corporation, shareholders or third persons as a result of gross
[1] WHAT IS A CORPORATION?
A corporation is an artificial being created by operation of law,
having the right of succession and the powers, attributes and
properties expressly authorized by law or incident to its existence.
[2] WHAT ARE A CORPORATION'S ATTRIBUTES?
If referring to the attribute of a corporation based on its definition,
they are the following: [a] artificial being; [b] created by operation of
law; [c] having the right of succession; and [d] with express, implied
and inherent powers.
If referring to the characteristics of corporations in general, they are
the following:
[a] Continuity of existence;
[b] Limited investor or shareholder's liability;
[c] Separate juridical personality;
[d] Capacity to sue and be sued;
[e] Capacity to incur obligations and acquire rights;
[f] Centralized management via the governing board;
[g] Immunity from collateral attack; and
[h] others.
[3] WHAT IS THE GRANDFATHER RULE?
The Grandfather Rule is a stricter or more stringent test than the
control test when it comes to determining compliance with the
minimum Filipino equity requirement among corporations. The
Grandfather Rule determines the actual Filipino ownership and
control in a corporation by tracing both the direct and indirect
shareholdings in the corporation.
In other words, if the shares of stock of the immediate investor
corporation is in turn held and controlled by another corporation, then
we must look into the citizenship of the individual stockholders of the
latter corporation. In other words, if there are layers of intervening
corporations investing in a Filipinized venture, we must delve into
the citizenship of the individual stockholders of each corporation.
[4] EXPLAIN THE DOCTRINE OF PIERCING THE VEIL OF
CORPORATE ENTITY?
As a rule, a corporation has a personality distinct from its
stockholders, and is not affected by the personal rights, obligations
and transactions of the latter. This general rule also applies between a
parent company and subsidiary. However, the veil of corporate
fiction may be pierced when it is used as a shield to further an end
subversive of justice, or for purposes that could not have been
intended by law that created it or to defeat public convenience, justify
wrong, protect fraud or defend crime or to perpetuate fraud or
confuse legitimate issues or to circumvent the law or perpetuate
deception or as an alter ego, adjunct or business conduit for the sole
benefit of the stockholders.
[5] WHAT ARE THE OBLIGATIONS OF DIRECTORS AND
OFFICERS OF A CORPORATION?
In general, directors and officers are bound by the trust fund doctrine
which states that the governing officers of the corporation hold in
trust the funds of the corporation in trust for the benefit of the
stockholders. Hence, specifically, directors and officers have the
obligation to maintain loyalty, obedience and diligence to the
corporation.
According to the Corporation Code, directors and trustees shall be
jointly and severally liable for all damages suffered by the
negligence or bad faith in directing the affairs of the corporation or as
a result of personal or pecuniary conflict of interest with their duties
as directors or trusties.
If a director, trustee or officer attempts to acquire or acquires any
interest adverse to the corporation's interest, in violation of his duty
or when equity disallows him to deal with himself, he shall be liable
as trustee for the corporation and must account for the profits which
otherwise would have accrued to the corporation.
[7] WHAT ARE THE CIRCUMSTANCES THAT MAY BE
CONSIDERED TO JUSTIFY THE APPLICATION OF THE
DOCTRINE TO MAKE THE PARENT CORPORATION LIABLE
FOR THE OBLIGATIONS OF ITS SUBSIDIARY?
According to Garrett vs. Southern Railway, there are 11 factors:
[a] STOCK. The parent corporation owns all or most of the capital
stock of the subsidiary;
[b] DIRECTORS. The parent and subsidiary have common directors
and officers;
[c] FINANCE. The parent finances the subsidiary;
[d] SUBSCRIPTION OR INCORPORATION. The parent subscribes
to all the capital stock of the subsidiary or otherwise causes its
incorporation;
[e] GROSSLY INADEQUATE CAPITAL. The subsidiary has
grossly inadequate capital;
[f] EXPENSES AND LOSSES. The parent pays the salaries and
other expenses or losses of the subsidiary;
[g] NO OTHER BUSINESS. The subsidiary has substantially no
business except with the parent corporation or no assets except those
conveyed to or by the parent corporation;
[h] DEPARTMENT OR DIVISION. In the papers of the parent
corporation or in the statements of its officers, the subsidiary is
described as a department or division of the parent corporation or its
business or financial responsibility is referred as the parent’s own;
[i] PROPERTY. The parent corporation uses the property of the
subsidiary as its own;
[j] DEPENDENCE. The directors or the executives of the subsidiary
do not act independently in the interest of the subsidiary but take their
orders from the parent corporation in the latter’s interest; and
[k] LEGAL REQUIREMENTS. The formal legal requirements of the
subsidiary are not observed.
[7] IS OWNERSHIP OF SUBSTANTIAL PORTION OF THE
OUTSTANDING CAPITAL IN A CORPORATION ENOUGH
JUSTIFICATION TO APPLY THE DOCTRINE?
No, ownership of substantial portion of the outstanding capital in a
corporation is no enough justification to apply the doctrine of
piercing of the corporate veil.
The veil of corporate fiction may be pierced when it is used as a
shield to further an end subversive of justice, or for purposes that
could not have been intended by law that created it or to defeat public
convenience, justify wrong, protect fraud or defend crime or to
perpetuate fraud or confuse legitimate issues or to circumvent the law
or perpetuate deception or as an alter ego, adjunct or business conduit
for the sole benefit of the stockholders. Therefore, there are limited
circumstances in which said doctrine applies:
[a] Injustice;
[b] Public inconvenience;
[c] Wrong;
[d] Fraud;
[e] Crime;
[f] Confusion regarding legitimate issues; and (among others)
[g] Deception through alter ego, adjunct or business conduit.

8. WHAT ARE THE ELEMENTS THAT MUST BE PRESENT TO
JUSTIFY THE PIERCING OF THE VEIL OF CORPORATE
FICTION ON THE GROUND THAT THE CORPORATION IS A
MERE ALTER EGO?
According to Garrett vs. Southern Railway, there are 11 factors:
[a] STOCK. The parent corporation owns all or most of the capital
stock of the subsidiary;
[b] DIRECTORS. The parent and subsidiary have common directors
and officers;
[c] FINANCE. The parent finances the subsidiary;
[d] SUBSCRIPTION OR INCORPORATION. The parent subscribes
to all the capital stock of the subsidiary or otherwise causes its
incorporation;
[e] GROSSLY INADEQUATE CAPITAL. The subsidiary has
grossly inadequate capital;
[f] EXPENSES AND LOSSES. The parent pays the salaries and
other expenses or losses of the subsidiary;
[g] NO OTHER BUSINESS. The subsidiary has substantially no
business except with the parent corporation or no assets except those
conveyed to or by the parent corporation;
[h] DEPARTMENT OR DIVISION. In the papers of the parent
corporation or in the statements of its officers, the subsidiary is
described as a department or division of the parent corporation or its
business or financial responsibility is referred as the parent’s own;
[i] PROPERTY. The parent corporation uses the property of the
subsidiary as its own;
[j] DEPENDENCE. The directors or the executives of the subsidiary
do not act independently in the interest of the subsidiary but take their
orders from the parent corporation in the latter’s interest; and
[k] LEGAL REQUIREMENTS. The formal legal requirements of the
subsidiary are not observed.
[9] EXPLAIN THE RIGHT OF SUCCESSION.
In corporation law, right of succession also means "continuity of
existence." This means that, despite the death, incapacity,
replacement or civil interdiction of the persons composing it, the
corporation is not affected and its business operations continue
uninterrupted as long as its juridical personality exists.
[10] DISTINGUISH THE FOLLOWING:
A. DE JURE CORPORATION VS. DE FACTO CORPORATION
A de facto corporation is a defectively organized corporation, which
has all the powers and liabilities of a de jure corporation and, except
as to the State, has a juridical personality distinct and separate from
its shareholders, provided that the following requisites are
concurrently present:
[a] That there is an apparently valid statute under which the
corporation with its purposes may be formed;
[b] That there has been colorable compliance with the legal
requirements in good faith; and
[c] That there has been use of corporate powers, i.e., the transaction
of business in some way as if it were a corporation.
A corporation which has no defect in legal requirements is a de jure
corporation.
B. STOCK CORPORATION VS. NON-STOCK
A stock corporation is one whose capital stock is divided into shares
and whose articles of incorporation allows it to distribute dividends.
A non-stock corporation is one which lacks either of the two
requirements of a stock corporation.
C. CORPORATION VS. PARTNERSHIP
A corporation is different from a partnership in the following ways:
[a] A corporation is created by law or by operation of law while a
partnership is created by mere agreement of the parties;
[b] A corporation is governed primarily by the Corporation Code
while a partnership, the Civil Code;
[c] A corporation can only exercise powers which are expressly
granted by law or those inherent or implied while a partnership can
act freely as long as not contrary to law, morals, good customs,
public order and public policy; and
[d] A corporation acts through a board while a partnership acts
through any partner, except when a general partner has been
appointed.
[11] A CORPORATION WAS CREATED BY A SPECIAL LAW.
LATER, THE LAW CREATING IT WAS DECLARED INVALID.
MAY SUCH CORPORATION CLAIM TO BE A DE FACTO
CORPORATION?
No, such a corporation created by an invalid special law cannot claim
to be a de facto corporation for two reasons.
First, an invalid law creates no office, confers no rights and imposes
no obligation. It is not a source of anything because it is void.
Second, for there to be a de facto corporation, there must be an
apparently valid statute under which the corporation with its purposes
may be formed.
[12] MAMUHUNAN WAS INVITED BY HIS FRIENDS TO
INVEST IN A CORP., A NEWLY ORGANIZED FIRM ENGAGED
IN MONEY MARKET FINANCING OPERATION. BECAUSE OF
HIS HEAVY INVESTMENTS, MAMUHUNAN BECAME THE
FIRM’S PRESIDENT AND, AS SUCH, PURCHASED A BIG
NUMBER OF COMPUTERS, TYPEWRITERS AND OTHER
EQUIPMENT FROM TAKTAK CORP. ON INSTALLMENT
BASIS. A CORP. PAID THE DOWN PAYMENT AND TAKTAK
CORP. ISSUED THE CORRESPONDING RECEIPT. TO HIS
CHAGRIN, MAMUHUNAN DISCOVERED THAT THE
ARTICLES OF INCORPORATION HAD NOT BEEN FILED BY
HIS FRIENDS ON THAT DATE SO HE HURRIEDLY
ATTENDED TO THE MATTER. NO SOONER HAD THE
CERTIFICATE OF INCORPORATION BEEN ISSUED BY THE
SEC, A CORP. BECAME BANKRUPT AFTER THREE MONTHS.
UPON BEING SUED BY TAKTAK CORP. IN HIS PERSONAL
CAPACITY, MAMUHUNAN RAISED AMONG ITS DEFENSES
THE DOCTRINES OF DE FACTO CORPORATIONS AND
CORPORATIONS BY ESTOPPEL. CAN THE TWO DEFENSES
BE VALIDLY RAISED?
As to the defense of de facto corporation, no, it cannot be validly
raised because one requisite is that there must be a colorable
compliance with the legal requirement. In short, there must be a
certificate of registration issued by the proper government agency
which, in this case, is the Securities and Exchange Commission.
If used to implead his friends, the defense of corporation by estoppel
can be validly raised.
Under the Corporation Code, the doctrine of corporation by estoppel
is a device to protect persons dealing with an ostensible corporation.
"All persons who assume to act as a corporation knowing it to be
without authority to do so shall be liable as general partners for all
debts, liabilities and damages incurred or arising as a result thereof."

Therefore, in the case of Mamuhunan, he can use this doctrine to
bring to the suit and make liable his friends who invited him to invest
and made him believe that the corporation exists.
However, if Mamuhunan intends to use this defense to defeat the
valid claims of TAKTAK, it cannot be validly raised. According to
the Corporation Code, when any such ostensible corporation is sued
on any transaction entered by it as a corporation or on any tort
committed by it as such, it shall not be allowed to use as a defense its
lack of corporate personality. On who assumes an obligation to an
ostensible corporation as such, cannot resist performance thereof on
the ground that there was in fact no corporation.
[13] EXPLAIN WHO THE FOLLOWING ARE:
A. INCORPORATORS
Incorporators are those stockholders or members mentioned in the
articles of incorporation as originally forming and composing the
corporation and who are signatories thereof.
B. CORPORATORS
Corporators are those who compose a corporation, whether as
stockholders or as members.
C. STOCKHOLDERS AND MEMBERS
Broadly, a stockholder or member is a person who has interest in a
corporation by reason of his investment therein. A stockholder is an
investor in a stock corporation while a member is an investor in a
non-stock corporation.
D. DIRECTORS AND TRUSTEES
Directors and trustees are persons who compose the governing board
of a corporation. Directors are members of the governing board of a
stock corporation while trustees, non-stock corporation.
E. CORPORATE OFFICERS
Corporate officers are special agents of the corporation as provided in
its by-laws. According to the Corporation Code, there shall be an
election of corporate officers such as the president, who shall be a
director, a treasurer who may or may not be a director, a secretary
who shall be a resident and citizen of the Philippines, and such other
officers as may be provided for in the by-laws.
F. PROMOTER
A promoter is a person who invites investors and subscribers before
the formation and organization of a corporation. Contracts entered
into by a promoter are called pre-incorporation subscriptions.
[14] CAN ALL THE STOCKHOLDERS IN A CORPORATION BE
FOREIGNERS?
Yes, as long as the corporation is not engaged in a nationalized
business, all its stockholders can be foreigners.
[15] WHAT ARE THE FULLY OR PARTLY NATIONALIZED
CORPORATIONS?
Based on the Constitution and statutes such as the Anti-Dummy Law,
the following are nationalized corporations:
[a] Banking institutions;
[b] Finance institutions;
[c] Public utilities;
[d] Those engaged in the disposition, development and utilization of
natural resources;
[e] Fishing companies;
[f] Shipping companies;
[g] Construction companies;
[h] Those dealing with geothermal energy;
[i] Retail companies;
[j] Mass media;
[k] Advertising;
[l] Educational institutions;
[m] Those engaged in the rice and corn industries;
[n] Those engaged in the tax-free cottage industry; and
[o] Those dealing with atomic energy.
[16] WHAT INDUSTRIES ARE NOT ALLOWED TO HAVE
FOREIGN STOCKHOLDERS?
As discussed above, under the Constitution and statutes, there are
nationalized industries. Partly nationalized ones can have foreign
stockholders as long as the minimum Filipino equity requirement is
complied with. In case of fully nationalized industries, corporations
engaged therein are not allowed to have any foreign stockholder.
Examples of fully nationalized/Filipinized industries are: [a] rural
banks; [b] cooperative fish farming; [c] use of marine resources; [d]
retail trade; [e] mass media; and [f] rice and cord industry.
[17] WHAT CORPORATE NAME CANNOT BE USED?
No corporate name may be allowed by the SEC if the proposed name
is identical or deceptively or confusingly similar to that of any
existing corporation or to any other name already protected by law or
is patently deceptive, confusing or contrary to existing laws. When a
change in the corporate name is approved, the Commission shall
issue an amended certificate of incorporation under the amended
name. In short, the following are not allowed:
[a] Identical names;
[b] Deceptively similar names;
[c] Confusingly similar names;
[d] Names protected by law;
[e] Patently deceptive names;
[f] Confusing names; and
[g] Illegal names.
18. WHAT IS THE IMPORTANCE/SIGNIFICANCE OF THE
PRINCIPAL PLACE OF BUSINESS STATED IN THE ARTICLES
OF INCORPORATION?
The statement regarding an exact principal place of business in the
AOI is important because it is this address to which all summons,
papers and other legal processes can be sent.
19. WHAT IS THE MAXIMUM TERM OF A CORPORATION?
CAN IT BE EXTENDED?
Under the Revised Corporation Code, the maximum term of
corporate existence has been removed. The Philippines now adopts
the doctrine of perpetual corporate existence.
20. DETERMINE THE FOLLOWING TERMS:
A. AUTHORIZED CAPITAL STOCK
This is the maximum capital of the corporation as reflected on its
articles of incorporation as approved by the SEC.
B. SUBSCRIBED CAPITAL STOCK

This is part of the authorized capital or the whole of it over which
there have been contracts of subscription. In other words, there has
been a promise to pay and purchase said stocks and, as a result of
such contract, a stockholder holds the stocks. According to the
Corporation Code, at least 25% of the capital stock must be
subscribed.
C. PAID-UP CAPITAL
This is part of the authorized capital stock or the whole of it which
has not only been subscribed but also paid. According to the
Corporation Code, the paid-up capital must be at least 25% of the
subscribed capital.
D. OUTSTANDING CAPITAL
Outstanding capital is that part of the authorized capital which has
been issued as shares to stockholders.
E. CAPITAL.
Capital is the maximum fund that the corporation intends to use in its
operations. If reflected on the articles of incorporation and approved
by the SEC, it is called "authorized capital stock."
[21] THE ARTICLES OF INCORPORATION TO BE
REGISTERED IN THE SEC CONTAINED THE FOLLOWING
PROVISIONS
A) “FIRST ARTICLE. THE NAME OF THE CORPORATION
SHALL BE TOHO MARKETING COMPANY.” B) “THIRD
ARTICLE. THE PRINCIPAL OFFICE OF THE CORPORATION
SHALL BE LOCATED IN REGION III, IN SUCH
MUNICIPALITY THEREIN AS ITS BOARD OF DIRECTORS
MAY DESIGNATE.” C) “SEVENTH ARTICLE. THE CAPITAL
STOCK OF THE CORPORATION IS ONE MILLION PESOS
(P1,000,000.00), PHILIPPINE CURRENCY.” WHAT ARE YOUR
COMMENTS AND SUGGESTED CHANGES TO THE
PROPOSED ARTICLES?
First, the corporate name already exists. It should be changed.
Second, the principal place of business or principal office should be
more specific. According to the implementing rules and regulations
of the SEC, the principal office should be an exact address.
[22] HOW CAN THE ARTICLES OF INCORPORATION BE
AMENDED?
There must be [a] a resolution by the governing board via a majority
vote of its members; [b] 2/3 vote or written assent of the stockholders
representing the outstanding capital stock; [c] submission to and
filing with the SEC; [d] a copy of the amendments duly certified
under oath by the corporate secretary and a majority of the directors
or trustees stating that the vote requirements have been complied
with; and [e] favorable recommendation by the appropriate
supervising government agency.
[23] WHEN CAN SEC SUSPEND OR CANCEL CERTIFICATE
OF REGISTRATION?
Without prejudice to other grounds provided by special laws, the
license of a foreign corporation to transact business in the Philippines
may be revoked or suspended by the Securities and Exchange
Commission upon any of the following grounds:
[a] REPORT. Failure to file its annual report or pay any fees as
required by this Code;
[b] RESIDENT AGENT. Failure to appoint and maintain a resident
agent in the Philippines as required by this Title;
[c] CHANGES. Failure, after change of its resident agent or of his
address, to submit to the Securities and Exchange Commission a
statement of such change as required by this Title;
[d] AUTHENTICATION. Failure to submit to the Securities and
Exchange Commission an authenticated copy of any amendment to
its articles of incorporation or by-laws or of any articles of merger or
consolidation within the time prescribed by this Title;
[e] MISREPRESENTATION. A misrepresentation of any material
matter in any application, report, affidavit or other document
submitted by such corporation pursuant to this Title;
[f] FAILURE TO PAY TAXES. Failure to pay any and all taxes,
imposts, assessments or penalties, if any, lawfully due to the
Philippine Government or any of its agencies or political
subdivisions;
[g] OUTSIDE PURPOSE. Transacting business in the Philippines
outside of the purpose or purposes for which such corporation is
authorized under its license;
[h] UNLICENSED FOREIGN CORPORATION. Transacting
business in the Philippines as agent of or acting for and in behalf of
any foreign corporation or entity not duly licensed to do business in
the Philippines; or
[i] OTHER GROUNDS. Any other ground as would render it unfit to
transact business in the Philippines. (n)
[24] WHAT IS A BY-LAW AND IT’S VALID REQUISITES?
A by-laws is the internal rules of the corporation. It is the list of
policies for the corporation's internal business. The requisites for its
validity are:
[a] It must not be contrary to law, public policy or morals;
[b] It must not be inconsistent with the articles of incorporation;
[c] It must be general and uniform in its effect or applicable to all
alike or those similarly situated;
[d] It must not impair the obligations of contracts or vested rights;
and
[c] It must be reasonable.
[25] WHAT IS THE BINDING EFFECT OF THE PROVISIONS OF
THE BY-LAWS?
By-laws become effective and binding only upon approval of the
Securities and Exchange Commission (SEC). Also, all the elements
for its validity must be present; otherwise, it cannot bind anyone.
It must be noted, however, that by-laws are mere internal rules and
are subordinate to the articles of incorporation.
[26] WHAT ARE THE KINDS OF POWERS OF A
CORPORATION?
In the broad sense, a corporation has the following powers:
[a] Those expressly granted or authorized by law and its charter or
articles of incorporation;
[b] Those impliedly granted or authorized by law as are reasonable
necessary to carry out its express powers; and
[c] Those incidental to its existence.
In the narrow sense, a corporation has the following express powers
(those expressly granted by law):
[a] Power to extend or shorten its corporate term;
[b] Power to increase or decrease its capital stock;
[c] Power to incur, create or increase bonded indebtedness;
[d] Power to deny pre-emptive rights;
[e] Power to sell or dispose of corporate assets;
[f] Power to acquire own shares;
[g] Power to invest corporate funds in another corporation or business
or for any other purpose;
[h] Power to declare dividends; and
[i] Power to enter into management contracts.
[27] WHAT IS AN ULTRA VIRES ACT?
An ultra vires act is one done by the corporation outside of its
purpose. In other words, it is an act not supported by the purpose
clause in the articles of corporation.
28. WHO MAY EXERCISE THE POWERS OF THE
CORPORATION?
The powers of a corporation are exercised by the governing board.
In case of stock corporations, it is the board of directors. In non-stock
corporations, it is the board of trustees.
[29] IAI INC. (IAI) BY A STOCK PURCHASE AGREEMENT
SOLD TO AI INC (AI) FOR THE SUM OF P19.5M ALL ITS
OUTSTANDING SHARES OF STOCKS IN “F” CORP. THE
AGREEMENT WAS SIGNED BY LG AND JV, PRESIDENTS OF
IAI AND AI RESPECTIVELY. IAI EXPRESSLY WARRANTED
IN THE AGREEMENT THAT THE NETWORTH OF “F” CORP.
IS P12M. IAI AGREED THAT IF THE NETWORTH IS LESS
THAN P12M, IAI WILL PAY AI THE DEFICIENCY. AI PAID IAI
P12M AND RETAINED THE AMOUNT OF P7.5M TO ANSWER
FOR ANY DEFICIENCY IN THE NET WORTH. INSTEAD OF
REFLECTING A NET WORTH, IT TURNED OUT THAT “F”
HAD A DEFICIENCY OF P1.2M. HENCE, IAI IS OBLIGATED
TO REIMBURSE AI THE AMOUNT OF P13.2M (P12M PLUS
THE DEFICIENCY OF P1.2M). HOWEVER, CONSIDERING
THAT AI RETAINED P7.5M, THE BALANCE TO BE
REIMBURSED IS ONLY P5.2M. LATER, LG, THE PRESIDENT
OF IAI PROPOSED IN WRITING THAT AI’S CLAIM FOR
REFUND BE REDUCED TO P4.09M BUT HE PROMISED TO
PAY THE COSTS OF CERTAIN SUPERSTRUCTURES IN
BEHALF OF AI. AI ACCEPTED THE PROPOSAL. LATER IAI’S
BOARD REFUSED TO IMPLEMENT THE ACCEPTED
PROPOSAL ON THE GROUND THAT WHILE THE BOARD
AUTHORIZED LG TO PURCHASE THE SHARES, IT DID NOT
AUTHORIZE LG TO MAKE THE LAST PROPOSAL. IS THE
POSITION OF IAI’S BOARD TENABLE?
[30] IN WHAT INSTANCES IS CONCURRENCE OF THE
STOCKHOLDERS NECESSARY FOR THE EXERCISE OF THE
POWERS OF THE CORPORATIONS?
[a]Section 16. Amendment of Articles of Incorporation
[b]Section 28. Removal of directors or trustees
[c]Ratification under Section 32. Dealings of directors, trustees or
officers with the corporation
[d]Ratification under Section 34. Disloyalty of a director
[e]Section 37. Power to extend or shorten corporate term
[f]Sale of all or substantially all under Section 40. Sale or other
disposition of assets
[g]Section 42. Power to invest corporate funds in another corporation
or business or for any other purpose
[h]Merger or acquisition under Section 77. Stockholder’s or
member’s approval
[i]Dissolution of the corporation under Section 118. Voluntary
dissolution where no creditors are affected and Section 119.
Voluntary dissolution where creditors are affected
[j]Deletion or removal of any provision in the articles or changes in
the quorum or voting requirements among close corporations under
Section 103. Amendment of articles of incorporation
[k] Section 43. Power to declare dividends (in case of stock
dividends)
[31] WHAT ARE THE INSTANCES WHEN CORPORATION
MAY ACQUIRE ITS OWN SHARES?
A stock corporation shall have the power to purchase or acquire its
own shares for a legitimate corporate purpose or purposes, including
but not limited to the following cases: Provided, That the corporation
has unrestricted retained earnings in its books to cover the shares to
be purchased or acquired:
[a] To eliminate fractional shares arising out of stock dividends;
[b] To collect or compromise an indebtedness to the corporation,
arising out of unpaid subscription, in a delinquency sale, and to
purchase delinquent shares sold during said sale; and
[c] To pay dissenting or withdrawing stockholders entitled to
payment for their shares under the provisions of the Corporation
Code.
[32] CAN THE BOARD BE COMPELLED TO DECLARE
DIVIDENDS EVERY YEAR?
As a general rule, the declaration of dividends is a business judgment
which is lodged in the governing board. By way of exception, the
articles of incorporation may provide that such declaration is required
every year.
It may also happen that the corporation's unrestricted retained
earnings would exceed 100% of its paid-in capital stock every year.
In such a case, each year this happens, the board may be compelled to
so declared except:
[a] When justified by definite corporate expansion projects or
programs approved by the board of directors; or
[b] When the corporation is prohibited under any loan agreement
with any financial institution or creditor, whether local or foreign,
from declaring dividends without its/his consent, and such consent
has not yet been secured; or
[c] When it can be clearly shown that such retention is necessary
under special circumstances obtaining in the corporation, such as
when there is need for special reserve for probable contingencies
[33] WHAT IS THE TRUST FUND DOCTRINE?
Trust fund doctrine is a principle of judicial invention which says that
corporate assets are held as a trust fund for the benefit of shareholders
and creditors and that the corporate officers have a fiduciary duty to
deal with them properly.
[34] WHAT CAN BE INCLUDED IN UNRESTRICTED
RETAINED EARNING?
In a nutshell, unrestricted retained earnings are surplus profits which
have not yet been earmarked for a project or transaction. More
specifically, they are earnings which have not been allocated for any
managerial, contractual or legal purpose and which are free for
distribution to stockholders as dividends.
[35] WHAT ITEMS CANNOT BE USED FOR DIVIDEND
DISTRIBUTION?
Broadly, the following items cannot be used for dividend distribution:
[a] Earnings allocated for managerial purposes;
[b] Earnings allocated for contractual purposes; and
[c] Earnings allocated for legal purposes.
Specifically, the dividends cannot be distributed from the
corporation's capital. It should be from actual and bona fide earnings.
Revaluation surplus, reduction surplus and treasury shares also
cannot be used as items for dividend distribution.
In addition to this, considerations received from the issuance of no-
par value shares form part of the capital and cannot be distributed as
dividends.
[36] CAN GAIN FROM SALE OF REAL PROPERTY BE
CONSIDERED PART OF UNRESTRICTED RETAINED
EARNINGS?
Yes.
[37] CAN TREASURY SHARES BE DISTRIBUTED BY WAY OF
DIVIDENDS?
Yes.
[38] WHAT ARE THE REQUISITES OF A SALE OF ALL OR
SUBSTANTIALLY ALL PROPERTIES?
The following requisites of a sale of all or substantially all properties:
[a] Resolution by the majority vote of a governing board;
[b] Authorization from the stockholders representing at least 2/3 of
the outstanding capital stock or 2/3 of members;
[c] Such ratification of stockholders or members must be made at a
meeting duly called for that purpose;
[d] Prior written notice of the proposed action and of the time and
place of meeting addressed to all stockholders of record, either by
mail or personal service;
[e] The sale of assets must not be illegal such as an illegal
combination or monopoly;
[f] Any dissenting stockholder shall have the option to exercise his
appraisal right.
[39] X CORPORATION IS ENGAGED IN SELLING PENCILS ON
WHOLESALE BASIS. IT IS MERELY RENTING A BODEGA
AND 90% OF ITS ASSETS CONSISTS OF ITS STOCKS OF
PENCIL. “A”, A SCHOOL SUPPLY DEALER, PURCHASED ALL
THE STOCKS OF X CORP. IS THE TRANSACTION A SALE OF
SUBSTANTIALLY ALL OF THE ASSETS OF THE
CORPORATION REQUIRING CONCURRENCE OF
STOCKHOLDERS REPRESENTING 2/3 OF THE
OUTSTANDING CAPITAL STOCK?
No, because this sale is in the regular course of business. Moreover,
this is in line with the purpose of the corporation.
[40] AA CORPORATION IS ENGAGED IN THE BUSINESS OF
PRINTING BOOKS. AROUND 70% OF ITS ASSETS CONSISTS
OF CASH IN THE BANK, 25% PRINTING MACHINE AND THE
REMAINING OFFICE EQUIPMENT AND SUPPLIES. AA
CORPORATION PLANS TO SELL THE MACHINE. CAN IT BE
CONSIDERED SALE OF SUBSTANTIALLY ALL OF THE
ASSETS OF THE CORPORATION?
Yes, because the normal operations of the company would be
impaired by such sale. Sale of substantially all assets of the
corporation has been defined as that which will render it "incapable
of continuing the business or accomplishing the purpose for which it
is incorporated. The test is not quantity but quality.
[41] WHAT ARE THE WAYS OF INCREASING AND
DECREASING THE CAPITAL STOCK?
The following are three ways of doing this:
[a] Increasing the par value of existing shares without increasing the
number of shares;
[b] Increasing the number of existing shares without increasing the
par value thereof; and
[c] Increasing the number of existing shares and, at the same time,
increasing the par value thereof.
42. WHAT ARE THE QUALIFICATIONS OF DIRECTORS?
[a] He must have at least one (1) share which stands in his name on
the books of the corporation; and
[b] He must be a natural person.
Also:
[c] He must not have been convicted by final judgment for a crime
punishable by at least 6 years of imprisonment;
[d] He must not have violated the Corporation Code within 5 years
prior to the date of his election; and
[e] He must be of legal age.
43. WHAT IS THE BUSINESS JUDGEMENT RULE?
Courts will not interfere with the decisions made by the governing
board as regards the internal affairs of the corporation unless such
acts are so unconscionable and oppressive as to amount to a wanton
destruction of the rights of the minority shareholders, let alone illegal.
44. WHAT IS THE DOCTRINE OF CORPORATE
OPPORTUNITY?
Where a director, by virtue of his office, acquires for himself a
business opportunity which should belong to the corporation, thereby
obtaining profits to the prejudice of such corporation: A director shall
refund to the corporation all the profits he realizes on a business
opportunity which: [a] the corporation is financially able to
undertake; [b] from its nature, is in line with corporation's business
and is of practical advantage to it; and [ c] the corporation has an
interest or a reasonable expectancy.
45. WHO IS AN INTERLOCKING DIRECTOR?
Interlocking directors are those whose interests in two (or more)
companies are both (all) substantial. Substantial interest means more
than 20% of the outstanding capital stock.
46. ARE CORPORATE AGENTS SUCH AS DIRECTORS,
TRUSTEES OR OFFICERS OF A CORPORATION SOLIDARILY
LIABLE WITH THE CORPORATION THEY REPRESENT?
Generally, corporate agents are not solidarily liable with the
corporation because of the doctrine of separate corporate personality.
It is hornbook principle that personal liability of corporate directors,
trustees or officers attaches only when: [a] they assent to a patently
unlawful act of the corporation, or when they are guilty of bad faith
or gross negligence in directing its affairs, or when there is a conflict
of interest resulting in damages to the corporation, its stockholders or
other persons; [b] they consent to the issuance of watered down
stocks or when, having knowledge of such issuance, do not forthwith
file with the corporate secretary their written objection; [c] they agree
to hold themselves personally and solidarily liable with the
corporation; or [d] they are made by specific provision of law
personally answerable for their corporate action.
47. ANSWER THE FOLLOWING:
A. WHO ARE SELF-DEALING
DIRECTORS/TRUSTEES/OFFICERS?
Self-dealing corporate agents are those [a] who have pecuniary
interest in the a transaction or contract that the corporation is entering
into and [b] whose affirmative vote is material to the realization or
approval of such transaction, contract or project.
B. WHAT ARE THE RULES WHEN THERE IS A SELF-
DEALING DIRECTOR/TRUSTEE/OFFICER IN A
CORPORATION?
A contract of the corporation with one or more of its directors or
trustees is VOIDABLE, at the option of such corporation.
Such contract is VALID if all of the following conditions are present:
[a] That the presence of such director or trustee in the board meeting
in which the contract was approved was not necessary to constitute a
quorum for such meeting;
[b] That the vote of such director or trustee was not necessary for the
approval of the contract;
[c] That the contract is fair and reasonable under the circumstances;
and
[d] That in case of an officer, the contract has been previously
authorized by the BOD.
In the absence of the [a] and [b] above, there may be ratification by
stockholders representing at least 2/3 of the outstanding capital stock
or at least 2/3 of the members in a meeting called for the purpose
voted to ratify the contract after full disclosure of such adverse
interest in said meeting.
48. WHO ARE THE CORPORATE OFFICERS OF A
CORPORATION?
They are those officers identified by the Corporation Code, by the
articles of incorporation or by the by-laws of the corporation.
Currently, the Revised Corporation Code provides that they are the
CEO, CFO, the corporate secretary and other officers as may be
provided in the by-laws.
49. IS SERVICE OF SUMMONS ON A SECRETARY OF THE
PRESIDENT OF A DOMESTIC PRIVATE CORPORATION
BINDING ON THE CORPORATION?
No, because the Rules of Court requires that such service shall be
made exclusively to the President, the Managing Director, the
Corporate Secretary, the in-house counsel, the Treasurer or the
General Manager.
50. “A”, AS OWNER OF A CERTAIN NUMBER OF SHARES OF
STOCK IN X CORPORATION, ENTERED INTO A VOTING
TRUST AGREEMENT WITH B. ON THE BASIS OF THE
VOTING TRUST AGREEMENT, B ANNOUNCED HIS DESIRE
TO RUN FOR A SEAT IN THE BOARD OF DIRECTORS OF X
CORPORATION. C, ANOTHER STOCKHOLDER, OBJECTED
AND QUESTIONED THE ELIGIBILITY OF B TO BE A
DIRECTOR OF X CORPORATION. IS C’S CONTENTION
CORRECT? WHY?
A voting trust agreement results in the separation of the voting rights
of a stockholder from his other rights such as the right to receive
dividends and other rights to which a stockholder may be entitled
until the liquidation of the corporation. It is the trustee of the shares
who acquires legal title to the shares under the voting trust agreement
and thus entitled to the right to vote and the right to be elected as
board of directors while the trustor‐stockholder has the beneficial title
which includes the right to receive dividends (Lee vs. CA 205 SCRA
752)
51. WHO CAN APPOINT AND REMOVE THE OFFICERS OF
THE CORPORATION?
The stockholders have the power to remove directors of the
corporation. The power to remove belongs to the stockholders
exclusively. The appointment of directors/trustees is done by election
also by the stockholders/members.
After the election of directors, they (the directors) must formally
organize for the election of corporate officers.
52. FLAD CORPORATION WAS ORIGINALLY WITH AN
AUTHORIZED CAPITAL STOCK OF P500,000.00 SHARES
WITH THE MEMBERS OF THE “T” FAMILY OWNING
P450,200.00 SHARES REPRESENTING THE OUTSTANDING
CAPITAL. THE “T” FAMILY INVITED MEMBERS OF THE “O”
FAMILY TO INVEST IN FLADC AS STOCKHOLDERS
NECESSITATING AN INCREASE OF THE AUTHORIZED
CAPITAL STOCK TO GIVE EACH GROUP EQUAL(50-50)
SHAREHOLDINGS AS AGREED UPON IN THE PRE-
SUBSCRIPTION AGREEMENT. PURSUANT TO THE SAID
SUBSCRIPTION AGREEMENT, THE AUTHORIZED CAPITAL
STOCK WAS THUS INCREASED FROM P500,000.00 SHARES
TO P2,000,000.00 SHARES WITH A PAR VALUE OF P100.00
EACH, WITH THE “O” FAMILY SUBSCRIBING TO
P1,000,000.00 SHARES AND THE “T” TO P549,800.00 MORE
SHARES IN ADDITION TO THEIR P450,200.00 SHARES TO
COMPLETE P1,000,000.00 SHARES. THE PRE-SUBSCRIPTION
AGREEMENT LIKEWISE PROVIDES THAT THE “T” FAMILY
SHALL NOMINATE THE VICE-PRESIDENT AND TREASURER
AND FIVE DIRECTORS WHILE THE “O” FAMILY IS
SUPPOSED TO MANAGE THE MALL OWNED BY FLADC.
LATER, ALLEGING NON-COMPLIANCE WITH THE
OBLIGATION UNDER THE AGREEMENT, THE MEMBERS OF
THE “T” FAMILY WERE ALLEGEDLY PREVENTED FROM
ACTING AS VICE-PRESIDENT AND TREASURER), THE “T”
FAMILY FILED AN ACTION FOR RESCISSION OF THE PRE-
SUBSCRIPTION AGREEMENT AND ASKED FOR THE
LIQUIDATION OF THE ASSETS OF FLADC. WILL THE
ACTION PROSPER? EXPLAIN.
No, because the agreement is contrary to the Corporation Code.
[a] Amendments increasing and decreasing the capital stock must not
only be approved by the board and the stockholders, it must also be
registered with and approved by the SEC;
[b] The election of corporate officers is within the power of the
governing board and cannot be taken away by mere contract;
[c] The election of directors is within the power of the stockholders
exclusively and cannot be taken away by mere contract; and
[d] The management of the affairs of the corporation is a business
judgment which cannot be taken away from the board of directors.
53. HOW DOES ONE BECOME A SHAREHOLDER IN A
CORPORATION?
He becomes one by subscription (contract of unissued shares), by
purchase of shares from existing stockholders or purchase of treasury
shares from the corporation.
54. WHAT IS AN UNDERWRITING AGREEMENT?

It is a contract for subscription entered into between a promoter (also
known as underwriter) and a would-be stockholder.
55. WHAT IS THE DOCTRINE OF INDIVIDUALITY AND
INDIVISIBILITY OF SUBSCRIPTION?
A subscription is one entire and indivisible whole contract. It cannot
be divided into portions.
56. DISTINGUISH SHARE OF STOCK FROM CERTIFICATE OF
STOCK.
A share of stock is an interest in the corporation while a certificate of
stock is a paper which serves as prima facie proof of such interest.
A share of stock is a part of the capital stock of a corporation which
may be purchased or issued. On the other hand, a certificate of stock,
even if unissued, does not mean that a stockholder owns no share in
the corporation.
A share of stock is a unit of investment which an investor promises to
pay or pays for via a subscription contract. Whereas, a certificate of
share is a mere tangible evidence of the stock itself which is an
intangible property.
CLUE: Unit v. evidence; intangible v. tangible; and not fully-paid v.
fully-paid.
57. WHAT IS YOUR UNDERSTANDING OF “TREASURY
SHARES”? ARE SAID SHARES CONSIDERED: (A) ISSUED; (B)
FULLY PAID (C) OUTSTANDING (D) ENTITLED TO
DIVIDENDS? (E) MAY SUCH SHARES BE DISTRIBUTED TO
THE STOCKHOLDERS BY WAY OF DIVIDENDS? IF YES,
HOW WOULD YOU CLASSIFY THE DIVIDEND – CASH OR
STOCK DIVIDEND?
Shares that have been earlier issued as fully corporation by
purchase, donation, and redemption or through some lawful means.
They are considered previously-issued, fully-paid, not outstandign
and not entitled to dividends.
They cannot be issued as dividends because they are not deemed
unrestricted.
58. WHAT ARE THE INSTANCES WHEN NON-VOTING
SHARES MAY VOTE?
[1] Amendment of articles of incorporation;
[2] Adoption and amendment of by‐laws;
[3] Sale, lease, exchange, mortgage, pledge or other disposition of all
or substantially all of the corporate property;
[4] Incurring, creating or increasing bonded indebtedness;
[5] Increase or decrease of capital stock;
[6] Merger or consolidation of the corporation with another
corporation or other corporations;
[7 Investment of corporate funds in another corporation or business in
accordance with this Code;
[8] Dissolution of the corporation.
59. WHAT ARE THE LIMITATIONS ON THE ISSUANCE OF
“NO PAR VALUE” SHARES?
[1] Cannot have an issue price of less than P5.00 per share;
[2] Once issued, they shall be deemed fully paid and non-assessable
and the holders of such shares shall not be liable to the corporation or
to its creditors in respect thereto;
[3] Entire consideration received by the corporation shall be treated
as capital and shall not be available for distribution as dividends;
[4] Articles of Incorporation must state the fact that the corporation
issues no-par shares and the number of shares;
[5] Cannot be issued as preferred stocks;
[6] Cannot be issued by banks, insurance companies, trust companies,
building and loan associations, and public utilities; and
[7] Issued price may be fixed in the Articles of Incorporation, or by
the BOD pursuant to authority conferred upon it by the Articles of
Incorporation, or, in the absence thereof, by majority vote of the
outstanding shares in a meeting called for the purpose.
60. WHAT IS THE DOCTRINE OF EQUALITY OF SHARES?
Where the articles of incorporation do not provide for any distinction
of the shares of stock, all shares issued by the corporation are
presumed to be equal and enjoy the same rights and privileges and
are also subject to the same liabilities.
61. WHAT ARE WATERED STOCKS?
A stock issued in exchange for cash, property, share, stock dividends,
or services lesser than its par value.
62. WHAT IS A CERTIFICATE OF STOCK?
It is a paper representation or tangible evidence of the stock itself and
of various interests therein (Tan v. SEC, G.R. No. 95696, Mar. 3,
1992)
63. WHEN CERTIFICATE OF STOCK MAY BE ISSUED?
[a] The certificate must be signed by the president or vice‐president,
countersigned by the secretary or assistant secretary;
[b] The certificate must be sealed with the seal of the corporation;
[c] The certificate must be delivered;
[d] The par value as to par value shares, or full subscription as to no
par value shares must be fully paid, the basis of which is the doctrine
of indivisibility of subscription; and
[e] The original certificate must be surrendered where the person
requesting the issuance of a certificate is a transferee from the
stockholder.
Of the five above, the short answer is [d]. The subscription must be
fully-paid before the issuance of a certificate of stock.
64. HOW ARE SHARES OF STOCKS TRANSFERRED?
It depends.
If certified or represent by a certificate of stock, by indorsement and
recording in the books.
If uncertified or not represented by a certificate of stock, by deed of
sale, assignment, transfer or conveyance and recording in the books.
65. MAY A STOCKHOLDER BRING SUIT TO COMPEL THE
CORPORATE SECRETARY TO REGISTER VALID TRANSFER
OF STOCKS?
Yes, it is the corporate secretary's duty and obligation to do so.
[65B] TO BE VALID AND BINDING ON THE CORPORATION
AND THIRD PARTIES, IS THE ATTACHMENT OR
MORTGAGE OF SHARES OF STOCK REQUIRED TO BE
REGISTERED IN THE CORPORATION’S STOCK AND
TRANSFER BOOKS?
No, mortgage is a voluntary dealing with shares. Involuntary dealings
(which are writs or processes issued or done against shares) are
required to be registered.
Involuntary dealing refers to such writ, order or process issued by a
court of record affecting shares of stocks which by law should be
registered to be effective, and also to such instruments which are not
the willful acts of the registered owner and which may have been
executed even without his knowledge or against his consent.
66. FG IS AN INCORPORATOR OF VC CORPORATION
HAVING SUBSCRIBED TO AND FULLY PAID 239,500
SHARES. HOWEVER, NO CERTIFICATE OF STOCK WAS
ISSUED TO FG. IN 1968, VCP AND FG SIGNED A DOCUMENT
ENTITLED “UNDERTAKING AND INDORSEMENT” WHICH
STATES: “UNDERTAKING: I, VCP, IS THE OWNER OF THE
TOTAL SUBSCRIPTION OF FG WITH VC CORPORATION IN
THE AMOUNT OF TWO HUNDRED THIRTY-NINE
THOUSAND FIVE HUNDRED(P239,500.00) PESOS AND THAT
FG DOES NOT HAVE ANY LIABILITY WHATSOEVER ON
THE SUBSCRIPTION AGREEMENT IN FAVOUR OF VC
CORPORATION. (SGD) VCP, CONFORME: (SGD) FG.
INDORSEMENT: I, FG IS INDORSING THE TOTAL AMOUNT
OF TWO HUNDRED THIRTY-NINE THOUSAND FIVE
HUNDRED(P239,500.00) STOCKS OF VC CORPORATION TO
VCP. (SGD) FG A. HOWEVER, FG REMAINS TO BE THE
STOCKHOLDER IN THE BOOKS OF THE CORPORATION AND
IT IS UNDISPUTED THAT VCP HAD NOT MADE A REQUEST
UPON THE CORPORATE SECRETARY OF VC CORPORATION
TO RECORD THE ALLEGED TRANSFER OF STOCKS. IN 1996,
VCP MADE A DEMAND FOR THE ISSUANCE OF
CERTIFICATES OF STOCK IN HIS NAME. THE DEMAND WAS
DENIED AND VCP FILED PETITION FOR MANDAMUS FOR
THE ISSUANCE OF THE CERTIFICATES.
A. WILL THE ACTION PROSPER?
No, the transfer does not bind the corporation because it was not
registered in the corporate books. The corporate secretary, as far as
she is concerned, has the duty to issue certificates of stock only under
the name of the owner thereof as registered in the books of the
corporation.
The remedy to ask for registration of his name as stockholder in the
books.
B. IN THE PROBLEM ABOVE, VCP ARGUED THAT IT IS
PRECISELY THE DUTY OF THE CORPORATE SECRETARY,
WHEN PRESENTED WITH THE DOCUMENT OF FULLY PAID
SHARES, TO EFFECT THE TRANSFER BY RECORDING THE
TRANSFER IN THE STOCK AND TRANSFER BOOK AND TO
ISSUE STOCK CERTIFICATES IN THE NAME OF THE
TRANSFEREE. IS THE CONTENTION TENABLE?
Yes, but VCP's remedy is to compel issuance of stock certificates.
His contention would be tenable if the issue is registration of transfer
and refusal to so register.
Insofar as the corporate secretary is concerned, FG is the registered
owner of the shares.
C. ASSUME THAT VCP CAN VALIDLY FILE THE PETITION
FOR MANDAMUS. CAN SUCH PETITION BE DISMISSED ON
THE GROUND OF PRESCRIPTION CONSIDERING THAT IT
WAS FILED ONLY 24 YEARS AFTER THE EXECUTION OF
THE UNDERTAKING AND INDORSEMENT?
The law does not prescribe a period within which the registration of
the transfer of shares should be effected. Hence, the action to enforce
the right does not accrue until there has been a demand and a refusal
concerning the transfer.
67. WHAT ARE THE BASIC RIGHTS OF SHAREHOLDERS?
[a] To manage the corporation by vote;
[b] To enter into voting trust agreements;
[c] To receive dividends and to compel declaration;
[d] To transfer shares and to compel registration;
[e] To be issued stock certificates;
[f] To exercise pre-emptive rights;
[g] To exercise appraisal rights;
[h] To file a derivative suit;
[i] To recover shares of stock unlawfully sold for delinquency;
[j] To inspect books;
[k] To be furnished the most recent financial statements;
[l] To be issued a new certificate in case of loss or destruction;
[m] To have the corporation dissolved;
[n] To participate in the distribution of assets upon dissolution; and
[o] In case of close corporations, to petition the SEC to arbitrate in
the event of deadlock.
68. WHAT ARE THE OBLIGATIONS OF A STOCKHOLDER?
[a] To pay the balance of his unpaid subscription/s;
[b] To pay interest on his unpaid subscriptions according to the by-
laws or the contract;
[c] To pay creditors of the corporation with respect to his unpaid
subscription based on the Trust Fund Doctrine;
[d] To pay for the water in his stocks;
[e] In case of corporation by estoppel, to be liable as a general
partner; and
[f] In case of close corporations, to be personally liable for torts if he
actively participates in the management of the corporation.
69. WHAT IS A DERIVATIVE ACTION AND ITS REQUISITES?
A derivative suit is a remedy under common law available to any
stockholder in case where corporate directors have committed a
breach of trust or fraud, negligence or ultra vires acts which have
caused directly injury to the corporation and indirect injury to the
stockholders AND in case the governing board is unwilling or unable
to institute an action to redress the wrong.
The requisites are:
[a] The party bring the suit should be a shareholder at the time the act
or transaction complained of took place;
[b] He has exhausted all intra-corporate remedies; and
[c] The cause of action actually belong to the corporation, not to the
stockholder.
In addition to the above, the act complained of must not be covered
by the stockholder's appraisal right.
70. WHAT IS A PRE-EMPTIVE RIGHT?
It is the preferential right of shareholders to subscribe to all issues or
disposition of shares of any class in proportion to their present
shareholdings. The purpose of this right is to enable the shareholder
to retain his proportionate control in the corporation and to retain his
equity in the surplus.
71. EXPLAIN THE APPRAISAL RIGHT AND WHERE IT MAY
BE EXERCISED?
It is the right to withdraw from the corporation and demand payment
of the fair value of the shares after dissenting from certain corporate
acts involving fundamental changes in corporate structure. The
amount paid to the stockholder is the fair value of his shares as of the
day prior to the date on which the vote was taken, excluding any
appreciation or depreciation in anticipation of the corporate action
The following are instances when it may be exercised:
[a] Extension or reduction or corporate term;
[b] Amendment to Articles of Incorporation which involves change
in the rights of stockholders, authorize preferences superior to those
stockholders, or restrict the right of any stockholder;
[c] Investment of corporate funds in another business or purpose;
[d] Sale or disposal of all or substantially all assets of the corporation;
and
[e] Merger or consolidation.
72. WHAT ARE THE REMEDIES OF CORPORATIONS TO
ENFORCE PAYMENT OF STOCKS?
There are three available remedies: (a) call (to action) by resolution
of the governing board and sale of delinquent shares; and (b) judicial
action via a collection suit.
73. WHAT DOES THE TERM UNPAID CLAIM MEAN (FOR
PURPOSES OF DECLARING THE SHAREHOLDER
DELINQUENT)?
The corporation may refuse to register the transfer of shares if it has
an existing unpaid claim over the shares to be transferred. The
“unpaid claim” refers to the unpaid subscription on the shares
transferred and not to any other indebtedness that the transferor may
have to the corporation.
74. WHAT IS THE PROCEDURE FOR COLLECTION AND
DELINQUENCY SALE?
[a] If there is due date, no need for a call by the board. If there is
none, there must be a board resolution declaring the unpaid
subscription due on a specified date;
[b] Personal notice or notice by registered mail must be sent and
addressed to the concerned stockholder;
[c] If he fails to pay within 30 days from call or due date, the unpaid
shares shall be subjected to delinquency sale;
[d] Board resolution ordering the sale must be issued stating the
amount, date, time and place of sale;
[e] The sale shall shall be made not earlier than 30 days but not later
than 60 days from date of delinquency;
[f] Note of sale with a copy of the board resolution shall be send to
every delinquent shareholder in person or by mail;
[g] Publication of notice of sale for 2 consecutive weeks;
[h] Sale to the bidder who offered the full amount of the balance of
subscription including all costs for the smallest number of shares;
[i] Registration in the name of the winning bidder and issuance of
certificate under his name;
[j] Remaining (paid) shares shall be credited to the delinquent
shareholder; and
[k] If there is no bidder, the corporation may purchase and pay for the
shares.
75. WHAT ARE THE EFFECTS OF STOCK DELINQUENCY?
No delinquent stock shall be voted for or be entitled to vote or to
representation at any stockholder’s meeting, nor shall the holder
thereof be entitled to any of the rights of a stockholder except the
right to dividends in accordance with the provisions of this Code,
until and unless he pays the amount due on his subscription with
accrued interest, and the costs and expenses of advertisement, if any.
Any cash dividends due on delinquent stock shall first be applied to
the unpaid balance on the subscription plus costs and expenses, while
stock dividends shall be withheld from the delinquent stockholder
until his unpaid subscription is fully paid.
Holders of subscribed shares not fully paid which are not delinquent
shall have all the rights of a stockholder.
76. WHAT BOOKS ARE REQUIRED TO BE MAINTAINED BY
THE CORPORATION?
[a] Book for the minutes of shareholder and board meetings;
[b] Record of transactions;
[c] Stock and transfer book; and
[d] Other books required to be kept.
77. WHAT IS THE PROBATIVE VALUE OF THE STOCK AND
TRANSFER BOOK?
The entries are considered prima facie evidence of the matters stated
therein and may be subject to proof to the contrary. (G.R. No.
123553)
78. WHAT ARE THE REQUIREMENTS FOR THE EXERCISE OF
THE RIGHT OF INSPECTION?
[a] It must be exercised at reasonable hours on business days;
[b] The stockholder has not improperly used any information he has
secured through any previous examination; and
[c] Demand is made in good faith or for a legitimate purpose.
79. DISTINGUISH
A. MERGER FROM CONSOLIDATION
Merger happens when a corporation absorbs another. On the other
hand, consolidation occurs when two or more corporations form one
new corporation.
In the first, one corporation survives. In the second, all constituent
corporations are dissolved.
In the first, no new corporation is created. In the second, a single,
new corporation emerges.
In the first, assets and liabilities are acquired by the surviving
corporation. In the second, they are transferred to the new
corporation.
B. ESTOPPEL FROM SUBSEQUENT COMPLIANCE
A corporation by estoppel is a legal device to protect the corporation
or third persons from deceit or fraud in dealings. Hence, despite lack
of registration of the corporation, the law treats those who purport to
act as a corporation liable as a corporation.
On the other hand, subsequent compliance with legal requirements
for incorporation makes the corporation one de facto prior to such
compliance.
80. WHAT IS THE EFFECT OF NON-USE OF CORPORATE
CHARTER AND CONTINUOUS INOPERATION OF
CORPORATION?
Revocation or forfeiture of the franchise or certificate of
incorporation due to its misuse or non‐use pursuant to quo warranto
proceedings filed by the Solicitor General.
Under the old corporation code, failure to organize and commence
business within 2 years from incorporation results in its corporate
powers ceasing and the corporation shall be deemed dissolve.
In the new law, the period is 5 years and the effect is "deemed
revoked."
Under the old law, in case of continuous inoperation for at least 5
years, this is a ground for the suspension or revocation of corporate
franchise or certificate of incorporation.
In the new law, the same period is prescribed but the effect is
"declaration of delinquency status" which may be removed by
compliance within 2 years.
81. IN THE ARTICLES OF INCORPORATION OF T
CORPORATION, ELEVEN MEMBERS WERE NAMED TO
CONSTITUTE THE BOARD OF DIRECTORS. THESE ELEVEN
ELECTED FROM AMONG THEMSELVES A SECRETARY-
TREASURER BUT DID NOT ELECT A PRESIDENT. THE
BOARD USED TO HOLD MEETINGS TO TRANSACT
BUSINESS, WHICH WAS DONE THROUGH THE SECRETARY-
TREASURER. IN A PROCEEDING TO FORFEIT ITS CHARTER,
THE QUESTION WAS POSED AS TO WHETHER THE
CORPORATION MAY BE CONSIDERED TO HAVE
FORMALLY ORGANIZED. RESOLVE THE QUESTION.
There are two views on this.
In Benguet Consolidated Mining v. Pineda, the Supreme Court held
that formal organization means that the corporation has taken
necessary steps to endow it with the capacity to transact legitimate
business in line with its purpose. The Court said that this includes the
election of officers, adoption of by-laws, subscription and payment
transactions and other steps.
However, Ladia (2015) opines that it is enough that the corporation
has functioned and engaged in the business for which it was formed
and its charter cannot be forfeited simply because it has failed to a
president or a secretary.
82. HOW MAY A CORPORATION DISSOLVE? AND WHAT
ARE THE MODES OF DISSOLUTION? WHAT ARE THE
EFFECTS?
It is the extinguishment of the franchise of a corporation and the
termination of its corporate existence. Dissolution may be voluntary
or involuntary.
If voluntary and there are no creditors affected, it is done by filing a
resolution approved by the board and the stockholders with the SEC.
This resolution must authorize dissolution and it must be certified and
countersigned.
If voluntary and there are creditors affected, by filing a verified
petition for dissolution with the SEC.
Voluntarily, there may also be a dissolution by shortening the
corporate term. This is done by amendment.
Voluntarily, in the case of corporate soles, mere filing of a
declaration of dissolution by the presiding elder.
Voluntarily, by merger or consolidation.
Voluntarily, by expiration of corporate term without extension. Note
that, under the new law, there is no perpetual corporate existence.
Involuntarily, the following are modes of dissolution:
[a] By expiration but with failure to extend;
[b] Failure to organize and commence;
[c] Continuous inoperation and delinquency for more than 2 years;
[d] Legislative dissolution; and
[e] Dissolution by the SEC.
83. WHAT IS LIQUIDATION?
Liquidation is the process by which all the assets of the corporation
are converted into liquid assets (cash) in order to facilitate the
payment of obligations to creditors, and the remaining balance if any
is to be distributed to the stockholders. It is a proceeding in rem.
84. WHAT CONSTITUTES “DOING BUSINESS” IN THE
PHILIPPINES FOR FOREIGN CORPORATIONS?
[a] Under the Continuity Test, doing business implies a continuity of
commercial dealings and arrangements, or performance of acts
normally incidental to the purpose and object of the organization.
[b] Under the Substance Test, a foreign corporation is doing business
in the country if it is continuing the body or substance of the
enterprise of business for which it was organized.
[c] Under the contract test, a foreign corporation is doing business in
the Philippines if the contracts entered into by the foreign corporation
or by an agent acting under the control and direction of the foreign
corporation are consummated in the Philippines.
[d] Under statutory definition, doing business means:
[i] Soliciting orders, service contracts, or opening offices;
[ii] Appointing representatives, distributors domiciled in the
Philippines or who stay for a period or periods totaling 180 days or
more;
[iv] Participating in the management, supervision, or control of any
domestic business, firm, entity, or corporation in the Philippines; or
[v] Any act or acts that imply a continuity of commercial dealings or
arrangements, and contemplate to some extent the performance of
acts or works or the exercise of some functions, normally incident to
and in progressive prosecution of the purpose and object of its
organization.
According to the Supreme Court, it relates to “business activities…
not only casual, but so systematic and regular as to manifest
continuity and permanence of activity to constitute doing business
here…” To constitute doing business in the Philippines, the activity
should involve profitmaking.
85. DOES AN “ISOLATED TRANSACTION” BY A FOREIGN
CORPORATION QUALIFY AS “DOING BUSINESS” IN THE
PHILIPPINES?
No. Foreign corporations, even unlicensed ones can sue or be sued on
a transaction or series of transactions set apart from their common
business in the sense that there is no intention to engage in a
progressive pursuit of the purpose and object of business transaction.
86. EXPLAIN THE CONTRACT TEST OF “DOING BUSINESS”
IN THE PHILIPPINES.
Under the contract test, a foreign corporation is doing business in the
Philippines if the contracts entered into by the foreign corporation or
by an agent acting under the control and direction of the foreign
corporation are consummated in the Philippines.
87. WHAT ARE THE REQUIREMENTS FOR CLOSE
CORPORATIONS?
A close corporation is onee whose articles of incorporation provide
that:

[a] All issued stock, exclusive of treasury shares, shall be held by

persons not exceeding 20;
[b] All issued stock shall be subject to one or more specified
restrictions on transfer; and
[c] The corporation shall not list in any stock exchange or make any
public offering of any of its stock of any class.

Notwithstanding the foregoing, a corporation shall not be deemed a

close corporation when at least 2/3 of its voting stock or voting rights
is owned or controlled by another corporation which is not a close
corporation.

Any corporation may be incorporated as a close incorporation,

except:

[a] Mining or oil companies;

[b] Stock exchanges;
[c] Banks;
[d] Insurance companies;
[e] Public utilities;
[f] Educational institutions; and
[g] Corporations declared to be vested with public interest.

88. CAN A NON-STOCK CORPORATION OFFSET UNUSED

CONTRIBUTIONS OF MEMBERS AGAINST THE BALANCE
OF RECEIVABLES FROM THE SAME MEMBERS?

The unused contributions of members cannot be offset against the

balance of receivables because this would amount to distribution of
the capital of the corporation. Members of a non‐stock corporation
are not entitled to distribution of capital. They are only entitled to
distribution of capital upon dissolution when it is provided for in the
articles of incorporation or by‐laws.