directors The question now is whether or not the parcel of land owned
anymore. They may, themselves operate and manage the by the spouses Cruz should be included to pay the liabilities of
corporation. the corporation, MSI.
Ruling: No, because it was not established that MSI is a close were not elected as such, granting that the assumption is a
corporation. The three requirements for a close corporation to close corporation.
exist were not established. Furthermore, even if it is a close
corporation, the property still cannot be used to pay off the But, does that make them personally liable? NO, there is
liability because of the separation of the juridical personality nothing in the Corporation Code which makes directors
between the corporation and the stockholder. This applies personally liable for the obligations and liabilities of the
even if the corporation is a close corporation. corporation, except in certain instances. One of those
With respect to the rule under close corporation when a instances, particular to a close corporation is in case of
stockholder will be liable as that like a director when they CORPORATE TORT LIABILITY. But in this case, it is just an
actively participated in the management, such does not apply ordinary civil obligation. It is not tort. So the SC said that the
even assuming that it is a close corporation because such property cannot be made to answer for the obligation of the
provision only applies with corporate torts. In the case at bar, corporation and the transfer to the purchaser can be done.
the case is about an ordinary civil liability.
Discussion:
It was not proven that it was a close corporation because the DEADLOCKS
articles of incorporation was not provided. In order to know if SEC. 103. Notwithstanding any contrary provision in the close
it a close corporation, you have to look at the AOI, and look corporation’s articles of incorporation, bylaws, or
for 3 things: stockholders’ agreement, if the directors or stockholders are
Restriction on the number of stockholders so divided on the management of the corporation’s business
Restriction on transfers and affairs that the votes required for a corporate action
No public offering/ not listed cannot be obtained, with the consequence that the business
But granting that this is a close corporation, it does not mean and affairs of the corporation can no longer be conducted to
that there is no separate personality between the corporation the advantage of the stockholders generally, the Commission,
and the stockholders. There is still that separate personality. upon written petition by any stockholder, shall have the
Even if they participated in the management, which makes power to arbitrate the dispute.
them directors, it still does not make them personally liable
for the obligations and liabilities of the corporation except in In the exercise of such power, the Commission shall have
particular circumstances. authority to make appropriate orders, such as: (a) cancelling
or altering any provision contained in the articles of
Bustos Case Arguments: incorporation, bylaws, or any stockholders’ agreement; (b)
cancelling, altering or enjoining a resolution or act of the
The SC said that it was not proven that the corporation is a corporation or its board of directors, stockholders, or officers;
close corporation because the AOI were not presented. And (c) directing or prohibiting any act of the corporation or its
we all know that in order to be a close corporation, you have board of directors, stockholders, officers, or other persons
to look at the AOI and you need to look for 3 things, the three party to the action; (d) requiring the purchase at their fair
qualification for a close corporation (number of stockholders, value of shares of any stockholder, either by the corporation
restrictions on the transfer, and no public offering or public regardless of the availability of unrestricted retained
listing: earnings in its books, or by the other stockholders; (e)
appointing a provisional director; (f) dissolving the
(a) all the corporation’s issued stock of all classes, exclusive of corporation; or (g) granting such other relief as the
treasury shares, shall be held of record by not more than a circumstances may warrant.
specified number of persons, not exceeding twenty (20);
A provisional director shall be an impartial person who is
(b) all the issued stock of all classes shall be subject to one (1) neither a stockholder nor a creditor of the corporation or any
or more specified restrictions on transfer permitted by this of its subsidiaries or affiliates, and whose further
Title; and qualifications, if any, may be determined by the Commission.
A provisional director is not a receiver of the corporation and
(c) the corporation shall not list in any stock exchange or does not have the title and powers of a custodian or receiver.
make any public offering of its stocks of any class. A provisional director shall have all the rights and powers of a
duly elected director, including the right to be notified of and
Granting that this is a close corporation, it does not mean to vote at meetings of directors until removed by order of the
that just because it is a close corporation, there is now no Commission or by all the stockholders. The compensation of
separate personality between the stockholders and the the provisional director shall be determined by agreement
corporation. There is still that separate personality. The between such director and the corporation, subject to
corporation is still an entity separate and distinct from the approval of the Commission, which may fix the compensation
stockholders. absent an agreement or in the event of disagreement
between the provisional director and the corporation.
What if they actively participated in the management of the
close corporation? Under a close corporation, that makes
them not stockholders anymore but directors, even if they
SEC may be petitioned to step in and to basically issue an order: TITLE XIII – SPECIAL CORPORATIONS
1. Cancel any provision or agreement between the stockholders
2. Cancel any resolution of the board or the stockholders 1. Educational corporations
3. Direct or prohibit any act of the corporation or the board 2. Religious corporations, and
4. Require the purchase at fair value of the shares of any 3. One Person Corporation
stockholder either by the corporation or by the other
stockholders EDUCATIONAL CORPORATIONS
5. Appoint a provisional director SEC. 105. Incorporation. – Educational corporations shall be
6. Dissolve the corporation governed by special laws and by the general provisions of this
7. Grant such other reliefs as the circumstances may warrant Code.
In case of a close corporation, the SEC has far-reaching power in Only the general provisions of the Corporation Code will apply to
cases of a deadlock. A deadlock is a situation where you cannot educational corporations. The primary rule governing
move on because you cannot get the necessary vote. It’s tie. It’s educational corporations are the special laws. The corporation
easier to have a deadlock in a close corporation because basically code is only applied suppletorily.
the directors are the same with the stockholders. Unlike in an
ordinary corporation where the approval is in two-layer, first, the RELIGIOUS CORPORATIONS
Board, and second, the stockholders. The close corporation, SEC. 107. Classes of Religious Corporations. – Religious
because of the nature of the corporation where the stockholders corporations may be incorporated by one (1) or more
can act as Board of Directors, one-layer ra ang approval. So it is persons. Such corporations may be classified into
easier to get a deadlock because you count by shares, not by the corporations sole and religious societies. Religious
number of persons. The SEC has far-reaching power in case of corporations shall be governed by this Chapter and by the
deadlock when the votes are tied. general provisions on non-stock corporations insofar as
applicable.
Religious corporation may be organized as a corporation sole or

religious societies.
CORPORATION SOLE
SEC. 108. Corporation Sole. – For the purpose of
administering and managing, as trustee, the affairs, property
and temporalities of any religious denomination, sect or
church, a corporation sole may be formed by the chief
archbishop, bishop, priest, minister, rabbi, or other presiding
elder of such religious denomination, sect or church.
ARTICLES OF INCORPORATION
SEC. 109. Articles of Incorporation. – In order to become a
corporation sole, the chief archbishop, bishop, priest,
minister, rabbi, or presiding elder of any religious
denomination, sect or church must file with the Commission
articles of incorporation setting forth the following:
(a) That the applicant chief archbishop, bishop, priest,

minister, rabbi, or presiding elder represents the religious
denomination, sect or church which desires to become a
corporation sole;
(b) That the rules, regulations and discipline of the religious

denomination, sect or church are consistent with becoming a
corporation sole and do not forbid it;
(c) That such chief archbishop, bishop, priest, minister, rabbi,

or presiding elder is charged with the administration of the
temporalities and the management of the affairs, estate and
properties of the religious denomination, sect, or church
within the territorial jurisdiction, so described succinctly in
the articles of incorporation;
(d) The manner by which any vacancy occurring in the office

of chief archbishop, bishop, priest, minister, rabbi, or
presiding elder is required to be filled, according to the rules,
regulations or discipline of the religious denomination, sect or However, this is subject to a qualification that if the disposition
church to which he belongs; of the properties of the religious corporation is governed by the
rules of such religious denomination, then there is no need for
(e) The place where the principal office of the corporation the intervention of the courts, and the rules of such religious
sole is to be established and located, which place must be denominations shall apply.
within the territory of the Philippines.
RELIGIOUS SOCIETIES
The articles of incorporation may include any other provision SEC. 114. Religious Societies. – Unless forbidden by
not contrary to law for the regulation of the affairs of the competent authority, the Constitution, pertinent rules,
corporation. regulations, or discipline of the religious denomination, sect
or church of which it is a part, any religious society, religious
For corporation sole, it may be formed by a chief archbishop, order, diocese, or synod, or district organization of any
bishop, priest, minister, rabbi, or other presiding elder of such religious denomination, sect or church, may, upon written
religious denomination, sect or church, by filing with the consent and/or by an affirmative vote at a meeting called for
Commission their AOI setting forth: the purpose of at least two-thirds (2/3) of its membership,
1. That the applicant chief archbishop, bishop, etc belong to a incorporate for the administration of its temporalities or for
religious denomination the management of its affairs, properties, and estate by filing
2. That such application is consistent with the rules of such with the Commission, articles of incorporation verified by the
religious denomination affidavit of the presiding elder, secretary, or clerk or other
3. such archbishop, bishop, etc is in charge with the member of such religious society or religious order, or
administration of the temporalities of the religious diocese, synod, or district organization of the religious
denomination. denomination, sect, or church, setting forth the following:
4. The manner in case of vacancy of the position of the
archbishop, bishop, etc. (a) That the religious society or religious order, or diocese,
5. And the principal office of the corporation sole. synod, or district organization is a religious organization of a
religious denomination, sect or church;
ACQUISITION AND ALIENATION OF PROPERTY
SEC. 111. Acquisition and Alienation of Property. – A (b) That at least two-thirds (2/3) of its membership has given
corporation sole may purchase and hold real estate and written consent or has voted to incorporate, at a duly
personal property for its church, charitable, benevolent, or convened meeting of the body;
educational purposes, and may receive bequests or gifts for
such purposes. Such corporation may sell or mortgage real (c) That the incorporation of the religious society or religious
property held by it by obtaining an order for that purpose order, or diocese, synod, or district organization is not
from the Regional Trial Court of the province where the forbidden by competent authority or by the Constitution,
property is situated upon proof that the notice of the rules, regulations or discipline of the religious denomination,
application for leave to sell or mortgage has been made sect or church of which it forms part;
through publication or as directed by the Court, and that it is
in the interest of the corporation that leave to sell or (d) That the religious society or religious order, or diocese,
mortgage be granted. The application for leave to sell or synod, or district organization desires to incorporate for the
mortgage must be made by petition, duly verified, by the administration of its affairs, properties and estate;
chief archbishop, bishop, priest, minister, rabbi, or presiding
elder acting as corporation sole, and may be opposed by any (e) The place within the Philippines where the principal office
member of the religious denomination, sect, or church of the corporation is to be established and located; and
represented by the corporation sole: Provided, That in cases
where the rules, regulations, and discipline of the religious (f) The names, nationalities, and residence addresses of the
denomination, sect or church, religious society, or order trustees, not less than five (5) nor more than fifteen (15),
concerned represented by such corporation sole regulate the elected by the religious society or religious order, or the
method of acquiring, holding, selling, and mortgaging real diocese, synod, or district organization to serve for the first
estate and personal property, such rules, regulations and year or such other period as may be prescribed by the laws of
discipline shall govern, and the intervention of the courts the religious society or religious order, or of the diocese,
shall not be necessary. synod, or district organization.
Can a corporation sole acquire properties? How are religious societies created?
Yes, under the Corporation Code, they are allowed to acquire Under the corporation code, religious societies may be created,
properties, receive donations and bequests. provided it is not prohibited under the laws, Constitution, and it
is not prohibited by their rules.
Can they dispose the properties?
Yes, they are allowed to dispose the properties, provided they Any religious society, religious order, diocese, or synod, or
obtain a court order from the RTC of the province where the district organization of any religious denomination, sect or
property is situated. church, may organize a religious society by written consent and
affirmative vote of 2/3 of its membership.
It shall file an application setting forth: How to establish that the property of the OPC is independent
1. That the religious society or religious order, or diocese, synod, from personal property of the stockholder
or district organization is a religious organization of a religious
denomination, sect or church It must be shown that the One Person Corporation is adequately
2. That at least two-thirds (2/3) of its membership has given financed
written consent or has voted to incorporate
3. It shall also provides that the rules of the religious Otherwise, if the OPC is not adequately financed in the sense
denomination allows the formation of religious societies, or it is that it cannot separate the assets of the corporation from the
not prohibited by competent authority or the constitution assets of the single stockholder, the single stockholder is
4. Principal office within the Philippines shall also be established solidarily liable for the debts of the one person corporation.
and the names, nationalities and residence addressed of their
trustees should be provided which shall not be less than 5 but LIABILITY OF SINGLE SHAREHOLDER
not more than 15. Sec. 130. A sole shareholder claiming limited liability has the
burden of affirmatively showing that the corporation was
What is purpose of establishing religious corporations? adequately financed.
Corporation Sole and Religious Societies are established for the
purpose of managing the affairs, and administer the Where the single stockholder cannot prove that the property
temporalities, assets and properties of the religious group. That of the One Person Corporation is independent of the
is why while they can acquire properties, they need the consent stockholder's personal property, the stockholder shall be
of the court in order to dispose or encumber the property jointly and severally liable for the debts and other liabilities
because their purpose is primarily for administration only. In of the One Person Corporation.
order to dispose or encumber the property, they will need the
approval or order from the courts. The principles of piercing the corporate veil applies with
equal force to One Person Corporations as with other
ONE PERSON CORPORATION corporations.
SEC. 116. One Person Corporation. – A One Person
Corporation is a corporation with a single stockholder:
A pre-condition before the limited liability will apply is that the
Provided, That only a natural person, trust, or an estate may
sole shareholder must prove that the corporation is adequately
form a One Person Corporation.
financed.
Banks and quasi-banks, preneed, trust, insurance, public and
publicly-listed companies, and non-chartered government- If the sole shareholder proves that the the corporation is
owned and -controlled corporations may not incorporate as adequately financed, the one person corporation can now
One Person Corporations: Provided, further, That a natural possessed a separate and distinct personality, the same with
person who is licensed to exercise a profession may not ordinary corporation.
organize as a One Person Corporation for the purpose of
exercising such profession except as otherwise provided How can the sole shareholder prove? He has to prove that his
under special laws. properties are not intermingled with the properties of the one
person corporation. That the corporation actually has a separate
One Person Corporation properties from his personal properties. If proven that his asset
A One Person Corporation is a corporation with a single and that of the one person corporation’s asset is intermingled,
stockholder. the sole shareholder is now solidary liable to whatever liabilities
the corporation incurs.
A One Person Corporation can only be created by a natural
person, a trust or an estate. It cannot be formed by other So, once established that the corporation is adequately funded,
juridical entities. the corporation possessed a separate and distinct personality
and the sole shareholder has a limited liability. But you can still
Determination of Liability of a Single Shareholder apply piercing the veil doctrine because this is applied when the
As a condition precedent, prove that the property of the One corporation is used to defraud the public.
Person Corporation is independent of the stockholder’s personal
property. Question: Can the sole shareholder in a one man person
a. If independent – apply the limited liability rule corporation be included in a suit against the corporation?
(because of the separate juridical entity) Depends. If you are suing the corporation, the sole shareholder
i. Exception – when piercing of the corporate veil cannot be held liable because the separate and distinct
is applied corporation still applies to a one person corporation. But if you
b. If not proved to be independent – joint and severally are directly suing the sole shareholder, in his personal capacity,
liable to the corporation then he is included in the suit.
MINIMUM CAPITALIZATION CORPORATE SECRETARY

SECTION 117. A One Person Corporation shall not be required SECTION 123. Special Functions of the Corporate Secretary. —
to have a minimum authorized capital stock except as In addition to the functions designated by the One Person
otherwise provided by special law. Corporation, the corporate secretary shall:
(a) Be responsible for maintaining the minutes book and/or
records of the corporation;
Take note that, there is NO required minimum authorised capital
(b) Notify the nominee or alternate nominee of the death or
stock.
incapacity of the single stockholder, which notice shall be
given no later than five (5) days from such occurrence;
This is not an exception to ordinary corporation because in (c) Notify the Commission of the death of the single
ordinary corporation, there is also NO MINIMUM REQUIREMENT stockholder within five (5) days from such occurrence and
for capitalisation. stating in such notice the names, residence addresses, and
contact details of all known legal heirs; and
CORPORATE NAME (d) Call the nominee or alternate nominee and the known
legal heirs to a meeting and advise the legal heirs with regard
SECTION 120. A One Person Corporation shall indicate the
to, among others, the election of a new director, amendment
letters "OPC" either below or at the end of its corporate
of the articles of incorporation, and other ancillary and/or
name.
consequential matters.
This is not the same in ordinary corporation where you put

What is the reason why the sole shareholder, who is the
“INC.” or “CORP.” or “Ltd”.
president and at the same time the director can NEVER be the
corporate secretary?
In one person corporation, you put instead, “OPC” to distinguish
that such corporation is a one person corporation.
This is because there are tasks that the corporate secretary
needs to do when the sole shareholder dies, become
DIRECTORS, PRESIDENT AND TREASURER incapacitated and is unable to continuously run the corporation.
SECTION 121. Single Stockholder as Director, President. —
The single stockholder shall be the sole director and president What are the responsibilities of a corporate secretary?
of the One Person Corporation.
1. Tasks to do the minutes
SECTION 122. Treasurer, Corporate Secretary, and Other 2. Notify the nominee or alternate nominee of the death
Officers. — Within fifteen (15) days from the issuance of its or incapacity of the single stockholder. So, here, if the
certificate of incorporation, the One Person Corporation shall single stockholder is also the corporate secretary, if he
appoint a treasurer, corporate secretary, and other officers as dies, who will now inform the nominee of alternate
it may deem necessary, and notify the Commission thereof nominee.
within five (5) days from appointment. 3. Notify the commission of the death. SO, who will now
notify the commission if the corporate secretary is also
The single stockholder may not be appointed as the corporate the single stockholder.
secretary. 4. Call the nominee, alternate nominee and the legal
heirs.
A single stockholder who is likewise the self-appointed
treasurer of the corporation shall give a bond to the In a nutshell, these are tasks that the single stockholder cannot
Commission in such a sum as may be required: Provided, That perform if he is death. Hence, he cannot be the corporate
the said stockholder/treasurer shall undertake in writing to secretary at the same time.
faithfully administer the One Person Corporation's funds to
be received as treasurer, and to disburse and invest the same
according to the articles of incorporation as approved by the When the single stockholder is dead or incapacitated, the rule
Commission. The bond shall be renewed every two (2) years
says that the nominee will assume the place of the single
or as often as may be required.
stockholder.
The sole shareholder can be the president and the director. He
can be a treasurer but he can never be the corporate secretary. What is the role of the Corporate Secretary?
Their role is to notify the nominee about the death or incapacity

In ordinary corporation, a president can be anyone
chosen/elected from the directors. Here, since there is only a of the single stockholder.
sole shareholder, he is the only director, so automatically he is
Who else needs to be notified?
the president.
The Securities and Exchange Commission
The sole shareholder may designate someone else to be a
corporate treasurer. But he can also designate himself. ATTY: Do you see why the Corporate Secretary cannot also be
the Director/President/single stockholder? It is because the role
of the Corporate Secretary is to notify the nominee or the For purposes of this provision, the fiscal year of a One Person
alternate nominee in case of death. How can he notify if he is Corporation shall be that set forth in its articles of incorporation
already dead? Logically, the Corporate Secretary cannot be the or, in the absence thereof, the calendar year.
single stockholder, not because there is a conflict of interest, but
because there is a conflict of duties. The single stockholder is The Commission may place the corporation under delinquent
automatically the Director and the President. He can choose to status should the corporation fail to submit the reportorial
be the Corporate Treasurer. However, he cannot be the requirements three (3) times, consecutively or intermittently,
Corporate Secretary. within a period of five (5) years.
What is the job of the nominee or alternate nominee? When is the independent audit required? [ Sec. 129 (a) ]
His job is to replace the single stockholder in case of death of If total assets or liabilities EXCEEDS P600,000, then it must be
incapacity. audited by an independent certified public accountant.
Who replaces the single stockholder? If LESS than P600,000, there is no need for a CPA. It only needs to
be certified under oath by the Corporation’s Treasurer and
The nominee. President.
What happens if the nominee refuses, or is similarly dead or CONVERSION: ORDINARY CORP TO ONE PERSON CORP
incapacitated? SEC. 131. When a single stockholder acquires all the stocks of
an ordinary stock corporation, the latter may apply for
The alternate nominee. conversion into a One Person Corporation, subject to the
submission of such documents as the Commission may
This is why in the Articles of Incorporation, the single stockholder
require. If the application for conversion is approved, the
is required to designate a nominee, as well as an alternate Commission shall issue a certificate of filing of amended
nominee. Unlike in an ordinary corporation—wherein if one articles of incorporation reflecting the conversion. The One
director dies (even if he is the President) the other directors can Person Corporation converted from an ordinary stock
take over—a One Person Corporation only has one director. corporation shall succeed the latter and be legally responsible
There is no other stockholder to replace him. This is why it needs for all the latter’s outstanding liabilities as of the date of
a nominee and an alternate nominee. conversion.
How long is the term of the nominee?

CONVERSION OF ORDINARY CORPORATION TO OPC
The nominee serves as the single stockholder/director/President 1. A single stockholder acquires all the stocks of the ordinary
until the heirs of the single stockholder have been identified, or stock corporation, becoming the only stockholder.
the legal heirs determine that the estate will become the single
stockholder. 2. File application for conversion with the SEC
What are the reportorial requirements to be submitted by an 3. When SEC approves application, ordinary stock corporation
OPC? becomes an OPC.
SEC. 129. Reportorial Requirements. – The One Person CONVERSION: ONE PERSON CORP TO ORDINARY CORP
Corporation shall submit the following within such period as the SEC. 132. A One Person Corporation may be converted into an
Commission may prescribe: ordinary stock corporation after due notice to the
Commission of such fact and of the circumstances leading to
(a) Annual financial statements audited by an independent the conversion, and after compliance with all other
certified public accountant: Provided, That if the total assets or requirements for stock corporations under this Code and
total liabilities of the corporation are less than Six Hundred applicable rules. Such notice shall be filed with the
Thousand Pesos (P600,000.00), the financial statements shall be Commission within sixty (60) days from the occurrence of the
certified under oath by the corporation’s treasurer and circumstances leading to the conversion into an ordinary
president; stock corporation. If all requirements have been complied
with, the Commission shall issue a certificate of filing of
(b) A report containing explanations or comments by the amended articles of incorporation reflecting the conversion.
president on every qualification, reservation, or adverse remark In case of death of the single stockholder, the nominee or
or disclaimer made by the auditor in the latter’s report; alternate nominee shall transfer the shares to the duly
designated legal heir or estate within seven (7) days from
(c) A disclosure of all self-dealings and related party transactions receipt of either an affidavit of heirship or self-adjudication
entered into between the One Person Corporation and the single executed by a sole heir, or any other legal document
stockholder; and declaring the legal heirs of the single stockholder and notify
the Commission of the transfer. Within sixty (60) days from
(d) Other reports as the Commission may require. the transfer of the shares, the legal heirs shall notify the
Commission of their decision to either wind up and dissolve
the One Person Corporation or convert it into an ordinary Where Creditors are affected
stock corporation. 1. There must be a verified petition for dissolution filed with the
The ordinary stock corporation converted from a One Person SEC
Corporation shall succeed the latter and be legally
responsible for all the latter’s outstanding liabilities as of the 2. The petition shall be signed by majority of the BOD and
date of conversion. affirmative vote of stockholders representing 2/3 of outstanding
capital stock
CONVERSION OF OPC TO ORDINARY STOCK CORPORATION Atty: This time it’s not majority of SH but 2/3.
Mere amendment of the articles of incorporation.
3. The order of the SEC reciting the purpose of the petition and
Atty: Conversion from OPC to Ordinary Corporation is merely setting the deadline for filing objections should be published at
amendment of the articles of incorporation. least once a week for 3 consecutive weeks
TITLE XIV -DISSOLUTION 4. The deadline for objections shall not be less than 30 days nor
more than 60 days after the entry of the order
Modes of dissolution
1. Voluntary dissolution 5. Upon five days notice given after the date on which the right
2. Involuntary dissolution to file objections has expired, the SEC shall conduct a hearing
3. Shortening of Corporate Term
6. If it finds that there is sufficient basis for the dissolution, it
Atty: Although technically the law says voluntary and involuntary shall render judgment dissolving the corporation
dissolution, actually there are 3 modes to dissolve the
corporation. You can do voluntary, involuntary, or shortening of 7. The dissolution shall take effect only upon the issuance by the
corporate term. commissioner of a certificate of dissolution.
VOLUNTARY DISSOLUTION
Voluntary dissolution without Voluntary dissolution with
Types of voluntary dissolution creditors creditors
1. Where creditors are not affected No hearing required A hearing is required
2. Where creditors are affected. A notice of the meeting is An order of the SEC setting the
published once before the deadline for objection is
Where Creditors are not affected meeting date published once a week for 3
1. At least 20 days prior to the meeting, notice shall be given to consecutive weeks
each shareholder/member
In voluntary dissolution without creditors, the publication of the
2. The notice calling for the dissolution must also be published notice of the meeting is only required once before the date of
once prior to the date of the meeting the meeting.
For voluntary dissolution with creditors, the order of the SEC
3. The dissolution may be effected by majority vote of the BOD setting the deadline for objections to the dissolution is published
and majority affirmative vote by the stockholders owning at least once a week for three (3) consecutive weeks.
majority of the outstanding capital stock
As to the voting requirement:
Atty: Take note there is an amendment here. Before it used to In voluntary dissolution without creditors, the voting
be 2/3 vote even for voluntary with no creditors affected. Now requirement is:
with the new amendment, it’s majority BOD + majority 1. Majority of the BOD; and
Stockholders representing majority of OCS. 2. Majority of the outstanding capital stock.
In voluntary dissolution with creditors, the voting requirement is:
4. Once you have the required votes, you file a request for 1. Majority of the BOD; and
dissolution with the SEC. Upon receipt of the request, the SEC 2. 2/3 of the outstanding capital stock.
will approve the dissolution. Once approved, the dissolution
becomes effective Atty: In sum, the process is more tedious if the voluntary
dissolution is one that affects creditors, because even if the
5. The SEC approves the dissolution by issuing the certificate of proceedings in the SEC is internal between the SEC and the
dissolution. Once that is done, the dissolution takes effect. corporation, it also affects third parties. The SEC will have to
publish the order calling for any objection to the dissolution.
DISSOLUTION BY SHORTENING CORPORATE TERM request for dissolution, the Commission shall withhold action
Sec 136. A voluntary dissolution may be effected by on the request for dissolution and shall, after investigation:
amending the articles of incorporation to shorten the (a) make a pronouncement that the request for dissolution is
corporate term pursuant to the provisions of this Code. A deemed withdrawn; (b) direct a joint meeting of the board of
copy of the amended articles of incorporation shall be directors or trustees and the stockholders or members for the
submitted to the Commission in accordance with this Code. purpose of ascertaining whether to proceed with dissolution;
or (c) issue such other orders as it may deem appropriate.
Upon the expiration of the shortened term, as stated in the A withdrawal of the petition for dissolution shall be in the
approved amended articles of incorporation, the corporation form of a motion and similar in substance to a withdrawal of
shall be deemed dissolved without any further proceedings, request for dissolution but shall be verified and filed prior to
subject to the provisions of this Code on liquidation. publication of the order setting the deadline for filing
In the case of expiration of corporate term, dissolution shall objections to the petition.
automatically take effect on the day following the last day of
the corporate term stated in the articles of incorporation, Voluntary Voluntary
without the need for the issuance by the Commission of a Dissolution without Dissolution with
certificate of dissolution. creditors creditors
How done? It is effected by amending the articles of How done? Verified written Verified motion.
incorporation. withdrawal of the
What is the normal corporate term? Under the Revised request for
Corporation Code, there is no more corporate term, it is now dissolution.
perpetual. However, corporations are still allowed to provide for When filed? Not later than Prior to publication
a corporate term. fifteen (15) days of the order setting
from receipt by the the deadline for
Atty: Providing for a corporate term does not automatically SEC of the request objections.
mean that you are dissolving your corporation. In fact, under the for dissolution.
new law, once the corporate term expires, you can still revive the Nature Non-adversarial, Adversarial. Hence,
corporation. since there are no written withdrawal
creditors affected. is not sufficient. It
Old Corporation Code Revised Corporation Code has to be in the
form of a motion.
Expiration of the corporate No automatic dissolution
term dissolves the corporation after expiration of the
automatically. corporate term.
INVOLUNTARY DISSOLUTION
Sec. 138. A corporation may be dissolved by the Commission
However, if you file an amendment to your articles of motu proprio or upon filing of a verified complaint by any
incorporation shortening the corporate term for the express interested party. The following may be grounds for
purpose of dissolving the corporation, then it will effect a dissolution of the corporation:
dissolution of the corporation after the expiration of the
shortened term. (a) Non-use of corporate charter as provided under Section 21
of this Code;
Ordinary Expiration of Express/Intentional Shortening (b) Continuous inoperation of a corporation as provided
Corporate Term of Corporate Term to Dissolve under Section 21 of this Code;
the Corporation
(c) Upon receipt of a lawful court order dissolving the
Does not dissolve a Dissolves the corporation. corporation;
corporation.
May file for a revival after No such option to revive (d) Upon finding by final judgment that the corporation
expiration of the original available. procured its incorporation through fraud;
term. (e) Upon finding by final judgment that the corporation:
(1) Was created for the purpose of committing, concealing or

WITHDRAWAL OF REQUEST AND PETITION FOR DISSOLUTION aiding the commission of securities violations, smuggling, tax
Sec. 137. A withdrawal of the request for dissolution shall be evasion, money laundering, or graft and corrupt practices;
made in writing, duly verified by any incorporator, director, (2) Committed or aided in the commission of securities
trustee, shareholder, or member and signed by the same violations, smuggling, tax evasion, money laundering, or graft
number of incorporators, directors, trustees, shareholders, or and corrupt practices, and its stockholders knew of the same;
members necessary to request for dissolution as set forth in and
the foregoing sections. The withdrawal shall be submitted no (3) Repeatedly and knowingly tolerated the commission of
later than fifteen (15) days from receipt by the Commission of graft and corrupt practices or other fraudulent or illegal acts
the request for dissolution. Upon receipt of a withdrawal of by its directors, trustees, officers, or employees.
If the corporation is ordered dissolved by final judgment corporation has 2 years to comply, OW, that will be a
pursuant to the grounds set forth in subparagraph (e) hereof, ground for involuntary dissolution.
its assets, after payment of its liabilities, shall, upon petition (2) In non-use of corporate charter, the revocation
of the Commission with the appropriate court, be forfeited in happens one day following the end of the 5-year
favor of the national government. Such forfeiture shall be period.
without prejudice to the rights of innocent stockholders and
employees for services rendered, and to the application of 3. Upon receipt of a lawful court order dissolving the
other penalty or sanction under this Code or other laws. corporation
The Commission shall give reasonable notice to, and
coordinate with, the appropriate regulatory agency prior to 4. Upon finding by final judgment that the corporation
the involuntary dissolution of companies under their special procured its incorporation through fraud
regulatory jurisdiction.
5. Upon finding by final judgment that the corporation:
Grounds: (1) Was created for the purpose of committing, concealing
1. Non-use of corporate charter under Section 21 or aiding the commission of securities violations,
smuggling, tax evasion, money laundering, or graft
Rule— and corrupt practices;
Corporation that does not formally organize and commence (2) Committed or aided in the commission of securities
its business within 5 years from the date of its incorporation violations, smuggling, tax evasion, money laundering,
shall have its certificate of incorporation DEEMED revoked as or graft and corrupt practices, and its stockholders
of the day following the end of the 5-year period. knew of the same; and
(3) Repeatedly and knowingly tolerated the commission of
“Charter”— graft and corrupt practices or other fraudulent or
The certificate of incorporation becomes the charter or the illegal acts by its directors, trustees, officers, or
corporate franchise from which the authority of the employees.
corporation to operate as such flows. The charter includes
the approved Articles, by-laws and its amendments. No Atty’s Note:
charter, no corporation to dissolve because there is no So you notice class that in Voluntary Dissolution, you need the
corporation without the charter. board and stockholders’ approval. Even for Shortening of
Corporate Term which requires amendment of Articles, it is still
“Non-use of Corporate Charter”— somehow like a Voluntary Dissolution. It’s just the procedures
The corporation fails to organize and commence its business that are different.
“Day following the end of the 5-year period”—
5 years plus 1 day. Not at the end of the 5 years. But for Involuntary Dissolution, the dissolution is done by the
SEC or by the courts or by the government.
2. Continuous inoperation under Section 21
LIQUIDATION
Rule— SEC. 139. Corporate Liquidation. – Except for banks, which
Corporation that has already commenced its business but shall be covered by the applicable provisions of Republic Act
subsequently becomes inoperative for a period of at least 5 No. 7653, otherwise known as the “New Central Bank Act”, as
consecutive years, the SEC may, after due notice and amended, and Republic Act No. 3591, otherwise known as the
hearing, place the corporation under delinquent status. “Philippine Deposit Insurance Corporation Charter”, as
amended, every corporation whose charter expires pursuant
A delinquent corporation shall have a period of 2 years to to its articles of incorporation, is annulled by forfeiture, or
resume operations and comply with all the prescribed whose corporate existence is terminated in any other
requirements. manner, shall nevertheless remain as a body corporate for
(1) Upon compliance, the SEC shall issue an order lifting three (3) years after the effective date of dissolution, for the
the delinquent status. purpose of prosecuting and defending suits by or against it
(2) Failure to comply within the period given by SEC shall and enabling it to settle and close its affairs, dispose of and
cause the revocation of the corporation’s certificate of convey its property, and distribute its assets, but not for the
incorporation. purpose of continuing the business for which it was
established.
Note: SEC shall give reasonable notice to, and coordinate
with the appropriate regulatory agency prior to the At any time during said three (3) years, the corporation is
suspension or revocation of the certificate of companies authorized and empowered to convey all of its property to
under their special regulatory jurisdiction. trustees for the benefit of stockholders, members, creditors
and other persons in interest. After any such conveyance by
Difference with the first ground— the corporation of its property in trust for the benefit of its
(1) In continuous inoperation, the certificate of stockholders, members, creditors and others in interest, all
incorporation here is NOT deemed revoked. The interest which the corporation had in the property
corporation is only placed under delinquent status terminates, the legal interest vests in the trustees, and the
after due notice and hearing by the SEC. The
beneficial interest in the stockholders, members, creditors or WON the corporation may still redeem the property despite
other persons-in-interest. having it dissolved?
Except as otherwise provided for in Sections Ruling:

93 and 94 of this Code, upon the winding up of corporate Once a corporation is dissolved, be it voluntarily or
affairs, any asset distributable to any creditor or stockholder involuntarily, liquidation, which is the process of settling the
or member who is unknown or cannot be found shall be affairs of the corporation, will ensue. This consists of (1)
escheated in favor of the national government. collection of all that is due the corporation, (2) the settlement
and adjustment of claims against it, and (3) the payment of its
Except by decrease of capital stock and as otherwise allowed debts. Yu more particularly described this process as that
by this Code, no corporation shall distribute any of its assets which entails the following:
or property except upon lawful dissolution and after payment
of all its debts and liabilities. "Winding up the affairs of the corporation means the collection
of all assets, the payment of all its creditors, and the
Effect of Dissolution distribution of the remaining assets, if any among the
When a corporation is dissolved, then we go to Liquidation stockholders thereof in accordance with their contracts, or if
phase. The moment the dissolution becomes effective, there be no special contract, on the basis of their respective
liquidation begins. interests. The manner of liquidation or winding up may be
provided for in the corporate by-laws and this would prevail
How long is the liquidation? unless it is inconsistent with law."
Every corporation whose charter expires pursuant to its Articles,
is annulled by forfeiture, or whose corporate existence is These pronouncements draw their basis from Section 122 of
terminated in any other manner, shall remain a body corporate the Corporation Code, which empowers every corporation
for 3 years after the effective date of dissolution. whose corporate existence has been legally terminated to
continue as a body corporate for three (3) years after the time
Atty: Even when the corporation is dissolved, it still remains a when it would have been dissolved. This continued existence
body corporate. would only be for the purposes of "prosecuting and defending
suits by or against it and enabling it to settle and close its
For what purpose that it remains a body corporate: affairs, to dispose of and convey its property and to distribute
its assets."
(1) Prosecuting and defending suits by or against it
(2) Enabling it to settle and close its affairs
This continuance of its legal existence for the purpose of
(3) Dispose of and convey its property
enabling it to close up its business is necessary to enable the
(4) Distribute its assets
corporation to collect the demands due it as well as to allow its
NOT FOR CONTINUING ITS BUSINESS
creditors to assert the demands against it.
Atty: So after dissolution, it remains a body corporate for 3
In addition, and as expressly mentioned by the Corporation
years. It is still considered as a juridical entity BUT no longer for
Code, this extended authority necessarily excludes the purpose
the purpose of continuing its operation—ONLY for the purpose
of continuing the business for which it was established. The
of winding up its affairs. Those are the only activities it can
reason for this is simple: the dissolution of the corporation
pursue within the 3-year period.
carries with it the termination of the corporation's juridical
personality. Any new business in which the dissolved
RICH V PALOMA
corporation would engage in, other than those for the purpose
Facts: of liquidation, "will be a void transaction because of the non-
Sometime in 1997, Dr. Gil Rich (petitioner) lent P1,000,000.00 existence of the corporate party."
to his brother, Estanislao Rich (Estanislao). The agreement was
secured by a real estate mortgage over a 1000-square-meter Two things must be said of the foregoing in relation to the facts
parcel of land with improvements. By reason of default, of this case. First, if MTLC entered into the real estate
petitioner foreclosed the mortgage in which he was declared mortgage agreement with Estanislao after its dissolution, then
as the highest bidder in a public auction. Without his resultantly, such real estate mortgage agreement would be
knowledge however, the same property was subsequently void ab initio because of the non-existence of MTLC's juridical
mortgaged in favor of Maasin Traders Lending Corporation to personality.
secure another loan prior to the foreclosure on the year 2005.
By reason of the second mortgage, respondent was able to Second, if, however, MTLC entered into the real estate
acquire a deed of redemption in his favor. This prompted mortgage agreement prior to its dissolution, then MTLC's
petitioner to file for the annulment of the deed of redemption redemption of the subject property, even if already after its
alleging that since the corporation on which respondent dissolution (as long as it would not exceed three years
Servacio was the president was already dissolved by the SEC on thereafter), would still be valid because of the
2003, the corporation has no juridical personality to effect the liquidation/winding up powers accorded by Section 122 of the
equitable redemption. Corporation Code to MTLC.
Issue:
Respondent Corporation that Estanislao executed the Real petitioners cannot be considered anymore as responsible
Estate Mortgage in favor of the Corporation on 2005, long after officers of CTCM. The motion was denied. Trial then ensued.
it was dissolved by the SEC. From the foregoing, it is clear that, The prosecution offered the testimonies of Joselyn and
by the time MTLC executed the real estate mortgage Abednego Velayo. On the other hand, the petitioners neither
agreement, its juridical personality has already ceased to exist. presented witnesses, nor filed any documentary evidence.
The agreement is void as MTLC could not have been a MeTC – Convicted
corporate party to the same. To be sure, a real estate MeTC MR – Denied
mortgage is not part of the liquidation powers that could have RTC Appeal – Denied
been extended to MTLC. It could not have been for the RTC MR – Denied
purposes of "prosecuting and defending suits by or against it CA Petition for Review – Denied due to technicality
and enabling it to settle and close its affairs, to dispose of and CA MR – Denied
convey its property and to distribute its assets." It is, in fact, a With the case now in the SC, Petitioners reiterated their
new business in which MTLC no longer has any business defense that CTCM had already ceased to exist at the time the
pursuing. request was asked for. They also averred that the prosecution
Atty: When was it dissolved? It was dissolved December failed to prove by competent evidence that they had actually
2003. The mortgage was entered into January 2005. So within prevented Joselyn from exercising her right of inspection. They
the 3-year period. That means there was still a body point out that when Joselyn was cross- examined, she admitted
corporate at that time when the act was not yet done. But is that the petitioners had allowed her to see the records.
the mortgage valid? Not valid. It is clear that for the 3-year However, since she had designated her accountant to conduct
winding up period, you cannot undertake any activity that is the inspection, she was not able to physically view the records.
not for the purpose of winding up the affairs of the Hence, she had no personal knowledge as to whether or not
corporation. the inspection of the specific records she requested was
Any action undertaken by the corporation which is not to allowed or denied. The OSG then filed a Comment, pointing
wind up or liquidate its business is an invalid act even if it is out that under Section 122 of the Corporation Code, a
done within the 3-year period. More so beyond the 3-year corporate entity, "whose charter expires by its own limitation"
period. shall continue as "a body corporate for three (3) years after the
time when it would have been so dissolved, for
CHUA V PEOPLE OF THE PHILIPPINES the purpose of prosecuting and defending suits by or against it
Facts: and enabling it to settle and close its affairs." It follows then
Characters of the story: that CTCM continued as a body corporate until May of 2002.
Joselyn Chua- stockholder of Chua Tee Corporation of Manila Issue:
(CTCM) Whether or not the officers are liable given that CTCM had
Alfredo Chua - president and chairman of the board, already ceased as a corporate entity at the time the documents
Tomas Chua - corporate secretary and also a member of the were requested. Officers are liable
board of the same corporation. Mercedes Diaz- Ruling:
accountant/bookkeeper tasked with the physical custody of Despite the expiration of CTCM's corporate term in 1999,
the corporate records. duties as corporate officers still pertained to the petitioners
Joselyn invoked her right to inspect the records of the books of when Joselyn's complaint was filed in 2000.
the business transactions of the corporation, the minutes of Sections 122 and 145 of the Corporation Code explicitly
the meetings of the board of directors and stockholders, and provide for the continuation of the body corporate for three
the financial statements of the corporation. She hired a lawyer years after dissolution. The rights and remedies against, or
to send demand letters to each of the petitioners for her right liabilities of, the officers shall not be removed or impaired by
to inspect to be heeded. However, she was denied of such right reason of the dissolution of the corporation.
to inspect. She also hired accountant to help her examine the The corporation continues to be a body corporate for three (3)
books but the firm was not formally presented the books of years after its dissolution for purposes of prosecuting and
accounts and list of schedules. defending suits by and against it and for enabling it to settle
She filed a Complaint-Affidavit before the Prosecutor’s Office. and close its affairs, culminating in the disposition and
The Petitioners argued that that the custody of the records distribution of its remaining assets. x xxThe termination of the
sought to be inspected by Joselyn did not pertain to them. life of a juridical entity does not by itself cause the extinction or
Besides, the physical records were merely kept diminution of the rights and liabilities of such entity x xx nor
inside the cabinets in the corporate office. Further, they did those of its owners and creditors. x xx
not prevent Joselyn from inspecting the records. What However, the SC changed the penalty from 30 days
happened was that Mercedes was severely occupied with imprisonment to a fine of ten thousand pesos (P10,000)
winding up the affairs of CTCM after it ceased operations. because: First. Malicious intent was seemingly wanting.
Joselyn and her lawyers then failed to set up an appointment Permission to check the records was granted, albeit not
with Mercedes. Joselyn, through counsel, then sent demand effected. Second. Joselyn had predeceased Alfredo and Tomas,
letters to inspect the records. A criminal case and a civil case her uncles, who are in their twilight years (???). Third. Joselyn's
were filed nonetheless. mother, Rosario, had executed an Affidavit of Desistance
Before the MeTC, the Petitioners filed a Motion to Quash stating that the filing of the complaint before was "merely the
arguing that CTCM had ceased to exist as a corporate entity result of [a] serious misunderstanding anent the management
since May 26, 1999. Consequently, when the acts complained and operation of [CTCM], which
of by Joselyn were allegedly committed in August of 2000, the
had long ceased to exist as a corporate entity even prior to the in receivables then assigned to State Financing; and
alleged commission of the crime in question, rather than by subsequently to obtain additional financing from Bancom in
reason of any criminal intent or actuation on the part of the the same amount for that purpose. (In short, the Promissory
[petitioners]. (Di madungog ang nag narrate ako nalang g Notes were not meant to be binding, given that the funds
transcribe ang important thought sa case from Atty. And released to Marbella by Bancom were not loans, but merely
pasted the digest) additional financing, which became necessary only because of
the failure of Fereit to comply with its obligation. In fact, Fereit
Atty: So at that time that the stockholder requested to expect even undertook to reimburse Marbella for the amount that
the books, the corporation was already dissolved, it was Marbella had paid. So basically, the PNs daw were issued in
already within the 3-year liquidation period. Does the connection with Fereit’s obligations, NOT Marbella.)
stockholder still have the right? 4. CORPO RELATED:that the Certificate of Registration issued to
Within the 3-year period, the corporation can only undertake Bancom had been revoked by the SEC, and that no trustee or
winding up operations any activity beyond that is a void receiver had been appointed to continue the suit, hence, the
activity because the corporation is already dissolved. BUT suit should be abated based on the obvious fact that Bancom
within that 3-year period, the corporation and its officers are no longer exists.
still required to recognize the rights of the stockholders RTC – held Marbella and the Reyes Group solidarily liable to
particularly the right to inspect the books of the corporation Bancom.
because even though it is dissolved there is still a body CA – denied the appeal. Also, in the proceedings before the CA,
corporate. There is still that juridical entity for the purpose of ACCRA moved to withdraw its appearance in the case as
winding up. counsel for Bancom. The law firm asserted that it had "totally
lost contact" with its client despite serious efforts on the part
REYES V BANCOM of the former to get in touch with its officers. The law firm also
FACTS: The dispute in this case originated from a Continuing alleged that it had "received reports that the client has
Guaranty executed in favor of respondent Bancom by Angel E. undergone a merger with another entity," thereby making its
Reyes, Sr., Florencio Reyes, Jr., Rosario R. Du, Olivia Arevalo, authority to represent the corporation subject to doubt.
and the two petitioners herein, Ramon E. Reyes and Clara R. ISSUES:
Pastor (the Reyes Group). In the instrument, the Reyes Group 1. CORPO RELATED -Whether the present suit should be
agreed to guarantee the full and due payment of obligations deemed abated by the revocation by the SEC of the Certificate
incurred by Marbella under an Underwriting Agreement with of Registration issued to Bancom. – NO.
Bancom. These obligations included certain Promissory Notes 2. Whether the CA correctly ruled that petitioners are liable to
issued by Marbella in favor of Bancom. Bancom for the payment of the loan amounts indicated on the
Marbella was unable to pay back the notes at the time of their Promissory Notes issued by Marbella – YES
maturity. Marbella issued replacement Promissory Notes, for HELD:
increased amounts, but again defaulted. They replaced the 1) The revocation of Bancom's Certificate of Registration does
Promissory Notes again, and defaulted again. (So kaduhasila not justify the abatement of these proceedings.
nag- replace2 sa promissory notes, so 3 sets ang PN nana issue Section 122 of the Corporation Code provides that a
– the original, replacement 1 and replacement 2) corporation whose charter is annulled, or whose corporate
Because of Marbella's continued failure to pay back the loan existence is otherwise terminated, may continue as a body
despite repeated demands, Bancom filed a Complaint for Sum corporate for a limited period of three years, but only for
of Money with a prayer for damages before the RTC of Makati. certain specific purposes enumerated by law. These include the
The case, which sought payment of the total sum of prosecution and defense of suits by or against the corporation,
P4,300,247.35, was instituted against (a) Marbella as principal and other objectives relating to the settlement and closure of
debtor; and (b) the individuals comprising the Reyes Group as corporate affairs.
guarantors of the loan. Based on the provision, a defunct corporation loses the right to
In their defense, Marbella and the Reyes Group argued: sue and be sued in its name upon the expiration of the three-
1. that they had been forced to execute the Promissory Notes year period provided by law. Jurisprudence, however, has
and carved out an exception to this rule. In several cases, this Court
the Continuing Guaranty against their will; has ruled that an appointed
2. that the foregoing instruments should be interpreted in receiver, an assignee, or a trustee may institute suits or
relation to earlier contracts pertaining to the development of a continue pending actions on behalf of the corporation, even
condominium project known as Marbella II; after the winding-up period. The rule was first enunciated in
3. That the Marbella II contracts were entered into by Bancom the 1939 case Sumera v. Valencia, in which we declared:
(creditor); the Reyes Group, as owners of the parcel of land to [I]f the corporation carries out the liquidation of its assets
be utilized for the condominium project; and Fereit Realty through its own officers and continues and defends the actions
Development Corporation (Fereit), a sister company of brought by or against it, its existence shall terminate at the end
Bancom, as the construction developer and project manager. of three years from the time of dissolution; but if a receiver or
This venture, however, soon encountered financial difficulties. assignee is appointed, as has been done in the present case,
As a result, the Reyes Group was allegedly forced to enter into with or without a transfer of its properties within three years,
a Memorandum of Agreement to take on part of the loans the legal interest passes to the assignee, the beneficial interest
obtainedbyFereit from Bancom for the development of the remaining in the members, stockholders, creditors and other
project. Marbella, for its part, was supposedly compelled to interested persons; and said assignee may bring an action,
assume Fereit's obligation to cause the release of P2.8 million prosecute that which has already been commenced for the
benefit of the corporation, or defend the latter against any the fact that these obligations were covered by the guaranty.
other action already instituted or which may be instituted even Their sole defense was that the promissory notes in question
outside of the period of three years fixed for the officers of the were not binding, because the funds released to Marbella by
corporation. Bancom were not loans but merely additional financing.
For the foregoing considerations, we are of the opinion and so The obligations of Marbella and the Reyes Group under the
hold that when a corporation is dissolved and the liquidation of Promissory Notes and the Continuing Guaranty, respectively,
its assets is placed in the hands of a receiver or assignee, the are plain and unqualified. Under the notes, Marbella promised
period of three years prescribed by Section 77 of Act No. 1459 to pay Bancom the amounts stated on the maturity dates
known as the Corporation Law is not applicable, and the indicated. The Reyes Group, on the other hand, agreed to
assignee may institute all actions leading to the liquidation of become liable if any of Marbella's guaranteed obligations were
the assets of the corporation even after the expiration of three not duly paid on the due date. There is absolutely no support
years. for the assertion that these agreements were not meant to be
In subsequent cases, the Court further clarified that a receiver binding.
or an assignee need not even be appointed for Bancom extended additional financing to Marbella on the
condition that the loan would be paid upon maturity. It is
the purpose of bringing suits or continuing those that are equally clear that the latter obligated itself to pay the stated
pending.In Gelano v. Court of Appeals, we declared that in the amount to Bancom without any condition. The unconditional
absence of a receiver or an assignee, suits may be instituted or tenor of the obligation of Marbella to pay Bancom for the loan
continued by a trustee specifically designated for a particular amount, plus interest and penalties, is likewise reflected in the
matter, such as a lawyer representing the corporation in a Promissory Notes issued in favor of the latter. Marbella, in
certain case. We also ruled in Clemente v. Court of Appeals turn, was granted the right to collect reimbursement from
that the board of directors of the corporation may be Fereit, an entirely distinct entity. While it was
considered trustees by legal implication for the purpose of averred that Bancom had complete control of Fereit's assets
winding up its affairs. and activities, we note that no sufficient evidence was
Here, it appears that the SEC revoked the Certificate of presented in support of this assertion.
Registration issued to Bancom on 26 May 2003. Despite this As to petitioners, the Continuing Guaranty evidently binds
revocation, however, Bancom does not seem to have conveyed them to pay Bancom the amounts indicated on the original set
its assets to trustees or to its stockholders and creditors. The of Promissory Notes, as well as any and all instruments issued
corporation has also failed to appoint a new counsel after the upon the renewal, extension, amendment or novation thereof.
law firm formerly representing it was allowed to withdraw its (Di madungog ang nag narrate ako nalang g transcribe ang
appearance on 1 June 2004. Citing these circumstances, important thought sa case from Atty. And pasted the digest)
petitioners assert that these proceedings should be considered
abated. Atty: How long has it been since bancom was dissolved?
We disagree. More than 3 years.So the 3-year liquidation period has
It is evident from the foregoing discussion of law and already expired. The case continued beyond the 3-year
jurisprudence that the mere revocation of the charter of a liquidation period. So how does it affect the expiration, not
corporation does not result in the abatement of proceedings. just the dissolution ha, even of the winding up period, how
Since its directors are considered trustees by legal implication, does it affect the case?
the fact that Bancom did not convey its assets to a receiver or 3-year winding up period, the corporation continues as a
assignee was of no consequence. It must also be emphasized body corporate but only for the purpose of winding up. Any
that the dissolution of a creditor-corporation does not activity beyond the winding up is void but stockholders can
extinguish any right or remedy in its favor. Section 145 of still exercise their rights.
theCorporation Code is explicit on this point:
Sec. 145. Amendment or repeal. — No right or remedy in favor Winding up activities includes selling, filing cases, or
of or against any corporation, its stockholders, members, prosecuting cases that are filed. Does that mean that at the
directors, trustees, or officers, nor any liability incurred by any end of the 3-year period automatically everything is also
such corporation, stockholders, members, directors, trustees, stopped or abated? The case of BANCOM says no. It may be
or officers, shall be removed or impaired either by the that the cases can continue beyond the 3-year liquidation
subsequent dissolution of said corporation or by any period it is not abated by the expiry of the liquidation period.
subsequent amendment or repeal of this Code or of any part
thereof. (Emphasis supplied) What happens if there was no trustee to take care of handling
As a necessary consequence of the above rule, the the case?
corresponding liability of the debtors of a dissolved Automatically, if there are no trustees designated, the
corporation must also be deemed subsisting. To rule otherwise directors become the trustees, they automatically take on the
would be to sanction the unjust enrichment of the debtor at role of trustess for the purpose of continuing the winding up.
the expense of the corporation.
2)Having executed a Continuing Guaranty in favor of Bancom,
petitioners are solidarily liable with Marbella for the payment
of the amounts indicated on the Promissory Notes.
As the appellate court observed, petitioners did not challenge
the genuineness and due execution of the promissory notes.
Neither did they deny their nonpayment of Marbella's loans or
Domestic Corporation Doing Business in the

Title xv Philippines vis-à-vis a Foreign Corporation Doing
FOREIGN CORPORATIONS Business in the Philippines:
DEFINITION AND RIGHTS 1. Domestic corporation does not require a license but what it needs is
its primary franchise which is the “certificate of incorporation.”
SEC. 140. Definition and Rights of Foreign Corporations. – For
Once the COI is obtained, as a general rule, that domestic
purposes of this Code, a foreign corporation is one formed,
corporation can do business in the Philippines.
organized or existing under laws other than those of the
2. Foreign corporation –
Philippines’ and whose laws allow Filipino citizens and
corporations to do business in its own country or State. It 1.) The License - which can be obtained from the
Securities and Exchange Commission (SEC).
shall have the right to transact business in the Philippines
2.) Certificate of Authority from the appropriate
after obtaining a license for that purpose in accordance with government agency. Eg. Insurance Commission for
this Code and a certificate of authority from the appropriate insurance companies.
government agency.
Entities Created When a FC gets a license or
Foreign Corporation (FC) vs. Foreign-owned transacts business in the Philippines:
Corporation (1) A Branch Office
1. Foreign corporation 6. Authorized to engage in activities for purposes of
earning income in the Philippines.
1. A classification as to nationality based on the (2) A Representative Office
place of incorporation. 7. Authorized to engage in activities which does not
earn income in the Philippines.
2. One incorporated under laws other than the
Philippines TN:
3. Counterpart is a Domestic Corporation which is a Branch & Representative Office: Both are extensions of the
corporation formed/organized under the laws of the FC. Considered as one entity with the FC.
Philippines
2. Foreign-owned corporation Once a FC obtains a license in the Philippines, it does not

create another corporation because it needs to incorporate
4. A classification as to nationality based on in order to do that. And if it incorporates, what is created is
stockholding. a domestic corporation and not a foreign corporation.
5. Does not comply with the 60%-40% (Filipino to
Therefore, a subsidiary/affiliate is not a foreign corporation
foreigner ratio) of stock/shareholders in order to qualify as
licensed to do business in the Philippines. It is actually a
Philippine national or Filipino-owned
domestic foreign-owned corporation for it contemplates of
Hence, there can be a foreign corporation that is Filipino- a creation of another corporation organized under
owned or a Philippine national or a domestic corporation Philippine laws. Hence, if your foreign client does not want
that is foreign-owned. They don’t cancel each other out. to create another corporation or incorporate another entity,
(Review): its option is to open a branch or a representative office in
3. Incorporators - Those stockholders or members the Philippines.
mentioned in the articles of incorporation as originally
forming and composing the corporation and who are A foreign corporation is required to secure a license when it
signatories thereof. is “doing business” in the Philippines.
4. Corporators - Those who comprise the

corporation, whether as stockholders or members, including
the incorporators.
“DOING BUSINESS”
5. Shareholders - The owners of shares in a
corporation which has a capital stock. An incorporator can “Implies a continuity of commercial dealings and
always be regarded as a stockholder but a stockholder may arrangements, and contemplates, to that extent, the
not be an incorporator. performance of acts or works or the exercise of some of the
functions normally incident to, and in progressive
prosecution of, the purpose and object for which the
corporation was organized."
(3) Test to determine whether a foreign company is "doing
Requirements Before A Foreign Corporation business,” (Mentholatum Co. Inc., vs. Mangaliman)
Conducts Business in the Philippines:
" x x x The true test, however, seems to be whether the
SEC. 140, last sentence. - It shall have the right to
foreign corporation is continuing the body or substance of
transact business in the Philippines after obtaining a
the business or enterprise for which it was organized or
license for that purpose in accordance with this Code whether it has substantially retired from it and turned it over
and a certificate of authority from the appropriate
government agency.
to another. (Traction Cos. vs. Collectors of Int. Revenue

[C.C.A., Ohio], 223 F. 984,987.) x x x." Examples of corporations not doing business in the
Republic Act No. 7042, otherwise known as the Philippines:
"Foreign Investment Act of 1991," defines "doing
business" as follows: • When a foreign corporation becomes a stockholder
"d) The phrase ‘doing business’ shall include soliciting in the shares of a domestic corporation.
orders, service contracts, opening offices, whether called
‘liaison’ offices or branches; appointing representatives or By becoming a stockholder it is not part of its primary
distributors domiciled in the Philippines or who in any purpose that is not the main operation of the foreign
calendar year stay in the country for a period or periods corporation, hence, it is merely incidental. Being a
totalling one hundred eight(y) (180) days or more; stockholder even if it nominates a nominee director to
participating in the management, supervision or control of the board of directors of that domestic corporation it
any domestic business, firm, entity, or corporation in the does not make such foreign corporation as doing
Philippines; and any other act or acts that imply a business in the Philippines. Being a stockholder is not its
continuity of commercial dealings or arrangements, and primary purpose it is continuous as long as the
contemplate to that extent the performance of acts or corporation is still alive it remains to be a stockholder. It
works; or the exercise of some of the functions normally is continuous but it is not part of its primary purpose ,
incident to, and in progressive prosecution of, commercial hence, it is not considered as doing business here in the
gain or of the purpose and object of the business Philippines.
organization; Provided, however, That the phrase ‘doing
business’ shall not be deemed to include mere investment
• Manufacturing Company being a stockholder for
as a shareholder by a foreign entity in domestic
being an investor in another corporation is not the
corporations duly registered to do business, and/or the
main purpose of the manufacturing company
exercise of rights as such investor, nor having a nominee
director or officer to represent its interests in such
Being a stockholder in a domestic corporation for example
corporation, nor appointing a representative or distributor
that corporation establishes and affiliate or subsidiary in
domiciled in the Philippines which transacts business in its
the Philippines does not make that corporation a “foreign
own name and for its own account." (Emphasis supplied)25
corporation doing business in the Philippines.”
Section 1 of Republic Act No. 5455, provides
Even if by virtue of its stockholdings it can nominate
that:
directors or a director to the board of directors of a
"SECTION. 1. Definition and scope of this Act. - (1) x x x
domestic corporation it does not make foreign corporation
the phrase ‘doing business’ shall include soliciting orders,
doing business in the Philippines.
purchases, service contracts, opening offices, whether
called ‘liaison’ offices or branches; appointing
representatives or distributors who are domiciled in the Transactions considered as NOT DOING BUSINESS in
Philippines or who in any calendar year stay in the the Philippines under FIA ( Foreign Investment Act)
Philippines for a period or periods totaling one hundred 1. Mere investment as a shareholder by a foreign entity in
eighty days or more; participating in the management, domestic corporations duly registered to do business, and/or the
supervision or control of any domestic business firm, entity exercise of rights as such investor;
or corporation in the Philippines; and any other act or acts 2. Having a nominee director or officer to represent its interest
that imply a continuity of commercial dealings or in such corporation;
arrangements, and contemplate to that extent the
performance of acts or works, or the exercise of some of 3. Appointing a representative or distributor domiciled in the
the functions normally incident to, and in progressive Philippines which transacts business in the representative's or
prosecution of, commercial gain or of the purpose and distributor's own name and account;
object of the business organization." 4. The publication of a general advertisement through any print
TN: The term "doing business" has one common or broadcast media;
denominator among them all and that is the concept of 5. Maintaining a stock of goods in the Philippines solely for the
"continuity." purpose of having the same processed by another entity in the
“NOT DOING BUSINESS” Philippines;
Incidental Transaction Isolated Transaction 6. Consignment by a foreign entity of equipment with a local
company to be used in the processing of products for export;
-it is not related to the -may be related to the 7. Collecting information in the Philippines; and
main purpose of the main purpose or main 8. Performing services auxiliary to an existing isolated contract
foreign corporation business of the foreign of sale which are not on a continuing basis, such as installing in
corporation but it is only the Philippines machinery it has manufactured or exported to
-it is a situation where it done one time there is no the Philippines, servicing the same, training domestic workers to
may be continuing but not intention to continue the operate it, and similar incidental services
directly related to the transaction or the
purpose of the foreign business in the Philippines TN: Those activities will not qualify as doing business in the
corporation Philippines and if it is not doing business in the Philippines
it is not required to secure a license to do business.
attached to the application.

If a foreign corporation intends to do business in the
Philippines it needs to secure a license. The application for a license to transact business in the
Philippines shall likewise be accompanied by a statement
under oath of the president or any other person
REQUIREMENTS FOR A FOREIGN CORPORATION TO authorized by the corporation, showing to the satisfaction
SECURE A LICENSE of the Commission and when appropriate, other
governmental agencies that the applicant is solvent and
SEC. 142 Application for a License. — A foreign
in sound financial condition, setting forth the assets and
corporation applying for a license to transact business in
liabilities of the corporation as of the date not exceeding
the Philippines shall submit to the Commission a copy of
one (1) year immediately prior to the filing of the
its articles of incorporation and bylaws, certified in
application.
accordance with law, and their translation to an official
Foreign banking, financial, and insurance corporations
language of the Philippines, if necessary. The application
shall, in addition to the above requirements, comply with
shall be under oath and, unless already stated in its
the provisions of existing laws applicable to them. In the
articles of incorporation, shall specifically set forth the
case of all other foreign corporations, no application for
following:
license to transact business in the Philippines shall be
a.) The date and term of incorporation;
accepted by the Commission without previous authority
b.) The address, including the street number, of the
from the appropriate government agency, whenever
principal office of the corporation in the country or State
required by law.
of incorporation;
c.)The name and address of its resident agent authorized Documents to be submitted to the Securities and
to accept summons and process in all legal proceedings Exchange Commission in order to secure license to
and all notices affecting the corporation, pending the do business in the Philippines (Section 142)
establishment of a local office
1. Application form
d.) The place in the Philippines where the corporation • The date and term of incorporation;
intends to operate; • The address, including the street number, of the principal
office of the corporation in the country or State of
e.) The specific purpose or purposes which the incorporation;
corporation intends to pursue in the transaction of its • The name and address of its resident agent authorized to
business in the Philippines: Provided, That said purpose or accept summons and process in all legal proceedings and all
purposes are those specifically stated in the certificate of notices affecting the corporation, pending the establishment
authority issued by the appropriate government agency; of a local office;
• The place in the Philippines where the corporation intends to
f.)The names and addresses of the present directors and
operate;
officers of the corporation;
g.)A statement of its authorized capital stock and the • The specific purpose or purposes which the corporation
aggregate number of shares which the corporation has intends to pursue in the transaction of its business in the
authority to issue, itemized by class, par value of shares, Philippines: Provided, That said purpose or purposes are those
shares without par value, and series, if any; specifically stated in the certificate of authority issued by the
h.) A statement of its outstanding capital stock and the appropriate government agency;
aggregate number of shares which the corporation has • The names and addresses of the present directors and officers
issued, itemized by class, par value of shares, shares of the corporation;
without par value, and series, if any; • A statement of its authorized capital stock and the aggregate
number of shares which the corporation has authority to issue,
i.) A statement of the amount actually paid in; and itemized by class, par value of shares, shares without par
value, and series, if any;
j.) Such additional information as may be necessary or
• A statement of its outstanding capital stock and the aggregate
appropriate in order to enable the Commission to
number of shares which the corporation has issued, itemized
determine whether such corporation is entitled to a
by class, par value of shares, shares without par value, and
license to transact business in the Philippines, and to
series, if any;
determine and assess the fees payable
• A statement of the amount actually paid in; and
Attached to the application for license shall be a • Such additional information as may be necessary or
certificate under oath duly executed by the authorized appropriate in order to enable the Commission to determine
official or officials of the jurisdiction of its incorporation, whether such corporation is entitled to a license to transact
attesting to the fact that the laws of the country or business in the Philippines, and to determine and assess the
State of the applicant allow Filipino citizens and fees payable.
corporations to do business therein, and that the
applicant is an existing corporation in good standing. If 2. Copy of the Articles of Incorporation and Bylaws
the certificate is in a foreign language, a translation
thereof in English under oath of the translator shall be 3. Certificate of Reciprocity
• A certificate under oath duly executed by the authorized any business or transaction which occurred in the
official or officials of the jurisdiction of its incorporation, Philippines and such service shall have the same force
attesting to the fact that the laws of the country or State and effect as if made upon the duly authorized officers
of the applicant allow Filipino citizens and corporations to of the corporation at its home office." Whenever such
do business therein. service of summons or other process is made upon the
Commission, the Commission shall, within ten (10) days
4. Certificate of financial soundness thereafter, transmit by mail a copy of such summons or
• A statement under oath of the president or any other other legal process to the corporation at its home or
person authorized by the corporation, showing to the principal office. The sending of such copy by the
satisfaction of the Commission and when appropriate, Commission shall be a necessary part of and shall
other governmental agencies that the applicant is solvent complete such service. All expenses incurred by the
and in sound financial condition, setting forth the assets Commission for such service shall be paid in advance by
and liabilities of the corporation as of the date not the party at whose instance the service is made. It shall
exceeding one (1) year immediately prior to the filing of be the duty of the resident agent to immediately notify
the application. the Commission in writing of any change in the resident
agent's address.
• Compliance with the foregoing the SEC will issue a license to
the foreign corporation allowing it to do business in the When the license is issued the following additional
Philippines, thus, creating a branch or a representative office requirements are to be complied with by the
depending on the license issued. foreign branch or office
1. Deposit securities to the Security and Exchange
WHO CAN BE A RESIDENT AGENT Commission.
SECTION 144. Who May be a Resident Agent. — A
resident agent may be either an individual residing in the - The deposit shall be in the amount of or the value of 500,000
Philippines or a domestic corporation lawfully transacting pesos (previously 100,000 pesos)
business in the Philippines: Provided, That an individual - Forms of securities required:
resident agent must be of good moral character and of a. Bonds
sound financial standing: Provided, further, That in case b. Other evidence of indebtedness issued by the
of a domestic corporation who will act as a resident Government
agent, it must likewise be of sound financial standing and c. Equity or debt securities which are registered under the
must show proof that it is in good standing as certified Securities and Regulation Code, meaning those that are
by the Commission. authorized to be sold in the Philippines.
Who can be resident agents (Section 144) d. Stocks of corporations which are listed in the stock
a. Individual RESIDING in the Philippines (not exchange, including shares of stock of insurance
required to be a citizen) companies and banks.
b. Domestic Corporation lawfully transacting
business in the Philippines Atty: The branch or office will need to buy those securities
mentioned and deposit them to the SEC.
WORK OF A RESIDENT AGENT DOING BUSINESS WITHOUT A LICENSE
SECTION 145.Resident Agent; Service of Process. — As a SECTION 150. Doing Business without a License. — No foreign
condition to the issuance of the license for a foreign corporation transacting business in the Philippines without a
corporation to transact business in the Philippines, such license, or its successors or assigns, shall be permitted to
corporation shall file with the Commission a written maintain or intervene in any action, suit or proceeding in any
power of attorney designating a person who must be a court or administrative agency of the Philippines; but such
resident of the Philippines, on whom summons and other corporation may be sued or proceeded against before
legal processes may be served in all actions or other Philippine courts or administrative tribunals on any valid
legal proceedings against such corporation, and consenting cause of action recognized under Philippine laws.
that service upon such resident agent shall be admitted Principles governing a foreign corporation’s right to
and held as valid as if served upon the duly authorized sue in local courts
officers of the foreign corporation at its home office.
Such foreign corporation shall likewise execute and file 1. if a foreign corporation does business in the Philippines
with the Commission an agreement or stipulation, without a license, it cannot sue before the Philippine courts
executed by the proper authorities of said corporation, in but can be sued
form and substance as follows: "The (name of foreign
2. if a foreign corporation does business in the Philippines with
corporation) hereby stipulates and agrees, in consideration
of being granted a license to transact business in the the required license, it can sue before Philippine courts on
Philippines, that if the corporation shall cease to transact any transaction and be sued.
business in the Philippines, or shall be without any 3. if a foreign corporation is not doing business in the
resident agent in the Philippines on whom any summons
or other legal process may be served, then service of any Philippines, it needs no license to sue before Philippine
summons or other legal process may be made upon the courts on an isolated transaction or on a cause of action
Commission in any action or proceeding arising out of
entirely independent of any business transaction; can sue sold in the Philippines. This arrangement and contrary to the
appellate court's conclusion shows an agency. An agent
but cannot be sued.
receives a commission upon the successful conclusion of a sale.
This fact could not be negated even if Hahn invested his own
CASE: HAHN V CA money to put up the service centers and showrooms for the
Facts: Petitioner Alfred Hahn is a Filipino citizen doing business BMW cars.
under the name and style "Hahn-Manila." On the other hand, Under the Foreign Investment Act of 1991 "doing business in
private respondent Bayerische Motoren Werke the Philippines” shall include soliciting orders, service
Aktiengesellschaft (BMW) is a nonresident foreign corporation contracts, opening offices, whether called "liaison" offices or
existing under the laws of the former Federal Republic of branches, appointing representatives or distributors domiciled
Germany, with principal office at Munich, Germany. Petitioner in the Philippines or who in any calendar year stay in the
Hahn executed in favor of private respondent a "Deed of country for a period or periods totaling one hundred eighty
Assignment with Special Power of Attorney,” the ASSIGNOR is (180) days or more; participating in the management,
the present owner and holder of the BMW trademark and supervision or control of any domestic business, firm, entity or
device in the Philippines which ASSIGNOR uses and has been corporation in the Philippines; and any other act or acts that
using on the products manufactured by ASSIGNEE, and for imply a continuity of commercial dealings or arrangements and
which ASSIGNOR is the authorized exclusive Dealer of the contemplate to that extent the performance of acts or works,
ASSIGNEE in the Philippines. That the ASSIGNOR and the or the exercise of some of the functions normally incident to,
ASSIGNEE shall continue business relations as has been usual in and in progressive prosecution of, commercial gain or of the
the past without a formal contract. purpose and object of the business organization. However, the
On February 16, 1993, in a meeting with a BMW representative phrase "doing business" shall not be deemed to include mere
and the president of Columbia Motors Corporation (CMC), Jose investment as a shareholder by a foreign entity in domestic
Alvarez, petitioner was informed that BMW was arranging to corporations duly registered to do business, and/or the
grant the exclusive dealership of BMW cars and products to exercise of rights as such investor; nor having, a nominee
CMC, which had expressed interest in acquiring the same. director or officer to represent its interests in such
Nonetheless, BMW expressed willingness to continue business corporation; nor appointing a representative or distributor
relations with the petitioner on the basis of a "standard BMW domiciled in the Philippines which transacts business in its own
importer” contract, otherwise, it said, if this was not name and for its own account.
acceptable to petitioner, BMW would have no alternative but DISCUSSION:
to terminate petitioner’s exclusive dealership. Petitioner WHEN THE REPRESENTATIVE ACTS IN THE NAME OF THE FOREIGN
protested, claiming that the termination of his exclusive CORPORATION, IT IS CLEARLY ACTING AS ITS AGENT. BEING AN AGENT IT HAS
dealership would be a breach of the Deed of Assignment. Hahn A PRINCIPAL AND IT IS ACTUALLY ITS PRINCIPAL DOING BUSINESS. THEREFORE
insisted that as long as the assignment of its trademark and A REPRESENTATIVE DOING BUSINESS UNDER THE NAME OF ITS PRINCIPAL, THE
device subsisted, he remained BMW's exclusive dealer in the PRINCIPAL IS DOING BUSINESS IN THE PHILIPPINES. BUT IF THE
Philippines because the assignment was made in consideration REPRESENTATIVE IS DOING BUSINESS UNDER ITS OWN NAME, THEN THAT
of the exclusive dealership. REPRESENTATIVE IS THE ONE CONDUCTING BUSINESS AND THE FOREIGN
On March 26, 1993 BMW withdraw its offer for the "standard ENTITY IS NOT DOING BUSINESS IN THE PHILIPPINES.
importer contract" and terminated the exclusive dealer UNFORTUNATELY FOR BMW, THE SC SAID THAT THERE ARE FACTS WHICH
relationship with petitioner Hahn. Thus, Hahn filed a complaint SHOWS THAT HAHN WAS NOT ACTING IN ITS OWN NAME, RATHER HE WAS
for specific performance and damages against BMW to compel ACTING UNDER THE NAME OF BMW. HE WAS MERELY AN AGENT OF BMW
it to continue the exclusive dealership. AND NOT AN INDEPENDENT DISTRIBUTOR WHICH WAS THE ALLEGATION OF
BMW moved to dismiss the case contending that the trial court BMW. THE SC SAID THAT THE CA CANNOT JUST SAY THAT THIS ENTITY IS
did not acquire jurisdiction over it through the service of DOING BUSINESS OR NOT DOING BUSINESS WITHOUT LOOKING AT THE
summons on the Department of Trade and Industry, because it EVIDENCE BECAUSE ON WHAT THE SC SAW IS THAT ALLEGATIONS ALSO SHOW
(BMW) was a foreign corporation and it was not doing business THAT BMW WAS DOING BUSINESS THROUGH HAHN. SO SC SAID THAT THE
in the Philippines. Petitioner Alfred Hahn opposed the motion. CASE SHOULD BE REMANDED TO THE TRIAL COURT FOR FURTHER HEARING.
He argued that BMW was doing business in the Philippines WHETHER OR NOT A CORPORATION DOING BUSINESS SHOULD BE BASED ON
through him as its agent. FACTS AND EVIDENCE, IT SHOULD NOT BE BASED ON ALLEGATIONS.
Issues: WON BMW is doing business in the Philippines WHEN DOES HAVING A REPRESENTATIVE CONSTITUTE DOING BUSINESS?
Ruling: IF THE REPRESENTATIVE ACTS IN THE NAME OF THE PRINCIPAL.
BMW is doing business in the Philippines WHEN IS THE PRINCIPAL NOT DOING BUSINESS?
In the case, there is nothing to support the appellate court's IF THE REPRESENTATIVE ACTS IN HIS OWN NAME.
finding that Hahn solicited orders alone and for his own MR HOLDINGS LTD. VS. BAJAR
account and without interference from, let alone direction of Facts:
BMW. To the contrary, Hahn claimed he took orders for BMW Under a "Principal Loan Agreement" and "Complementary
cars and transmitted them to BMW. Upon receipt of the Loan Agreement," both dated 4 November 1992, Asian
orders, BMW fixed the down payment and pricing charges, Development Bank (ADB), a multilateral development finance
notified Hahn of the scheduled production month for the institution, agreed to extend to Marcopper Mining Corporation
orders, and reconfirmed the orders by signing and returning to (Marcopper) a loan in the aggregate amount of
Hahn the acceptance sheets. Payment was made by the buyer US$40,000,000.00 to finance the latter's mining project at Sta.
directly to BMW. Title to cars purchased passed directly to the Cruz, Marinduque. The principal loan of US$15,000,000.00 was
buyer and Hahn never paid for the purchase price of BMW cars sourced from ADB's ordinary capital resources, while the
complementary loan of US$25,000,000.00 was funded by the concurrent jurisdiction;" and (c) the validity of the "Assignment
Bank of Nova Scotia, a participating finance institution. On Agreement" and the "Deed of Assignment" has been "put into
even date, ADB and Placer Dome, Inc., (Placer Dome), a foreign serious question by the timing of their execution and
corporation which owns 40% of Marcopper, executed a registration." Unsatisfied, MR Holdings elevated the matter to
"Support and Standby Credit Agreement" whereby the latter. the Court of Appeals on a Petition for Certiorari, Prohibition
agreed to provide Marcopper with cash flow support for the and Mandamus (CA-GR SP 49226). On 8 January 1999, the
payment of its obligations to ADB. To secure the loan, Court of Appeals rendered a Decision affirming the trial court's
Marcopper executed in favor of ADB a "Deed of Real Estate decision. MR Holdings filed the Petition for Review on
and Chattel Mortgage" dated 11 November 1992, covering Certiorari.
substantially all of its (Marcopper's) properties and assets in Issue:
Marinduque. Whether MR Holdings' participation under the "Assignment
It was registered with the Register of Deeds on 12 November Agreement" and the "Deed of Assignment" constitutes “doing
1992. When Marcopper defaulted in the payment of its loan business.”
obligation, Placer Dome, in fulfillment of its undertaking under Held: Batas Pambansa 68, otherwise known as "The
the "Support and Standby Credit Agreement," and presumably Corporation Code of the Philippines," is silent as to what
to preserve its international credit standing, agreed to have its constitutes doing" or "transacting" business in the Philippines.
subsidiary corporation, MR Holding, Ltd., assumed Fortunately, jurisprudence has supplied the deficiency and has
Marcopper's obligation to ADB in the amount of held that the term "implies a continuity of commercial dealings
US$18,453,450.02. Consequently, in an "Assignment and arrangements, and contemplates, to that extent, the
Agreement" dated 20 March 1997 ADB assigned to MR performance of acts or works or the exercise of some of the
Holdings all its rights, interests and obligations under the functions normally incident to, and in progressive prosecution
principal and complementary loan agreements, ("Deed of Real of, the purpose and object for which the corporation was
Estate and Chattel Mortgage," and "Support and Standby organized." The traditional case law definition has
Credit Agreement"). On 8 December 1997, Marcopper likewise metamorphosed into a statutory definition, having been
executed a "Deed of Assignment" in favor of MR Holdings. adopted with some qualifications in various pieces of
Under its provisions, Marcopper assigns, transfers, cedes and legislation in Philippine jurisdiction, such as Republic Act 7042
conveys to MR Holdings, its assigns and/or successors-in- (Foreign Investment Act of 1991), and Republic Act 5455. There
interest all of its (Marcopper's) properties, mining equipment are other statutes defining the term "doing business," and as
and facilities. Meanwhile, it appeared that on 7 May 1997, may be observed, one common denominator among them all is
Solidbank Corporation (Solidbank) obtained a Partial Judgment the concept of "continuity." The expression "doing business"
against Marcopper from the RTC, Branch 26, Manila, in Civil should not be given such a strict and literal construction as to
Case 96-80083, ordering Marcopper to pay Solidbank he make it apply to any corporate dealing whatever. At this early
amount if PHP 52,970,756.89, plus interest and charges until stage and with MR Holdings' acts or transactions limited to the
fully paid; to pay an amount equivalent to 10% of above-stated assignment contracts, it cannot be said that it had performed
amount as attorney's fees; and to pay the costs of suit. Upon acts intended to continue the business for which it was
Solidbank's motion, the RTC of Manila issued a writ of organized. Herein, at this early stage and with MR Holdings'
execution pending appeal directing Carlos P. Bajar, sheriff, to acts or transactions limited to the assignment contracts, it
require Marcopper "to pay the sums of money to satisfy the cannot be said that it had performed acts intended to continue
Partial Judgment." Thereafter, Bajar issued two notices of levy the business for which it was organized. It may not be amiss to
on Marcopper's personal and real properties, and over all its point out that the purpose or business for which MR Holdings
stocks of scrap iron and unserviceable mining equipment. was organized is not discernible in the records. No effort was
Together with sheriff Ferdinand M. Jandusay of the RTC, exerted by the Court of Appeals to establish the nexus
Branch 94, Boac, Marinduque, Bajar issued two notices setting between MR Holdings' business and the acts supposed to
the public auction sale of the levied properties on 27 August constitute "doing business." Thus, whether the assignment
1998 at the Marcopper mine site. Having learned of the contracts were incidental to MR Holdings' business or were
scheduled auction sale, MR Holdings served an "Affidavit of continuation thereof is beyond determination. The Court of
Third-Party Claim" upon the sheriffs on 26 August 1998, Appeals' holding that MR Holdings was determined to be
asserting its ownership over all Marcopper's mining properties, "doing business" in the Philippines is based mainly on
equipment and facilities by virtue of the "Deed of Assignment." conjectures and speculation. In concluding that the
Upon the denial of its "Affidavit of Third-Party Claim" by the "unmistakable intention" of MR Holdings is to continue
RTC of Manila, MR Holdings commenced with the RTC of Boac, Marcopper's business, the Court of Appeals hangs on the
Marinduque, presided by Judge Leonardo P. Ansaldo, a wobbly premise that "there is no other way for petitioner to
complaint for reivindication of properties, etc., with prayer for recover its huge financial investments which it poured into
preliminary injunction and temporary restraining order against Marcopper's rehabilitation without it (petitioner) continuing
Solidbank, Marcopper, and sheriffs Bajar and Jandusay (Civil Marcopper's business in the country." Absent overt acts of MR
Case 98-13). Holdings from which we may directly infer its intention to
In an Order dated 6 October 1998, Judge Ansaldo denied MR continue Marcopper's business, the Supreme Court cannot give
Holdings' application for a writ of preliminary injunction on the its concurrence. Significantly, a view subscribed upon by many
ground that (a) MR Holdings has no legal capacity to sue, it authorities is that the mere ownership by a foreign corporation
being a foreign corporation doing business in the Philippines of a property in a certain state, unaccompanied by its active
without license; (b) an injunction will amount "to staying the use in furtherance of the business for which it was formed, is
execution of a final judgment by a court of co-equal and insufficient in itself to constitute doing business. Further, long
before MR Holdings assumed Marcopper's debt to ADB and “Doing Business”

became their assignee under the two assignment contracts, Implies a continuity of commercial dealings and arrangements
there already existed a "Support and Standby Credit
Agreement" between ADB and Placer Dome whereby the latter
bound itself to provide cash flow support for Marcopper's
payment of its obligations to ADB. Plainly, MR Holdings'
payment of US$18,453,450.12 to ADB was more of a fulfillment
of an obligation under the "Support and Standby Credit
Agreement" rather than an investment. That MR Holdings had
to step into the shoes of ADB as Marcopper's creditor was just
a necessary legal consequence of the transactions that
transpired. Also, the "Support and Standby Credit Agreement"
was executed 4 years prior to Marcopper's insolvency, hence,
the alleged "intention of MR Holdings to continue Marcopper's
business" could have no basis for at that time, Marcopper's
fate cannot yet be determined. In the final analysis, MR
Holdings was engaged only in isolated acts or transactions.
Single or isolated acts, contracts, or transactions of foreign
corporations are not regarded as a doing or carrying on of
business. Typical examples of these are the making of a single
contract, sale, sale with the taking of a note and mortgage in
the state to secure payment therefor, purchase, or note, or the
mere commission of a tort. In these instances, there is no
purpose to do any other business within the country.
Discussion
Not doing business by mere assumption (Deed of Assignment)
Since it’s not doing business, it does not need a license and it
can sue in the Philippines.
By virtue of the deed of Assignment, the lower court should

not make assumptions that it will continue the business since
it was all it was. There was no FACT and EVIDENCE that MR
Holdings will continue the business Marcooper.
Title xvi
Doctrine:
investigations, offenses, & penalties
GR: Deed of Assignment alone shows Isolated Transaction
HIGHLIGHTS
1. If Continuing Transaction 1. All administrative Penalties
SC: must show further evidence : (absence such merely 2. Expressly provides for the Investigative power of the SEC.
Isolated Transaction) 3.
a. such transaction is part of the primary purpose of the
Corporation 1. All Administrative Penalties
b. Evidence or proof of acts which support the act of
continuing the operation Before there used to be Criminal penalties but now
its all administrative under the Revised Penal Code.
Rule Before the SEC can file Criminal case, it needs to
1. If a foreign corporation DOES business in the Philippines W/O license
2. Provides for the Investigative power of the SEC
effect: CANT sue before the Phil courts a. Power to investigate violations the Code , or of a rule, regulation , or
order of the Commission
2. If FC is NOT DOING business in the Philippines
-NEEDS NO license to sue before Phil. Courts b. May publish its findings, orders, opinions , advisories or information
- in isolated transaction concerning any violation as may be relevant to the general public
- or COA entirely independent of any business transaction
c. Power to administer oaths, and affirmations , issue subpoena and
3. If FC DOES business in Phil w. license sobpoena duces tecum , take testimony and may perform other acts
- can sue on any transaction necessary to the proceedings or investigation
Note: its not the absence of prescribed license but the “doing of d. Can issue Cease and Desist order for violation of the code , rule or
business” in the Phil w/o license which bars the FC from access to our regulation or order of the Commission.
courts.
I. EX PARTE CEASE AND DESIST ORDERS
1. Grounds: if act to enjoin is fraudulent or expected to cause significant, Under the merit based approach:
imminent and irreparable danger or injury to public
• registration of the security guarantees the soundness of the
security
2. Duration : 20 days
The ex parte order shall be valid for a MAXIMUM period of 20 days • registration under the src, the buyer should be given full and fair
Caveat - w/o prejudice to the order being made permanent after due disclosure of all aspects of the security and the issuer. it is up to
notice and hearing. the buyer to decide
• Thrust of SRC: full and fair disclosure requirement
e. Can Suspend and revoke Certificates off Incorporation • SRC provides for the creation, establishment and regulation of
f. Contempt power or the power to impose administrative sanctions SRO’s
If the SEC claims that there should be a criminal case filed against v In the Philippines there is only ONE
a corporation, its officers or directors, the sec must file a SRO, the Philippine Stock Exchange or
complaint with the DOJ for preliminary investigation the PSE
Acts penalized under the amended corporation Purpose of SRO

code Atty: The SRO is the market itself through which securities are traded.
That is the purpose of the SRO, it is the market. You buy and sell
1. unauthorized use of corporate name
securities through the SRO. It is the place where the buyer and the seller
2. violation of disqualification for directors, trustees and officers meet to exchange securities and cash. So the PSE is actually a market
• penalty is fine and Permanent disqualification where you buy and sell securities
3. violation of duty to maintain records to allow thorough The SRC allows the creation of these SROs because SROs serve as the
inspection and reproduction market for securities. The SRO does not create the market, it is the
• Defined as Contempt, before it was defined as market itself. What creates the market is the SRC.
criminal So the regulation in the SRC is to create a free market that can regulate
4. certification of incomplete and inaccurate/ false and itself. And that market is the SRO.
misleading statements or reports, shown by an independent
auditor for incomplete, inaccurate or false and misleading Other objectives
reports To encourage the widest participation of ownership in enterprises
5. obtaining corporate registration through fraud (Fraudulent Q: How does the SRC ensure that the public has access to the shares?
conduct of business ) A certain portion of any offering is allocated for local small investors
6. any activities relating to Graft and corrupt practices (LSIs), meaning, the individual traders not just the qualified buyers, not
7. revelation against whistle blowers just the institutional buyers. There is a minimum set aside for individuals
in every kind of offering. This is to assure that the ownership of
WHISTLEBLOWERS: persons who disclose violations of the enterprises are distributed not just to big institutions but to individual
corporation code or the rules and regulation of the commission shareholders as well.
• Allegations/Exposé MUST be Truthful To enhance the democratization of wealth
• If the whistleblower is an employee, they CANNOT To promote the development of the capital market
be Terminated To protect investors
• The Corporation CANNOT Retaliate, if they do the To ensure full and fair disclosure about securities
Corporation can be subject to Administrative To eliminate insider trading and other fraudulent or manipulative
Sanctions devices
Atty: All of these objectives are implemented in the body of the SRC. The
contents of the SRC is geared towards achieving these objectives. The
REPORTORIAL REQUIREMENTS for corporations SRC also enhances the powers of the SEC.
registered under the corporation code
AUDITED FINANCIAL STATEMENTS
• If the assets are less than 600,000 pesos there is
Powers of the SEC
NO need for an Independent Auditor. Instead: a. Have jurisdiction and supervision over all corporations,
v A Certification from the Treasurer or partnerships or associations who are the grantees of primary
CFO is Required franchises and/or a license or a permit issued by the
v Also need to file the General government;
Information Sheet. b. Formulate policies and recommendations on issues
• FAILURE to submit a Reportorial Requirement at
concerning the securities market, advise Congress and other
least 3 times whether consecutive or intermittent
within 5 years is grounds for the SEC to declare a government agencies on all aspects of the securities market
Corporation Delinquent. and propose legislation and amendments thereto;
v 3 Non-filings within 5 years c. Approve, reject, suspend, revoke or require amendments to
registration statements and registration and licensing
Securities Act/ truth and securities law applications; - mao ra ni gi-emphasize ni Atty G
PURPOSE: d. Regulate, investigate or supervise the activities of persons to
Full and fair disclosure of material information ensure compliance;
OBJECTIVES: e. Supervise, monitor, suspend or take over the activities of
1. Sought to provide investors full and fair exchanges, clearing agencies and other SROs;
disclosure of Material Information
f. Impose sanctions for the violation of law and the rules,
2. Seeks to provide protection to Issuer companies by eliminating
regulations, and orders issued pursuant thereto;
securities that are fraudulent or defrauds the public.
g. Prepare, approve, amend or repeal rules, regulations and b. Between a stockholder and the corporation to which he
orders, and issue opinions and provide guidance on and is a stockholder
supervise compliance with such rules, regulations and orders; c. The corporation and the state but only with respect to
h. Enlist the aid and support of and/or deputize any and all its existence (these refer to quo warranto proceedings)
enforcement agencies of the government, civil or military as
well as any private institutions, corporations, firm, association 2 tests to determine whether or not a controversy is
or person in the implementation of its power and functions an intra-corporate dispute:
under this Code;
a. Relationship Test – look at the relationship between the
i. Issue cease and desist orders to prevent raud or injury to the
parties. Whether it is among stockholders, between
investing public;
stockholders and the corporation, or the state regarding the
j. Punish for contempt of the Commission, both direct and
franchise
indirect, in accordance with the pertinent provisions of and
b. Nature Test – look at the nature of the controversy or if the
penalties prescribed by the Rules of Court;
issue pertains to the enforcement of rights and obligations of
k. Compel the officers of any registered corporations or
the parties found in the Revised Corporation Code or other
associations to call meetings of stockholders or members
implementing rules.
thereof under its supervision;
l. Issue subpoena duces tecum and summon witnesses to
appear in any proceedings of the Commission and in
Effect of an intra-corporate dispute
Filed in the RTC (Special Commercial Court). However, it does not mean
appropriate cases, order the examination, search and seizure
that whenever there is Intra-corporate dispute, the SEC is automatically
of all documents, papers, files and records, tax returns and
ousted from hearing such dispute. Because the SEC retains its
books of accounts of any entity or person under investigation administrative and regulatory/ supervisory power.
as may be necessary for the proper disposition of the cases
before it, subject to the provisions of existing laws;
m. Suspend, or revoke, after proper notice and hearing the SECURITIES AND EXCHANGE COMMISSION VS. SUBIC
franchise or certificate o registration of corporations, BAY GOLD AND COUNTRY CLUB, INC
partnerships or associations upon any of the grounds
provided by law; Principle: Intra-corporate controversies, previously under the
n. Exercise such other powers as may be provided by law as well
SEC’s jurisdiction, are now under the jurisdiction of the RTC
as those which may be implied from, or which are necessary
designated as commercial courts. However, the transfer of
jurisdiction to the trial courts does not oust the SEC of its
or incidental to the carrying out of, the express powers
jurisdiction to determine if administrative rules and
granted the Commission to achieve the objectives and
regulations were violated.
purposes of these laws.
Facts
On April 25 1996, Subic Bay Golf and Country Club, Inc
Powers of SEC taken by SRC (SBGCCI) and Universal International Group Development
SEC no longer exercises quasi-judicial functions. The jurisdiction to hear Corporation (UIGDC) entered into a Development Agreement.
intra-corporate disputes were transferred to the regular courts. UIGDC agreed to “finance, construct and develop the golf
PD No. 902-A Section 5 course, for an in consideration of the payment by SBGCCI of it’s
a. Devices or schemes employed by or any acts of the board of 1,530 shares of stock.”
directors, business associates, its officers or partnership, Upon, SBGCCI’s application, SEC issued an order for the
amounting to fraud and misrepresentation which may be registration of 3,000 no par value shares of SBGCCI on July 8,
detrimental to the interest of the public and/or of the 1996. SBGCCI was also issued a certificate of permit to offer
stockholder, partners; members of associations or securities for sale to the Public of its 1, 530 no par value
organizations registered with the Commission. proprietary shares on August 9, 1996. The shares are sold at
b. Controversies arising out of intra-corporate or partnership P425,000 per share and the same were used to pay UIGDC for
relations, between and among members, or associates; the development of the golf course.
between any or all of them and the corporation, partnership Complainants Filart and Villareal informed SEC that they had
or association of which they are stockholders, members or been asking UIGDC for the refund of their payment for their
associates, respectively; and between such corporation, SGGBCCI shares. UIGDC did not act on their requests. They
partnership or association and the state insofar as it concerns alleged that they purchased shares in the promise of SBGCCI
their individual franchise or right to exist as such entity; and UIGDC to deliver the ff:1) swimming pool and tennis court;
c. Controversies in the election or appointments of directors, 2) 18 hole golf course; 3) 9 hole executive course and etc.
trustees, officers or members of such corporations, However, these promises were not delivered. And despite the
partnerships or associations. undelivered promises, they started to charged monthly dues
They were even threated that their shares would be auctioned
Letter B pertains to intra-corporate disputes. off if their back dues would remain unpaid.
SBGCCI and UIGDC averred that they had already substantially
Intra-corporate dispute complied with their commitment. SEC conducted an inspection
and found that SBGCCI and UIGDC failed to substantially
a. It is any dispute between the stockholders or among the comply with their commitment to complete the project. They
stockholders or members found out that Filart and Villareal invested because of SBGCCI
and UIGDC’s representation of 27-hole world class golf course
being developed. Hence, the Corporate Finance Dept of SEC compliant. Any fraud or misrepresentation in the issuance of
ordered the return of purchase price of the shares. securities injures the public. However, the Securities and
SBGCCI and UIGDC in a petition for review questioned the Exchange Commission's regulatory power does not include the
order and jurisdiction of the Corporation Finance Deparment’s authority to order the refund of the purchase price of
order before the SEC since the same involved an intra- Villareal's and Filart's shares in the golf club. The issue of
corporate dispute. SEC ruled that the proceedings were refund is intra-corporate or civil in nature. Similar to issues
administrative in nature. It was only conducted to determining such as the existence or inexistence of appraisal rights, pre-
if SEC’s rules and regulations were violated. SEC has power to emptive rights, and the right to inspect books and corporate
investigate possible violations and impose appropriate records, the issue of refund is an intra- corporate dispute that
administrative sanctions. CA, however, declared SEC’s decision requires the court to determine and adjudicate the parties'
as null and void since it found the case as an intra-corporate rights based on law or contract. Injuries, rights, and obligations
controversy not under SEC’s jurisdiction. involved in intra-corporate disputes are specific to the parties
HELD: involved. They do not affect the Securities and Exchange
Before solving the issue, we have to determine whether SEC Commission or the public directly.
has the authority to order the return of purchase price of Hence, the issue of refund should be litigated in the
securities upon finding that there were fraudulent appropriate Regional Trial Court. This issue is both intra-
representation in the prospectus. corporate and civil in nature, which is under the jurisdiction of
The Court rules for SBGCCI and UIGDC. the designated Regional Trial Courts.
Under PD No. 902-A, SEC has jurisdiction over acts amunting to
fraud and misrepresentation by a corporation’s board of
SECURITIES AND EXCHANGE COMMISSION VS.
directors, business association and officers, even intra-
corporate disputes. However, jurisdiction over intra-corporate UNIVERSAL RIGHTFIELD PROPERTY HOLDINGS, INC.,
disputes and all other cases enumerated in Sec 5 had already FACTS:
been transferred to designated RTC under RA no. 8799. Petitioner is the Securities and Exchange Commission (SEC) and
For a dispute to be intracorporate, it must satisfy the Respondent is Universal Rightfield Property Holdings, Inc.
relationship and nature of controversy tests. (URPHI).
Relationship test – requires that the dispute be between a: URPHI is a corporation duly registered and existing under
corporation/partnership/association and the public; Philippine Law which is engaged in the business of providing
corporation/partnership/association and the state regarding residential and leisure related needs and wants market.
the entity’s franchise, permit or license to operate;a On May 29, 2003, SEC issued an Order revoking URPHI's
corporation/partnership/association and its stockholders, Registration of SEC for failure to timely file its Year 2001
partners, members or officers; and among stockholders, Annual Report and Year 2002, 1st, 2nd, and 3rd Quarterly
partners or associates of the entity Reports which required pursuant to Section 17 of the Securities
Nature of the Controversy Test – requires that the action Regulation Code (SRC).
involves the enforcement of corporate rights and obligations. On October 16, 2003, URPHI Filed a motion to set aside the
In Medical Plaza Makati Condominium Corporation vs. Cullen: revocation order and reinstate registration after complying
“The controversy must not only be rooted in the existence of with its reportorial requirements.
an intra-corporate relationship, but must as well pertain to the On October 24, 2003, SEC granted the motion to lift the
enforcement of parties’ correlative rights and obligations revocation order.
under the Corporation Code and the internal and However, URPHI failed again to comply with the same
intracorporate regulatory rules of the corporation.” reportorial requirements.
This case is an intra-corporate dispute, over which the RTC has On June 24, 2004, in a NOTICE OF HEARING, SEC directed
jurisdiction. It involves a dispute between the corporation, URPHI to show cause why its registration of Securities and
SBGCCI and its shareholders, Villareal and Filart. Their right to a Certificate of Permit to Sell securities to the Public should not
refund of the value of their shares was based on SBGCCI and be suspended for failure to submit said requirements in
UIGDC's alleged failure to abide by their representations in violation of SRC Rule 17.
their prospectus. It involves the determination of a On July 6, 2004, the scheduled hearing, URPHI through its Chief
shareholder's rights under the Corporation Code or other intra- accountant, informed SEC why it failed to submit the
corporate rules when the corporation or association fails to reportorial requirement, viz:
fulfill its obligations.
HOWEVER, even though it is intra-corporate in nature, it does (1) it was constrained to reduce its accounting staff due to
not necessarily oust the Commission of its regulatory and cost-cutting measures; thus, some of the audit requirements
administrative jurisdiction to determine and act if there were were not completed within the original
administrative violations committed in relation to securities, timetable;
the Securities and Exchange Commission's regulatory power (2) its audited financial statements for the period ending
pertains to the approval and rejection, and suspension or December 31, 2003 could not be finalized by reason of the
revocation, of applications for registration of securities for, delay in the completion of some of its audit requirements.
among others, violations of the law, fraud, and On July 27, 2004, SEC suspended URPHI's registration of
misrepresentations. (CF: Sec 13 and 15) Securities and Permit to Sell Securities to the public for failure
To ensure compliance with the law and the rules, SEC is to submit the reportorial requirements DESPITE THE LAPSO OF
empowered to impose fines and penalties. It may also THE EXTENTION PERION, and due to lack of sufficient
investigate motu propio to see whether corporations are justification.
On August 23, 2004, SEC informed URPHI that it failed to (i) Suspension, or revocation of any registration for the
submit its 2004 2nd Quarter Report in violation of the offering of securities;
amended IRR of the SRC Rule 17.a SC further held that the essence of due process is simply giving
(1)(A)(ii). It directed URPHI to file the said report and show an opportunity to be heard, or as applied to administrative
cause why it should not be held in violation for the said rule. proceedings, an opportunity to explain one's side or an
On September 23, 2004, URPHI requested for a final extension opportunity to seek a reconsideration of the action or ruling
or until November 15, 2004. complained of.
On December 1, 2004, URPHI filed with SEC its 2003 Annual What the law prohibits is not the absence of previous notice
Report. but the absolute absence thereof and the lack of opportunity
On December 8, 2004, SEC revoked URPHI's Registration of to be heard.
Securities and Permit to Sell Securities to the Public for its The due notice of revocation given to URPHI through the SEC
failure to submits its reportorial requirements within the final Order dated July 27, 2004, wherein the SEC expressly warned
extension period. that such registration would be revoked should it persistently
On December 9, 10 and 14, 2004, URPHI finally submitted to fail to comply with the said requirements. Still, URPHI
the SEC its Quarterly Reports. continuously failed to submit the required reports.
URPHI appealed the SEC Order of Revocation dated December Due notice simply means the information must be given or
8, 2004 by filing a Notice of Appeal and a Memorandum both made to a particular person or to the public within a legally
dated January 3, 2005. mandated period of time so that its recipient will have the
On December 15, 2005, SEC denied URPHI's appeal through a opportunity to respond to a situation or to allegations that
resolution. affect the individual's or public's legal rights or duties.
Aggrieved, URPHI filed a petition for review with the CA. Furthermore, the SC notes that SEC has both regulatory and
Issue: adjudicative functions. The revocation of registration of
Whether or not the URPHI was accorded all the opportunity to securities and permit to sell them to the public is not an exercise
be heard and comply with all the reportorial requirements of the SEC's quasi-judicial power, but of its regulatory power.
before the Order of Revocation was issued by SEC. The case used by URPHI which is the Globe Telecom ruling is
Held: YES. SC granted the petition as meritorious stating that different from the case at hand. The SC in Globe Case ruled that
there is no dispute that the violation of reportorial the fined imposed by the NTC without notice and hearing was
requirements under Sec 17.1 of the Amended IRR of the SRC is null and void due to the denial of petitioner's right to due
a ground for suspension or revocation of the registration of process. The revocation of URPHI's registration of securities and
securities pursuant to Sec 13.1 and 54.1 of the SRC to wit: permit to sell them to the public cannot be considered a penalty
13.1. The Commission may reject a registration statement and but a withdrawal of a privilege, which regulatory power the SEC
refuse registration of the security thereunder, or revoke the validly exercised after giving it due notice and opportunity to be
effectivity of a registration statement and the registration of heard.
the security thereunder after due notice and hearing by issuing Thus, petition is granted and the decision of CA is reversed. The
an order to such effect, setting forth its findings in respect requirements of due notice and hearing under Section 13.1 and
thereto, if it finds that: 54.1 of the SRC were substantially complied with.
a) The issuer: xxx xxx xxx Discussion: the notice given was deemed sufficient by the SC
(ii) Has violated any of the provisions of this Code, the rules (although such only involved the suspension and not
promulgated pursuant thereto, or any order of the revocation) because even though there is a requirement for
Commission of which the issuer has notice in connection with notice and hearing (N&H) it does not make the revocation a
the offering for which a registration statement judicial or exercise of quasi-judicial power by the SEC, it is still
has been filed; an exercise of its regulatory or administrative power, being
54.1. If, after due notice and hearing, the Commission finds that, substantial compliance with the n & h or due process
that: (a) There is a violation of this Code, its rules, or its orders; requirement. So the N&H done for the suspension is already
(b) Any registered broker or dealer, associated person thereof sufficient N&H for the revocation. There was no need to conduct
has failed reasonably to supervise, with a view to preventing another hearing. (SUBSTANTIAL COMPLIANCE WITH DUE
violations, another person subject to supervision who commits PROCESS REQUIREMENT IS SUFFICIENT BECAUSE NOT IN THE
any such violation; EXERCISE OF ITS JUDICIAL OR QUASI-JUDICIAL POWER BUT
(c) Any registrant or other person has, in a registration ONLY REGULATORY AND ADMINISTRATIVE POWER).
statement or in other reports, applications, accounts, records
or documents required by law or rules to be filed with the SRC; COVERAGE
Commission, made any untrue statement of a material fact, or SECURITIES
omitted to state any material fact required to be stated therein
or necessary to make the statements therein not misleading; SECURITIES; DEFINED
or, in the case of an underwriter, has failed to conduct an
Section 3.Definition of Terms.-3.1. "Securities" are shares, participation
inquiry with reasonable diligence to insure that a registration or interests in a corporation or in a commercial enterprise or profit-
statement is accurate and complete in all material making venture and evidenced by a certificate, contract, instruments,
respects; or (d) Any person has refused to permit any lawful whether written or electronic in character.
examinations into its affairs, it shall, in its discretion, and
subject only to the limitations hereinafter prescribed, impose TYPES OF SECURITIES
any or all of the following sanctions as may be appropriate in (a) Shares of stocks, bonds, debentures, notes evidences of
light of the facts and circumstances: indebtedness, asset-backed securities;
Gives the buyer the right, but not the obligation, to buy or sell an
(b) Investment contracts, certificates of interest or participation in a underlying security at a predetermined price called the exercise or strike
profit sharing agreement, certifies of deposit for a future subscription; price, on or before a predetermined date, called the expiry date;
ILLUSTRATION:
(c) Fractional undivided interests in oil, gas or other mineral rights; You have an option with a value of 5php per option which allows you to
(d) Derivatives like option and warrants; purchase 20php per share, and the market value of the share is 30php. In
(e) Certificates of assignments, certificates of participation, trust this case, people will be willing to buy the option at 5php. You would still
certificates, voting trust certificates or similar instruments even be willing to buy it for 9php. Beccause 20+9=29, it is still lower than
(f) Proprietary or nonproprietary membership certificates in the market value of the share which is 30php.
corporations; and A DERIVATIVE IS A FINANCIAL INSTRUMENT WHOSE VALUE CHANGES
(g) Other instruments as may in the future be determined by the IN ACCORDANCE OF THE VALUE OF ITS UNDERLYING SECURITY.
Commission. The relationship between the value of the option and the value of the
underlying security is DIRECT. If the market value increases, the value of
TWO KINDS OF SECURITIES the option increases. If the market value of the underlying security
decreases, the value of the option decreases.
1. Equity Securities
If, in the illustration above, the market value increases to 50php, people
2. Debt Securities: anything to do with the payment of money
will be willing to buy the option at 20php per option because 20+20=40
the cost is still lower than the market value
SECURITIES LISTED IN THE SRC But, if the value of the underlying security decreases to 10php per share,
SEC. 3. Definition of Terms. – would people would still be willing to buy the option at 1php, which
allows you to buy the share at 20php when you can buy the underlying
3.1. “Securities” are shares, participation or interests in a security at 10php?
corporation or in a commercial enterprise or profit-making NO. because when you buy the underlying security, you pay 10php, but
when you buy the option, you will spend 1+20=21.
venture and evidenced by a certificate, contract, instrument,
whether written or electronic in character. It includes:
(a) Shares of stock, bonds, debentures, notes, evidences of KINDS OF OPTIONS
indebtedness, asset-backed securities; CALL OPTION- OPTION TO BUY
(b) Investment contracts, certificates of interest or PUT OPTION- OPTION TO SELL
participation in a profit sharing agreement, certificates of
deposit for a future subscription; 2. WARRANTS
(c) Fractional undivided interests in oil, gas or other mineral Warrants are issued by the issuing company. While an option has two
securities (option and underlying security), Warrants on the other hand
rights;
has 3 securities (Warrant, underlying security and beneficiary security).
(d) Derivatives like option and warrants; In warrants, an issuer issues a stock and at the same time issues a
(e) Certificates of assignments, certificates of participation, warrant which has an underlying security to buy a stock at a certain price.
trust certificates, voting trust certificates or similar Warrants are issued with beneficiary securities. Meaning, warrants are
instruments; not sold by themselves. They are sold
(f) Proprietary or non proprietary membership certificates and issued with the beneficiary security. So, when a
incorporations; and beneficiary security issues warrants, it cannot issue warrants to anyone
(g) Other instruments as may in the future be determined by but to those who are already holders of its own stock.
the Commission. ILLUSTRATION:
So, you issue it with a beneficiary security. How does it work? I’m the
issuer. I issue shares for P50 per share and as an enticement a warrant. A
warrant will entitle the holder to purchase the shares at another P50 per
BOND - A long term debt security. It normally takes more share. If the underlying security will be traded at P60, you can purchase it
than 3 years. at P50. So, your beneficiary security benefits from the presence of the
warrant because some people thinking they can use that warrant in the
PROPRIETARY SHARES entitle the holder to name a future will buy now. If for example, with the presence of the warrant, the
nominee to become the member to use and enjoy the price became P55 which allows you to purchase the underlying security
facilities and services; to vote and be voted in meetings of for P50. If you anticipate that underlying security will be at P60, will you
buy this? Yes. because the P55 plus P50, you paid P105. Without the
the shareholders; and to be entitled to a share in the net
warrant, P50 +P60, it would be 110. So, divided by 2 shares, P55 per
assets upon liquidation and dissolution share. (from IBL notes)
NON PROPRIETARY SHARE – allows the holder to use KINDS OF WARRANTS
the facilities but has no right to the stock dividends. • DETACHABLE WARRANT – can sell the warrant without selling
Normally, these are issued by the clubs and resorts which the shares.
allows you to use the facilities. • NON-DETACHABLE – cannot sell the warrant without selling
the shares.
Derivatives
Derivatives are financial instruments whose depends on the of an
Investment contracts
underlying security or commodity. We call it because it derives its value It is a contract, transaction or scheme whereby a person invests his
from other security or commodity. money in a common enterprise and is led to expect profits PRIMARILY
from the efforts of others.
TYPES OF DERIVATIVES Howey Test
This term derivative shall include, but not limited, to the following: (1) a contract, transaction, or scheme;
1. OPTIONS (2) an investment of money;
(3) investment is made in a common enterprise;
(4) expectation of profits; and
(5) profits arising primarily from the efforts of others. the Philippines, under Section 8, it is required to be registered
with the SEC. That is the meat and bone of the SRC.
SEC VS PROSPERITY.COM
Facts: POWER HOMES VS SEC
Prosperity.com, Inc. (PCI) came up with a scheme wherein a Facts:
buyer of its services gets incentives and commissions by Power Homes (P) was engaged in managing real estate
sponsoring and referring down-line buyers to PCI. This scheme properties for subdivision & allied purposes and in the
was patterned after another company that stopped operations purchase, exchange, and/or sale of such through network
after being enjoined by SEC. Aggrieved, elements of the other marketing. Manero & Munsayac requested SEC (R) to
company filed a complaint against PCI with SEC, where the investigate P’s business since he attended a seminar conducted
latter held that PCI’s scheme constitutes an investment by P where the latter claimed to sell properties that were
contract, which should have been registered with the same. inexistent and without any broker’s license & desires to know if
Aggrieved, PCI filed a petition for certiorari with CA, which held network marketing is legitimate. P submitted to R copies of its
that PCI’s scheme is not an investment contract following the marketing course module and letters of
Howey Test, which needed to be registered with SEC. Hence, accreditation/authority or confirmation from Crown Asia, Fil-
this petition. Estate Network and Pioneer 29 Realty Corporation after a
ISSUE: conference held by R. R found P to be engaged in the sale or
Whether or not PCI’s scheme constitutes an investment offer for sale or distribution of investment contracts, which are
contract that requires registration. considered securities under Sec. 3.1 (b) of R.A. No. 8799 (The
RULING: Securities Regulation Code), but failed to register them in
NO. violation of Sec. 8.1 of the same Act. R then issued a CDO to P
Investment contracts are “securities” that have to be to enjoin the latter from engaging in the sale, offer or
registered with the SEC before they can be distributed and distribution of the securities.
sold; a contract, transaction, or scheme where a person invests
his money in a common enterprise and is led to expect profits Issue:
primarily for the efforts of others. Following the Howey Test, Whether P’s business constitutes investment contracts which
for an investment contract to exist, the following elements should be registered with R before its sale or offer for sale or
must concur: 1)a contract, transaction, or scheme; 2) an distribution to the public.
investment of money; 3) investment is made in a common
enterprise; 4) expectation of profits; and 5) profits arising Ruling:
primarily from the efforts of others. Yes. The court ruled that P failed the Howey Test. It requires a
In this case, PCI’s clients do not make such investments; rather transaction, contract, or scheme whereby a person:
they are engage in network marketing, a scheme adopted by (1) makes an investment of money
companies for getting people to buy their products where the (2) in a common enterprise
buyer can become a down-line seller, who earns commissions (3) with the expectation of profits
from purchases made by new buyers whom he refers to (4) to be derived solely from the efforts of others.
the person who sold the product to him, is not an investment
contract. The commissions, interest in real estate, and Any investment contract covered by the Howey Test must be
insurance coverage are incentives to down-line sellers to bring registered under the Securities Act, regardless of whether its
in other customers which can hardly be regarded as profits issuer was engaged in fraudulent practices. R.A. No. 8799
from investment of money under the Howey Test. defines an Investment contract as a contract, transaction or
Discussion: scheme whereby a person invests his money in a common
The money you pay is not really an investment but a enterprise and is led to expect profits not solely but primarily
purchase price for the website. According to the SC, in an from the efforts of others. In the case at bar, P’s business
investment contract, you derive primarily from the efforts of involves security contracts wherein an investor enrolls in P’s
others. In this case, it’s not primarily from the efforts of program by paying US$234. This entitles him to recruit two (2)
others since you derive from the income by using your investors who pay US$234 each and out of which amount he
website to sell whatever product you want. You earn by your receives US$92. A minimum recruitment of four (4) investors
own effort and not from the efforts of others. So, it fails 2 by these two (2) recruits, who then recruit at least two (2)
elements form the Howey test; one, the money you gave was each, entitles the principal investor to US$184 and the pyramid
not an investment but a purchase price and second, you don’t goes on.
earn income from the efforts of others rather you earn The trainings or seminars are merely designed to enhance P’s
income from operating your own website. If it’s not an business of teaching its investors the know-how of its multi-
investment contract, that means it’s not a security, so it’s not level marketing business. An investor enrolls under the scheme
covered under the SRC and does not need registration. of P to be entitled to recruit other investors and to receive
the SC said that it was not an investment contract and since it commissions from the investments of those directly recruited
was not an investment contract, then it is not a security. If it by him. Under the scheme, the accumulated amount received
is not a security, it does not fall under the requirements by the investor comes primarily from the efforts of his recruits.
under the SRC. If it was an investment contract, it would have DISCUSSION
made it a security. As a security it falls under the requirement PCI vs Power homes case
of SRC to be registered. Before securities can be sold within In the Prosperity case, the exchange for the investment is the
use of the website where they can sell their products. On the
other hand, in Power homes, when you invest money, you get 2 points of difference on the exemption under the
the right to employ downlines. law and exemption under the IRR:
The difference is on the 4th requisite of the Howey Test, in
1. TYPE OF SECURITY
Power homes, they will just earn money from the downlines 2. TYPE OF ISSUER
without getting any product. This is a Ponzi or pyramiding
scheme. Unlike in the prosperity case, where you give money Both are allowable exemptions, they are not exclusive. Under the law,
and you get a product. You can earn by using that product. what is exempt is any security issued by a bank except its own shares of
You use the website and sell. What about the earnings that stocks. In the IRR, what is allowed is any evidence of indebtedness issued
you get from your downlines? The SC said that it is just by a financial institution licensed as a bank or a quasi bank.
incidental because the main source of your income is the use
of the website to sell goods. In power homes, there is no such 9.1.2 The registration requirements shall not likewise apply to
thing, the investment just allows you to get a downline. Your the following:
downline will earn money by getting their own downline. 9.1.2.1 Evidence of indebtedness issued to the BSP under its
There is no exchange of product. You just sit down there and open market and/or rediscounting operations;
wait for your downlines to get their own downlines. 9.1.2.2 Bills of exchange arising from a bona fide sale of goods
and services that are distributed and/or traded by banks or
EXEMPT SECURITIES investment houses duly licensed by the Commission and BSP
through an organized market that is operated under the Rules
Section 9. Exempt Securities. – 9.1. The requirement of
approved by the Commission;
registration under Subsection 8.1 shall not as a general rule
9.1.2.3. Any security issued or guaranteed by multilateral
apply to any of the following classes of securities:
financial entities established through a treaty or any other
(a) Any security issued or guaranteed by the Government of
binding agreement to which the Philippines is a party or
the Philippines, or by any political subdivision or agency
subsequently becomes a member (hereinafter referred as
thereof, or by any person controlled or supervised by, and
Multilateral Financial Entities or MFE), e.g., international
acting as an instrumentality of said Government.
financial institutions, multilateral development banks,
(b) Any security issued or guaranteed by the government of
development finance institutions or any other similar entities;
any country with which the Philippines maintains diplomatic
or by facilities or funds established, administered, and
relations, or by any state, province or political subdivision
supported by MFEs; Provided, that the issuer shall file an
thereof on the basis of reciprocity: Provided, That the
offering circular/ memorandum in a format prescribed by the
Commission may require compliance with the form and
Commission and containing among others; (1) information
content for disclosures the Commission may prescribe.
about the issuer and the security to be issued, (2) information
(c) Certificates issued by a receiver or by a trustee in
about the MFE, and (3) information about the guarantee.
bankruptcy duly approved by the proper adjudicatory body.
9.1.2.4. The registration requirements shall not likewise apply
(d) Any security or its derivatives the sale or transfer of
to evidence of indebtedness, e.g., commercial papers, that
which, by law, is under the supervision and regulation of the
meet the following conditions:
Office of the Insurance Commission, Housing and Land Use
9.1.2.4.1. Issued to not more than nineteen (19) non-
Rule Regulatory Board, or the Bureau of Internal Revenue.
institutional lenders;
(e) Any security issued by a bank except its own shares of
9.1.2.4.2. Payable to a specific person;
stock.
9.1.2.4.3. Neither negotiable nor assignable and held on to
9.2. The Commission may, by rule or regulation after public
maturity; and
hearing, add to the foregoing any class of securities if it finds
9.1.2.4.4. In an amount not exceeding One Hundred Fifty
that the enforcement of this Code with respect to such
Million Pesos (PhP150,000,000.00) or such higher amount as
securities is not necessary in the public interest and for the
the Commission may prescribe.
protection of investors.
The main requirement of SRC is found in Section 8, that before any
Under Sec 9.1.2.4, all requisites must be present: not more than 19,
security can be sold within the Philippines, it must be first be registered
payable to specific person, neither negotiable nor assignable, and not
with the SEC. There must be a registration statement filed and approved
exceeding 150M.
by the SEC. But they are exemptions to this rule. There are securities and
transactions where they do not need to be registered.
Under the IRR: What characterizes an exempt securities?
Sec 9.1 Exempt Securities They are issued to be safe securities.
9.1.1 Any evidence of indebtedness issued by a financial
institution that has been licensed by the BSP to engage in
banking and quasi-banking shall be exempt from registration
What does it mean when a security is tagged as an
under Section 8.1 of the Code. exempt security?
What is the difference between Sec 9.1.1 of the IRR and Sec 9(e) any There is no requirement for registration at all times, regardless at how
security issued by a bank except its own shares of stocks? many times you transact an exempt security, however you transact it, it
Under the law, it applies to any type of security except shares of stocks of is exempt from the registration requirement under Sec 8.
the issuer. Under the IRR, just evidence of indebtedness or debt security. EXEMPT SECURITIES ARE ALWAYS EXEMPT.
In the law, it only talks about any security issued by a bank, while in the
IRR, debt securities issued by banks and quasi-banks. Meaning, there is
also difference in issuer. In the law, it only talks about banks, while in the
IRR, it allows banks and quasi-banks.
(i) Subscriptions for shares of the capitals stocks of a

EXEMPT TRANSACTIONS corporation prior to the incorporation thereof or in pursuance
Section 10. Exempt Transactions. – of an increase in its authorized capital stocks under the
10.1. The requirement of registration under Subsection 8.1 Corporation Code, when no expense is incurred, or no
shall not apply to the sale of any security in any of the commission, compensation or remuneration is paid or given
following transactions: in connection with the sale or disposition of such securities,
(a) At any judicial sale, or sale by an executor, administrator, and only when the purpose for soliciting, giving or taking of
guardian or receiver or trustee in insolvency or bankruptcy. such subscription is to comply with the requirements of such
law as to the percentage of the capital stock of a corporation
How is that different from certificates issued by a receiver or by a trustee which should be subscribed before it can be registered and
in bankruptcy under exempt securities? duly incorporated, or its authorized, capital increase.
In exempt securities, the certificates are issued by the receiver. Whereas (j) The exchange of securities by the issuer with the existing
in exempt transactions, the certificates are sold at a judicial sale. security holders exclusively, where no commission or other
remuneration is paid or given directly or indirectly for
(b) By or for the account of a pledge holder, or mortgagee or soliciting such exchange.
any of a pledge lien holder selling of offering for sale or (k) The sale of securities by an issuer to fewer than twenty
delivery in the ordinary course of business and not for the (20) persons in the Philippines during any twelve-month
purpose of avoiding the provision of this Code, to liquidate a period.
bonafide debt, a security pledged in good faith as security for (l) The sale of securities to any number of the following
such debt. qualified buyers:
(c) An isolated transaction in which any security is sold, (i) Bank;
offered for sale, subscription or delivery by the owner (ii) Registered investment house;
therefore, or by his representative for the owner’s account, (iii) Insurance company;
such sale or offer for sale or offer for sale, subscription or (iv) Pension fund or retirement plan maintained by the
delivery not being made in the course of repeated and Government of the Philippines or any political subdivision
successive transaction of a like character by such owner, or thereof or manage by a bank or other persons authorized by
on his account by such representative and such owner or the Bangko Sentral to engage in trust functions;
representative not being the underwriter of such security. (v) Investment company or;
(vi) Such other person as the Commission may rule by
Who sells in an isolated transaction?
determine as qualified buyers, on the basis of such factors as
The seller is that owner of the security for it to qualify as an isolated
transaction. financial sophistication, net worth, knowledge, and
experience in financial and business matters, or amount of
(d) The distribution by a corporation actively engaged in the assets under management.
business authorized by its articles of incorporation, of
securities to its stockholders or other security holders as a Difference between the exempt transaction and an
stock dividend or other exempt security:
distribution out of surplus.
(e) The sale of capital stock of a corporation to its own In exempt security, the exemption is on the security itself. It does not
stockholders exclusively, where no commission or other depend on what kind of transaction, who the seller and purchaser is.
remuneration is paid or given directly or indirectly in Whereas in exempt transaction, the security itself being sold may not
connection with the sale of such capital stock. necessarily be exempt, but the transaction itself will be exempt because
(f) The issuance of bonds or notes secured by mortgage upon of the circumstances of the seller and the buyer.
real estate or tangible personal property, when the entire
mortgage together with all the bonds or notes secured Is it guaranteed that the next transaction for the
thereby are sold to a single purchaser at a single sale.
same type of security will still be exempt?
(g) The issue and delivery of any security in exchange for any
other security of the same issuer pursuant to a right of
In exempt security, it is guaranteed at all times that the transaction
conversion entitling the holder of the security surrendered in regarding such security be exempt. But in cases of exempt transaction,
exchange to make such conversion: Provided, That the only that certain transaction is exempt, it is not guaranteed that the next
security so surrendered has been registered under this Code transaction will be exempt unless it falls on the exemptions.
or was, when sold, exempt from the provision of this Code,
and that the security issued and delivered in
exchange, if sold at the conversion price, would at the time of
Question regarding an item in the mockbar
1. Regarding sale to a bank:
such conversion fall within the class of securities entitled to
Sale by a bank is an exempt security, except its own shares of stocks. Sale
registration under this Code. Upon such conversion the par to a bank is an exempt transaction because it is a qualified buyer.
value of the security 2. When the security was sold abroad:
surrendered in such exchange shall be deemed the price at Recording already cut.
which the securities issued and delivered in such exchange
are sold.
(h) Broker’s transaction, executed upon customer’s orders, on
any registered Exchange or other trading market.
STAGES FOR THE SALE OF SECURITIES II. PRE-OFFERING STAGE

(Process for Registration) FILING OF REGISTRATION STATEMENT AND PROSPECTUS.
*NOTE THAT THEY ARE MERELY FILED, BUT NOT YET EFFECTIVE.
I. PRE-FILING STAGE NO SALE OF SECURITIES TO THE PUBLIC BUT A PRELIMINARY PROSPECTUS MAY BE
PREPARATION OF THE REGISTRATION STATEMENT AND PROSPECTUS. ADVERTISED.
NO SALE OF SECURITIES, NO DISSEMINATION OF INFORMATION
PRELIMINARY PROSPECTUS (AKA RED HERRING PROSPECTUS)
NECESSITY OF AN UNDERWRITER WHERE A REGISTRATION HAS BEEN FILED BUT NOT YET RENDERED EFFECTIVE
12.1.1. Underwriting Requirement for Registered
RED HERRING BECAUSE IT IS NOT FINAL, THERE MAY STILL BE CHANGES REQUIRED BY
Securities Issuers of Registered Securities shall enter THE SEC. IT IS JUST A PRELIMINARY PROSPECTUS WHEREIN A REGISTRATION STATEMENT
HAS BEEN FILED BUT NOT YET RENDERED EFFECTIVE BY THE SEC.
into an underwriting agreement with a universal
bank, investment house or any other financial AT THIS STAGE YOU ARE ALLOWED TO ADVERTISE BUT IT MUST BE VERY SPECIFIC, IT
institution duly licensed under the Investment SHOULD ONLY TALK ABOUT THE COMPANY BUT THERE SHOULD NOT BE AN OFFER TO
SELL.
Houses Law; Provided, that if the underwriter is part
of a group composed of such institutions, the group TOMBSTONE ADVERTISEMENTS
shall agree on a syndicate manager that shall act on DEAD ADVERTISING BECAUSE YOU ARE NOT ALLOWED TO SELL YET JUST ADVERTISE
ABOUT THE COMPANY; DEAD BECAUSE IT ADVERTISES BUT DOES NOT ALLOW PURCHASE.
behalf of, and be responsible to, the group and
whose actions shall be binding on the members of 12.6. WITHIN FORTY-FIVE (45) DAYS AFTER THE DATE OF
the group. FILING OF THE REGISTRATION STATEMENT, OR BY SUCH LATER
NO UNDERWRITING AGREEMENT SHALL BE REQUIRED FOR ISSUERS OF DATE TO WHICH THE ISSUER HAS CONSENTED, THE COMMISSION
PROPRIETARY/NON-PROPRIETARY SECURITIES AND TIMESHARES. SHALL DECLARE THE REGISTRATION STATEMENT EFFECTIVE OR
REJECTED, UNLESS THE APPLICANT IS ALLOWED TO AMEND THE
DURING THIS STAGE, THE ISSUER NEEDS TO FIND AN UNDERWRITER OR ENGAGES INTO
AN UNDERWRITING AGREEMENT. UNDER THE CURRENT IRR, YOU CANNOT REGISTER IF
REGISTRATION STATEMENT AS PROVIDED IN SECTION 14
YOU DO NOT HAVE AN UNDERWRITER. HEREOF. THE COMMISSION SHALL ENTER AN ORDER DECLARING
THE REGISTRATION STATEMENT TO BE EFFECTIVE IF IT 5NDS
WHO CAN BE AN UNDERWRITER?
THAT THE REGISTRATION STATEMENT TOGETHER WITH ALL THE
MUST BE DULY LICENSED UNDER THE INVESTMENT HOUSES LAW. (INVESTMENT HOUSE OTHER PAPERS AND DOCUMENTS ATTACHED THERETO, IS ON ITS
LICENSE) FACE COMPLETE AND THAT THE REQUIREMENTS HAVE BEEN
COMPLIED WITH. THE COMMISSION MAY IMPOSE SUCH TERMS
WHO CAN APPLY FOR INVESTMENT HOUSE LICENSE?
AND CONDITIONS AS MAY BE NECESSARY OR APPROPRIATE FOR
UNIVERSAL BANKS, INVESTMENT HOUSES OR ANY OTHER FINANCIAL INSTITUTIONS DULY THE PROTECTION OF THE INVESTORS.
LICENSED UNDER THE INVESTMENT HOUSES LAW AND THOSE ENTITIES SOLELY
PROVIDING SERVICES AS UNDERWRITER. NOW THE SEC WILL EVALUATE, UNDER THE LAW THE SEC SUPPOSEDLY HAS WITHIN 45
DAYS TO SAY WHETHER THE APPLICATION IS REJECTED OR RENDERED EFFECTIVE.
WHAT IS THE JOB OF THE UNDERWRITER?
ENSURES THAT ALL SECURITIES ISSUED WILL BE SOLD TO THE PUBLIC AND IN SUCH CASE
III. OFFERING STAGE
WHEN NOT ALL SECURITIES ARE SOLD TO THE PUBLIC, THEY UNDERTAKE TO BUY THESE
SALE OF SECURITIES ALLOWED, DISSEMINATION (ADVERTISEMENT) OF INFORMATION
ABOUT THE ISSUER ALLOWED.
SECURITIES THEMSELVES.
AT THIS POINT, EVERYTHING IS CONFIDENTIAL SO YOU ARE NOT ALLOWED TO ADVERTISE 8.1.1.5. THE SALE OF THE SECURITIES SUBJECT OF THE
THAT YOU ARE PREPARING FOR AN IPO. THE MOMENT THAT THE SEC FINDS OUT THAT REGISTRATION STATEMENT SHALL COMMENCE WITHIN TEN (10)
YOU ARE DISCLOSING INFORMATION THAT YOU WILL BE SELLING SECURITIES AND YOU
ALLOW SOMEONE TO RESERVE FOR THEIR PURCHASE OF SHARES THEN THEY WILL
BUSINESS DAYS FROM THE DATE OF THE EFFECTIVITY OF THE
PENALIZE YOU. REGISTRATION STATEMENT 1 AND SHALL CONTINUE UNTIL THE
END OF THE OFFERING PERIOD OR UNTIL THE SALE IS
TERMINATED BY THE ISSUER. IF THE SALE IS NOT COMMENCED
WITHIN TEN (10) BUSINESS DAYS, THE RS SHALL BE CANCELLED
AND ALL FEES PAID THEREON FORFEITED.
DOCUMENT REQUIRED FOR THE ‘SELLING’ STAGE

FINAL PROSPECTUS.
A FINAL PROSPECTUS IS THAT WHICH IS APPROVED BY THE SECURITIES AND EXCHANGE

COMMISSION. IT IS APPROVED BY THE SEC THROUGH THE CERTIFICATE OF
REGISTRATION AND THE ISSUANCE BY THE SEC OF THE PERMIT TO SELL.
SHELF REGISTRATION
SALE OF SECURITY BY TRANCHES.
8.1.2. DELAYED AND CONTINUOUS OFFERING AND SALE OF

SECURITIES (SHELF REGISTRATION) SECURITIES, WHICH ARE
INTENDED TO BE ISSUED IN TRANCHES AT MORE THAN ONE
INSTANCE AFTER THE REGISTRATION STATEMENT HAS BEEN
RENDERED EFFECTIVE BY THE COMMISSION, MAY BE
REGISTERED FOR AN OFFERING TO BE MADE ON A CONTINUOUS
OR DELAYED BASIS IN THE FUTURE, FOR A PERIOD NOT
EXCEEDING THREE (3) YEARS FROM THE EFFECTIVE DATE OF THE
REGISTRATION STATEMENT UNDER WHICH THEY ARE BEING
OFFERED AND SOLD.
HOW IT WORKS
ISSUER MUST SPECIFICALLY PROVIDE THAT IT IS SELLING IN TRANCHES, BUT IT MUST NOT
EXCEED THREE (3) YEARS.
ILLUSTRATION
YOU HAVE TO DO IT DELIBERATELY. IT SHOULDN’T JUST DEPEND ON WHAT’S LEFT OF
YOUR SHARES AFTER THE OFFERING PERIOD. YOU HAVE TO SAY IN YOUR REGISTRATION
BEFOREHAND THAT FOR THIS OFFER PERIOD I’M OFFERING 1M SHARES, IN THE NEXT
YEAR I’M GOING TO DO ANOTHER OFFER PERIOD, ANOTHER 1M SHARES. UNDER THE
LAW, THAT’S ALLOWED. YOU’RE ALLOWED TO OFFER ON A CONTINUOUS OR DELAYED
BASIS BUT NOT
EXCEEDING 3 YEARS. YOU’RE ALLOWED TO OFFER BY TRANCHES OR DELAYED BASIS AND

THAT IS WHAT WE CALL AS SHELF REGISTRATION.
SO THERE ARE REQUIREMENTS UNDER RULE 8 ON SHELF REGISTRATION, IT’S BASICALLY

JUST UPDATING OF YOUR REGISTRATION STATEMENT.

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CORPORATION LAW (2019) REVIEWER ATTY.

TITLE XI – NONSTOCK CORPORATION to vote in a non-stock Corporation. Whereas, quorum is

IOW, it cannot be established primarily for the purpose of

Take note: In Non-stock Corporation quorum is not necessarily

Sec. 89. Membership in a nonstock corporation and all rights Facts

Section 25 of the Corporation Code mandates that the Stock corporation:

Requisites to be close corporation

The number of stockholders must be specified in the AOI and it

2 | ALL THE ISSUED STOCK OF ALL CLASSES SHALL BE SUBJECT TO

The AOI must specify a restriction on the transfer of shares. This

Right of First Refusal

Take Note: Provision in the restriction on transfer must be stated

compelled to recognize the transfer even if it is against the

Religious corporation may be organized as a corporation sole or

(a) That the applicant chief archbishop, bishop, priest,

(b) That the rules, regulations and discipline of the religious

(c) That such chief archbishop, bishop, priest, minister, rabbi,

(d) The manner by which any vacancy occurring in the office

MINIMUM CAPITALIZATION CORPORATE SECRETARY

This is not the same in ordinary corporation where you put

Their role is to notify the nominee about the death or incapacity

How long is the term of the nominee?

(1) Was created for the purpose of committing, concealing or

Except as otherwise provided for in Sections Ruling:

Domestic Corporation Doing Business in the

2. Foreign-owned corporation Once a FC obtains a license in the Philippines, it does not

4. Corporators - Those who comprise the

to another. (Traction Cos. vs. Collectors of Int. Revenue

attached to the application.

before MR Holdings assumed Marcopper's debt to ADB and “Doing Business”

By virtue of the deed of Assignment, the lower court should

Acts penalized under the amended corporation Purpose of SRO

(i) Subscriptions for shares of the capitals stocks of a

STAGES FOR THE SALE OF SECURITIES II. PRE-OFFERING STAGE

DOCUMENT REQUIRED FOR THE ‘SELLING’ STAGE

A FINAL PROSPECTUS IS THAT WHICH IS APPROVED BY THE SECURITIES AND EXCHANGE

8.1.2. DELAYED AND CONTINUOUS OFFERING AND SALE OF

EXCEEDING 3 YEARS. YOU’RE ALLOWED TO OFFER BY TRANCHES OR DELAYED BASIS AND

SO THERE ARE REQUIREMENTS UNDER RULE 8 ON SHELF REGISTRATION, IT’S BASICALLY

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